Rushmore is one of the few hospitality consultants that actually invests in and owns hotels. In 1999, he was recognized by the New York chapter of the Cornell Hotel Society as.
Overview of the U.S
Lodging Industry
1.01 THE LODGING INDUSTRY
1] History
Along the way, it points to the major developments that have affected the industry, such as franchising, new financing methods and product and market segmentation.
2] National Supply and Demand
1.02 PLANNING A HOTEL INVESTMENT
A proposed hotel (as opposed to an existing facility) was chosen as the subject to demonstrate how a market study and assessment can be conducted without the benefit of historical operating data.
1] Selecting a Lodging Market
When buying or developing an accommodation facility, it is recommended for investors to stay close to home so that they can fully devote themselves to it. We can reposition the hotel by renovating or upgrading, changing the franchise or introducing new management.
2] Property and Site Selection
The same hospitality knowledge and experience is necessary for a hotel search firm as a hotel broker. By dealing directly with the seller, the buyer can avoid paying a fee to a broker or a search firm, and thus eliminate a significant expense, which is ultimately reflected in the purchase price of the property.
3] Preliminary Market Study and Appraisal
One of the last steps in the preliminary evaluation is to forecast the income and expenses of the proposed hotel investment. The first step in a property valuation is to determine the overall value of the property in question.
1.03 DEVELOPMENT, ACQUISITION, AND FINANCING
- Individual ownership
- Concurrent ownership (by two or more individuals) 3. Partnership (general and limited)
- Regular corporation (C Corporation) 5. S Corporation
- Limited liability company (LLC)
- Trust
- Real estate investment trust (REIT)
- Institutions that originate mortgages and maintain portfolios of both mortgages and real estate equities, including
- Investment conduits, which are primarily entities that invest in hotel real estate mortgages and pass through income and gain to investors (both private individuals and institutions),
- Mortgage financing, which is how most hotels are financed. Topics covered include
It explains how operating information can be obtained or projected for competing hotels and shows how data obtained from competitors can be adjusted to eliminate any bias they may contain. This value is contrasted with the cost of the property, which is either the purchase cost or the construction cost.
1.04 FRANCHISE AFFILIATIONS AND HOTEL MANAGEMENT
An exchange of hotels, or an exchange of commercial property for a desired hotel property, is a creative means of acquiring a new property.
1] Property Management
2] Management Contracts
1.05 OTHER ISSUES
For each country, the current state of the hotel market and its potential for growth are discussed. This chapter provides a detailed analysis of the current state of the industry as well as its future.
1.06 INDUSTRY SOURCES AND CONTACTS
CHAPTER 2
History of the Lodging Industry
2.01 COLONIAL TIMES TO WORLD WAR II
1] Inns, Rooming Houses, and Grand Hotels
2] Birth of the Modern-Era Hotel
3] Overdevelopment in the 1920s
4] Depression Years
5] Economic Recovery in the Early 1940s; World War II
It was in this period that some of the most popular hotel chains were born. Occupancy levels exceeded 90 percent across the country - translating into one of the most profitable business cycles the industry has experienced.
2.02 POST-WORLD WAR II ERA: CONTROLLED GROWTH AND CHAIN EXPANSION
The combination of increased demand and constant room supply resulted in a huge increase in the hotel occupancy rate. During this period of extremely high demand and limited supply, labor and material shortages significantly compromised the service levels of most hotels, in many cases forcing guests to wait for hours in hotel lobbies for accommodation.
1] Motels
In addition, financing was generally unavailable for new construction because lenders and investors still had fresh memories of the devastation in the real estate industry caused by the last economic crisis. The first motels differed markedly from larger hotels of the same period in terms of size, construction costs, land values, and management requirements.
2] The Late 1950s and Early 1960s
They accommodated in convenient highway locations; they were much smaller and offered fewer amenities, but charged lower rates than typical urban hotel facilities of the time.
1] The Bubble Burst
2] The Involuntary Owners
3] Historical Perspective on Hotel Values
2.04 LATE 1970s: RECOVERY AND CALM
1] Maturation of Systems and Procedures
2] Chain Expansion Through Asset Sales
2.05 THE 1980s
1] Non-Economic Real Estate Transactions
2] The Savings and Loan Debacle
3] Development of Product Segmentation
4] Extended-Stay and Suite Concepts
5] Supply and Demand Imbalance
6] Lodging Industry Stock Performance
2.06 THE 1990s: SIGNIFICANT EVENTS
1] Nonperforming Loans
Many savings and loans were taken over by the federal government and their hotel assets were auctioned off. The number of hotel foreclosures peaked in 1991 as loan restructuring was an attractive alternative to foreclosure.
2] Gradual Improvement
3] Rebirth of the REIT
Considerable activity continued in the REIT market until the fall of 1994, when the rise in interest rates and the perception of an oversupply of offerings and pending structural problems brought the hotel REIT market to a virtual standstill. Then, in the fall of 1998, a credit crunch hit the real estate market and REITs, which paid a premium for hotel properties, began to find their stock values plummeting.
4] Alternative Financing Sources
Returns on existing REITs fell and numerous offerings in the planning stage were shelved or cancelled. Particularly popular were the few so-called paired shared REITs that could take advantage of a tax loophole and raise capital very quickly and cheaply to take over hotel companies.
5] The Hot Market: Increased Occupancies, Profitability, and Values
In addition, Congress enacted legislation that severely limited the future activities of paired-share REITs, and many of them have therefore converted or are in the process of converting to regular C corporations. Impressive increases in value were a result of greatly improved occupancy rates and average prices, large amounts of capital in the market and no significant new supply in sight.
6] Demand Outpaces Supply
New construction of full-service hotel projects remained rare, but several developers indicated that they were preparing to develop multiple projects. Marriott bought several full-service hotels from a major insurance company, and Starwood Capital and Goldman Sachs Whitehall Fund bought the Westin luxury hotel chain.
7] The Markets, the Buyers, and the Sellers
The lodging industry's impressive recovery continued, and 1995 was a banner year, generating $7.6 billion in pretax profits, driven by increased occupancy, room rate gains and operational efficiencies. 1995 was the third consecutive profitable year for the lodging industry since it bottomed out in the economic recession of the early 1990s. Financial performance has improved significantly as demand for accommodation has increased over the past few years while only a limited number of new hotels have entered the market. .
8] Future Trends
In addition to the fact that capacity decreased when demand decreased, capacity utilization also decreased when the increase in demand was less than the increase in supply.
National Supply
3.01 QUANTIFICATION OF SUPPLY
CHAPTER 3
One of the best sources of data on lodging in the US is Smith Travel Research. Smith Travel Research also publishes the Host Study, which presents composite hotel and motel performance statistics broken down by type, location, region, price level and market orientation, along with other valuable hotel investment information.
1] Facility Types
As noted in the chart, all segments, with the exception of Upper-Tier Extended Stay properties, show some increase in RevPAR for the year. However, only the Lower-Tier Extended Stay segment managed to report a double-digit (10.5%) increase in RevPAR for the year.
As mentioned earlier, the increased supply put pressure on the overall occupancy rates and held back the increases in RevPAR, as shown in Exhibit 3-2.
Other valuable sources are Bear Steam's Global Lodging Almanac, Pricewaterhouse Coopers, LLP, Arthur Anderson consulting, KPMG Peat Marwick, LLP and EYKL Hospitality Services. Convention hotels generally contain a large variety of rooms with a high percentage of double/twin bed configurations.
Exhibit 3-5 shows that there are 863 properties that are categorized as luxury, with Marriott dominating the segment with 262 properties and 106,587 rooms. Exhibit 3-6 shows that there are 1,527 properties in this segment with Courtyard by Marriott and Radisson hotels dominating the segment with 439 and 233 properties respectively.
Since 1995, the range in this segment has grown by more than 10% each year. In fact, this segment has not seen demand or supply grow more than 8% since 1995.
A relatively new segment in the hotel industry has been the lower end extended stay hotel. Extended Stay America is currently the largest company in this segment with 230 hotels and 26,006 rooms in 1999.
This is the fastest growing segment, with new supply increasing by 44.5% compared to the previous year. Exhibit 3-12 Bear Steams Brand Segments - Lower Tier Extended Stay Segment Sources: Bear, Steams & Co.
2] Class
The accommodation industry does not seem to have a uniform definition of the different hotel classes. Most chains attempt to create and maintain a specific image regarding their class of facilities and service.
3] Location
For example, Microtel caters to very fee-sensitive budget travelers, while Ritz-Carlton Hotels attract a high-end, luxury-oriented clientele. Holiday Inns, for example, have implemented strict product improvement requirements for franchisees in order to combat an overall declining perception of product quality.
Exhibits 3-13 and 3-14 show the various class categories and the corresponding average occupancy and average room rates for accommodations in the United States.
3.02 GUESTROOM DESIGN
3.03 AMENITIES
3.04 FINANCIAL OPERATING CHARACTERISTICS
CHAPTER 4
4.01 INTRODUCTION
Over the past twenty years, the increasing prominence of dual-income households has meant for these families greater disposable income that can be devoted to leisure travel. In a number of travel-related industries, including the airline, car rental, and hotel industries, numerous incentive programs now exist that encourage travel by awarding free or reduced-cost transportation, lodging, and other financial rewards.
4.02 NATIONAL DEMAND DATA
4.03 USE OF TRANSIENT ACCOMMODATIONS
1] Trends in Hotel Travel Volume
2] Trends in Total Room Sales
4.04 TRAVEL INDUSTRY STATISTICS
1] Food and Beverage Sales
2] Domestic Passenger Traffic
3] International Travel Demand
4.05 ECONOMIC AND DEMOGRAPHIC TRENDS
4.06 CHARACTERISTICS OF TRAVEL DEMAND
Three primary segments are (1) commercial demand, which consists of individual business people traveling for a business purpose;. 2) meeting and convention needs, which consist of groups of people (more than three) traveling for the purpose of holding a meeting of some kind; and (3) leisure demand, which consists of people traveling for pleasure. For example, commercial demand shows a low double occupancy rate, while leisure travel generates a much larger number of people per person. room; leisure travelers typically have a longer average stay than commercial patrons; and growth rates in commercial travel are often dependent on the local economy, whereas growth rates in meeting and convention patronage are most often influenced by national economic trends.
1] Commercial Demand Segment
An important reason to look at Category 4 data by individual demand segments is that different types of demand typically exhibit different characteristics that are useful to planners and managers of housing facilities. Most business people spend two to three nights away from home, while only 13.6 percent of corporate travelers spend more than ten nights on the road.
2] Meeting and Convention Demand Segment
The meeting market divides the meeting and convention market into three segments: corporate meetings, conventions, and association meetings. As the United States economy becomes increasingly service-oriented, the need for meetings and conventions should continue to grow.
3] Leisure Demand Segment
This trend will be offset by the increased use of video communications, which will eventually reduce the need for meetings.
4] Comparison of Demand Characteristics
CHAPTER 5
Market, Product, and Site Selection
5.01 LONG-TERM TRENDS
This trend has negatively affected the regional economies of many of the main manufacturing centers in the country. The aging population will result in a greater number of elderly people who have the time and money to travel and use transitional housing facilities.
5.02 TRENDS IN THE BUDGET AND ECONOMY SEGMENTS
Figure 5-2 outlines the hotel brands typically found in the economy and budget segments of the industry. On a macro level, supply currently exceeds demand in the budget and economy segments of the lodging industry.
1] Regional Performance
Due to recent construction activity in the budget and economy segments of the lodging industry, supply in these segments currently exceeds demand. However, at the micro level, some regions of the country are more affected by oversupply than others; there are regions where it is still appropriate to build new budgetary and economic facilities.
2] Hotel Valuation Index
On the negative side, new development is limited when the market value line falls below the replacement cost line. Generally, new hotel development does not begin to slow down until the market value line crosses the replacement cost line.
3] Challenges Facing the Budget and Economy Segments
These new additions to offerings in the extended stay arena are expected to increase the threat of oversupply and reduce demand in the budget and economy transition segment. Overall, new hotel construction has been moderate in the budget and economy segments of the lodging industry, resulting in supply growth expected to outpace demand growth.
5.03 MARKET POTENTIAL
The second challenge facing the budget and economy segment appears to be the mid-priced segment of the lodging industry. The lack of buildable land in the location and proposals for greater and better use of land are also forms of barriers to entry.
5.04 MARKET OVERVIEW STUDY
5.05 PRODUCT SELECTION
Other chains, such as TraveLodge, Ramada Inns, and Days Inns, also started in the economy segment of the lodging industry, but have established themselves as mid-range chains by expanding amenities. Hotel investors can benefit from understanding the cycle of increasing amenities and the opportunities it creates.
1] New Hotel Products
Because franchise fees are generally calculated as a percentage of room revenue, when amenity creep drives room rates upward, franchisors benefit directly by collecting additional franchise fees. However, this gap is currently being filled by the spread of new development in the economic sector, mainly due to lower barriers to entry.
2] Success Factors for Unique Hotel Products
For example, Days Inns' strategy of moving up from the economy segment to the mid-price market has left fewer products available to economy travelers. Hotel products that achieve the greatest success in the market generally offer good value for money.
5.06 MATCHING THE PRODUCT TO THE MARKET
A product that is not currently in the local market, but for which there is sufficient demand to justify its addition to the market. A product that exists in the local market but, due to high demand and limited competition, outperforms all other products and for which there is sufficient demand to justify adding more products of this type to the market.
5.07 HOTEL SITE SELECTION
CHAPTER 6
Site Analysis
6.01 PHYSICAL SUITABILITY
Parking requirements may also limit building size if the configuration of the lot and the number of parking spaces required necessitate the use of a significant amount of space. A qualified engineer should be involved to evaluate the integrity of the foundation support components and to review any other conditions affecting the site.
6.02 ACCESS AND VISIBILITY
The access and visibility of a property being considered for development should be further assessed against the same qualities offered by competing hotels. In a market survey and assessment, the access and visibility of the proposed property should be thoroughly analyzed and a decision should be made as to how well the property compares with competing accommodation facilities.
6.03 UTILITIES AND OTHER SERVICES
While zoning codes govern the use of real estate, permits and licenses typically govern business activities. A license that is essential for most full facility hotel operations is a bar or liquor license.
6.05 EXCESS LAND
Liquor laws vary considerably from one jurisdiction to another, and the availability of a liquor license should not be taken for granted. Although zoning codes, permits, and licenses generally seem restrictive, they can often create value by limiting competition, improving the neighborhood environment, protecting the health and safety of guests, and regulating the quality of operations.
CASE STUDY Site Analysis
CHAPTER 7
7.01 INTRODUCTION
7.02 NEIGHBORHOOD ANALYSIS
1] Observation
A list of the various land uses in the neighborhood, categorized in broad terms (eg, retail, office, industrial, rural, suburban, or urban). Assessment of the competitive environment, including identification of other accommodation facilities and food, beverage and entertainment establishments.
2] Economic Trends
How will the characteristics of the neighborhood affect the local demand for temporary accommodation and the operation of the accommodation facility. What is the current economic base of the neighborhood and how will it change in the future.
7.03 MARKET AREA ANALYSIS
What is the current character of the neighborhood and how it might change in the future. How the local economy will affect the quality and desirability of the neighborhood, the demand for temporary housing and the operation of an accommodation facility.
1] Boundary Definition
If the neighborhood for the property in question has one or more of these characteristics, and it can be demonstrated that a positive economic climate exists and will continue to exist, it is generally justified to conduct the market area analysis. The appraiser can verify the radius of the local market area by conducting interviews with overnight travelers.
2] Economic and Demographic Data
In most cases, where the primary means of transport is the car, twenty minutes of travel is the same as twenty minutes of driving. In rural regions, the travel time radius is often significantly increased, while a central business district may have a more compact market area.
Depending on the highway patterns, the scale of the market can take different forms, showing the different distances that can be traveled in a twenty-minute period.
Another statistic often cited in conjunction with retail sales figures is effective purchase income (EBI), which is the amount of a person's gross income available after tax to purchase goods and services. Trends in EBI reflect area residents' ability to spend money on the goods and services offered by accommodation facilities.
3] Data Collection
4] Data Analysis
Calculating change over a number of years is somewhat more complicated because the appraiser must determine the annual compound percentage change. The annual compound percentage change in the early years can be extremely high because the original population base is so small and new development so intense.
5] Estimate of Future Transient Demand
The demand for commercial hotels is largely influenced by trends related to business activities, such as the take-up of office space; employment (particularly wholesale and retail trade, FIRE and services); For example, if an area's population is expected to grow at an annual rate of 1.5 percent, it is likely that demand for commercial hotels will grow at least at the same rate.
The commercial segment represents a highly desirable and lucrative market segment for hotels and motels because it provides a consistent level of demand for room rates that approach the upper limit of the range. Population growth, while not a strong indicator of changes in commercial demand, usually sets the floor for potential growth in commercial visitation.
There are fewer economic and demographic indicators of convention fulfillment and demand than for the commercial segment. Convention center activity, particularly usage that generates visits from outside the area, is perhaps the best indicator of convention fulfillment and demand.
The typical length of stay for leisure travelers ranges from one to four days, depending on the guests' destination and purpose of travel. However, if visitor statistics are available, especially in tourist areas, some good indicators of leisure demand trends can be obtained from them.
CASE STUDY
Neighborhood and Market Area Analysis
Most of the companies occupying office space in Rockland County are local firms or branch offices of national organizations. The subject site occupies a prominent location along the New York State Thruway and within a few miles of the Garden State and Palisades Parkways.
Demand for meetings and conventions in the Rock-land County area has historically grown at an annual compounding rate of between 1 and 2 percent. Based on this specific economic and demographic data for the Spring Valley market area, along with a general sense of economic recovery in the regional (Northeastern) economy and the country as a whole, the demand for leisure activities can be expected to show a moderate long-term growth trend.
CHAPTER 8
8.01 INTRODUCTION
8.02 EVALUATION OF COMPETITION
Is the hotel comparable to the accommodation in question in terms of the facilities it offers? Does the hotel in question have a picture similar to that of the property in question?
8.03 FIELDWORK
An accommodation object that is not of the same class or image as the subject property can also be a secondary competitor if it has a particularly good location - for example, one adjacent to a demand generator. Because travelers tend to stay at the first hotel they encounter, especially during bad weather, a secondary competitor with a convenient location will attract a certain percentage of the market for which the subject property competes.
8.04 BENCHMARK INFORMATION
Location is not always as important a factor as it has been in the past for guests looking for a place to stay. Some hotels in the market area offer no competition to the property in question and will not be considered in the competitor analysis.
8.05 COMPETITOR INTERVIEWS
CHAPTER 9
Lodging Demand Analysis
9.01 INTRODUCTION
9.02 DEMAND GENERATOR BUILD-UP APPROACH
1] Definition of Market Area
2] Potential Demand Generators
3] Demand Interviews and Surveys
- Phone Number
- Location (including subsidiary office in marketplace, if any)
- Distance from site of proposed hotel
- Name of contact/position
- Present number of employees
- Projected growth in employees
- What hotels/motels does interviewee currently use?
- Reason for lodging selection (location, rate, facilities)
- Room-nights booked
- What rate would interviewee be willing to pay for a suite on a daily basis?
- Describe the proposed hotel and ask whether interviewee would have use for this type of facility?
Appendix 9-2 is an example of the type of form a valuer uses to collect information obtained during an interview with a question generator. The demand generator survey shown in Figure 9-3 at the end of this chapter is an example of a written survey that can be used to quantify accommodation demand and learn more about traveler preferences.
9.03 LODGING ACTIVITY BUILD-UP APPROACH
1] Current Accommodated Room-Night Demand
2] Current and Forecasted Total Latent Demand
Unadjusted demand is always difficult to quantify accurately, so a conservative estimator's estimate is usually justified.
3] Accommodatable Latent Demand
4] Accommodated Room-Night Demand
5] Total Usable Latent Demand
6] Total Available Room-Nights
7] Overall Occupancy
CHAPTER 10
10.01 INTRODUCTION
10.02 MARKET PENETRATION METHOD
10.03 COMPETITIVE INDEX METHOD
1] Advantages of Competitive Index Method
As shown in the exhibit, the competitive index method gives the same result as the penetration method, but requires less work. Consider e.g. the competitive indices for Hotel A and B for each individual market segment, as shown in Appendix 10-6.
2] Evaluation of Proposed Properties____
However, Hotel B is almost 150 percent more competitive than Hotel A in the group and meeting market. In terms of meeting facilities, the proposed hotel is similar to Hotel A, which has a Group and Meeting Competition Index of 29.
The average leisure competitive index for the five existing hotels is 50, so it can be assumed that the proposed hotel will be comparable in that respect. The competitive indices serve as the basis for calculating the market share and occupancy rate of the proposed hotel.
The rationale for assigning these competitive indices is as follows: Hotel F is planned to be oriented towards the commercial segment, so it is similar to Hotel C, which has a commercial competitive index of 192. The percentage of occupancy for each hotel is calculated by first by multiplying the market share percentage by the total room-night demand for the respective segment to arrive at the room nights captured for the respective segment.
10.04 STABILIZED OCCUPANCY
The nature of local hotel demand is probably the best indicator for establishing a stabilized level of occupancy. Historical occupancy cycles for a market area give an indication of the level at which stabilized occupancy should be set.
10.05 AVERAGE RATE PER OCCUPIED ROOM
10.06 FORECASTING AVERAGE RATE PER OCCUPIED ROOM
1] Procedure for Existing Hotels
This rate is usually quoted in ranges (ie, single and represents the range of shelf rates for specific types of accommodations. Some hotels allow almost any commercial traveler to use a commercial rate, while others apply this rate only to specific accounts.
Contract Rate: A discounted rate available to individual users, such as an airline, convention group, or bus tour. Arrangements for this fee are negotiated individually by the user and payment is often billed directly to the firm or organization using the room.
Average room rates tend to be closer to the published rates for single rooms than for double beds. Depending on the amount and timing of usage, a contract rate can be heavily discounted and significantly lower than either the average rate or the commercial rate.
2] Procedure for Proposed Hotels
The dynamics of the surrounding market area are taken into account by considering the current average room rates achieved by competing properties. The competitive positioning method is a good way to verify that the average room rate achieved by an existing residential structure actually reflects its competitive position in the local market.
It does not use a market basis to assess the reasonableness of the average room rate estimate. This method may therefore result in an average room rate that is not available in the local marketplace.
The total average room rate is then calculated by dividing the total room revenue by the total number of occupied rooms. The result is a weighted average room rate that reflects the price sensitivity of each accommodation demand segment.
Revenue Forecast
11.01 INTRODUCTION
This chapter explains the theory behind the fixed and variable component approach and demonstrates its application in revenue forecasting. The procedure used in the fixed and variable component approach is identical for both income and expenses.
11.02 ROOMS REVENUE
The fixed and variable component approach is based on the expected relationship between food revenue and room turnover and beverage revenue and food revenue. The fixed and variable component approach relies on data from a directly comparable hotel, but can easily be adjusted to accommodate differences in occupancy rates.
11.03 FOOD AND BEVERAGE REVENUE
1] Food Revenue
The number of guests served during each meal period is determined simply by counting the cover plates used. The average check is similar in concept to the average room rate and is calculated by dividing the total food receipts for a given period by the number of covers served.
- Calculate the total house count by market segment using the projected occupancy and double occupancy estimates derived during the room-night analysis and the
- Apply the percentage of each market segment that patronizes each of the pro- posed subject's food outlets by meal period to the total house count to yield the
- Estimate the out-of-house demand generated from non-hotel guests using a hotel's restaurant facilities either on a per-cover basis or as a percentage of total
- Estimate total banquet covers served to non-hotel guests based on the product of the average number of banquets per week and the average number of covers per
- Determine total food service demand by adding together in-house food service demand, out-of-house restaurant demand, and non-hotel guest banquet demand
- Estimate the average check for each meal period based on the operating history of either the subject property or similar competitive food facilities in the
- Multiply the average check for each meal period by the estimated total number of covers (per year) for that meal period to yield the total food revenue
Multiply the average check for each meal period by the estimated total number of covers (per year) for that meal period to yield the total food income. Banquet covers are estimated separately and are based on the product of the average number of banquets per week multiplied by the average number of covers per banquet.
- Inflate (or deflate) the revenue and expense numbers in the base to a level that reflects current dollars for the forecast year. The average room rate used in the
- Estimate the fixed and variable percentages for each revenue and expense category. Exhibit 11-3 lists typical ranges of fixed and variable percentages
- Calculate the unadjusted variable component by multiplying the appropriate base revenue or expense category for the projected year by the variable percentage
- Adjust the unadjusted variable component for variability by multiplying it by the variable percentage change calculated in Step 6. The resulting product is the
- Total the forecasted revenue or expense for that specific category, in the projected year, by adding the fixed component calculated in Step 5 to the adjusted variable
Calculate the fixed component by multiplying the appropriate base income or expense category for the expected year by the fixed percentage estimated in step 4. Adjust the unadjusted variable component for variability by multiplying it by the variable percentage change that is calculated in step 6.
Calculate the unadjusted variable component by multiplying the appropriate base category of revenue or expense for the forecast year by the variable percentage category of revenue or expense for the forecast year with the variable percentage estimated in step 4. Add the forecast revenue or expense for that particular category, in the forecast year with by adding the fixed component calculated in step 5 adjusted to the variable year by adding the fixed component calculated in step 5 to the adjusted variable component calculated in step 8.
2] Beverage Revenue
As with food income, the fixed and variable components approach is generally the preferred procedure for forecasting this income category. Because of this high variability, which can be attributed to the direct relationship between food and beverage revenue, an assumed 100 percent variable component is usually used.
11.04 TELEPHONE REVENUE
11.05 OTHER INCOME
When planning for other income, care should be taken to evaluate all possible sources of income. Hotels with extensive retail space or recreational facilities should divide other revenues into multiple categories to identify and appropriately account for important revenue generators.
11.06 TOTAL REVENUE
Other revenue is highly sensitive to occupancy and slightly sensitive to food and beverage, meaning that the relevant benchmarks are a percentage of room revenue adjusted for unusual volume of food and beverage and other revenue per occupied room.
Expense Forecast
12.01 INTRODUCTION
Exhibit 12-1 illustrates typical fixed and variable percentages and the index used to measure changes in the variable component. The variability index refers to a factor that controls the movement of the variable component.
12.02 ROOMS EXPENSE
12.03 FOOD AND BEVERAGE EXPENSE
The appropriate index of variability for food and beverage expenditure is food and beverage revenue. This means that the variable portion of the food and beverage expense category will vary directly with changes in food and beverage revenue.
12.04 TELEPHONE EXPENSE
A variable cost is the actual spending by hotel guests that directly corresponds to telephone revenue.
12.05 OTHER INCOME EXPENSE
12.06 ADMINISTRATIVE AND GENERAL EXPENSE
