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April 12, 2022
  • Investment & Partnership

5 Secrets to Evaluating Viability of a Hotel for Your Development Property

In the right location, hotels can be a jackpot for commercial property developers. While they can have risks, the rewards can be lucrative.

With the proper research, a hotel can become the epicenter of a bustling economic hive, providing stability and long-term financial return for both tenants and developers. The secret is to thoroughly vet the project and potential hotel partners with a few tried and true steps.

1. Conduct a market assessment

An in-depth market assessment should be the first step when considering a hotel for a development property for a number of reasons.

First off, it will assess business viability by determining the market demand for a hotel. Secondly, it will measure the amount of consumer traffic through a particular area. Thirdly, it will evaluate the competitive environment and help identify the area’s target customer.

Is the key audience business travelers, tourists, stopover visits or all of the above? Are they typically short-term or long-term travelers? Will the location be profitable year-round or is it more seasonal? A market assessment will answer all these questions and more to ensure the numbers add up for success well into the future.

2. Choose a hotel-sized for your development

Your market assessment will tell you what kind of occupancy rates to expect, which will inform on the size of the hotel and the number of rooms needed to fill the demand.

The more real estate you have, the bigger the hotel footprint can be. If the land is at a premium, you may need to look at a hotel with a smaller footprint. You should also consider requirements for parking and any other related infrastructure that will impact your land usage. As you speak to various hotels, they will provide all the planning details you require. By understanding what you need in your development, you will be able to narrow your search.

3. Ensure you can secure the proper zoning

City municipalities hold the keys when it comes to the approval of development permits and approvals. Knowing these demands before making too much of an investment is essential. If the site is not currently zoned for a hotel, will it need to be rezoned.

If rezoning is required, it will be important to know what public consultation is involved and to have a strong case to present to the community members and the municipality. It is also important to note that zoning requirements vary across each Canadian municipality, so local knowledge is a necessity.

4. Know the investment requirements

There are a number of different options when it comes to investment requirements and all should be investigated depending on the development ownership structure.

For the franchisee, it will be important to consider the debt to equity ratio to ensure a hotel is not over-leveraged. The franchisee will need to ensure they have all financing in order, whether that means financing themselves or from a group of investors for example.

5. Find a dedicated hotel franchise

Armed with strong market research and a sound business case, you can approach hotels and make your pitch. This is the time to reach out and share your vision. Shop your hard-earned research and look for the right hotel for you. If your desired hotel company has Canadian representation, deal with them directly as the support and understanding of the local market will be more valuable than talking at the corporate level, which typically is U.S.-based.

Be sure to ask the various hotel companies you speak with about the success and track record of their Canadian properties. If you have interest from multiple partners, you can choose the one who provides the strongest proposal.

Due diligence and hard work went into this assessment, so your selection should reflect that effort. After all, finding the right hotel company to develop on your property will determine the future success of your relationship and, most importantly, that of your development.

Considering a hotel for your development property

A businesswoman standing at a conference table explaining something to many business peopleA man standing by the window in a hotel room with a suitcase next to him