Feasibility Studies for Outdoor Hospitality
What is a feasibility study? Why might you want one? What do you need to know before hiring a provider?
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Estimated time to read: 5 minutes
TL;DR:
A feasibility study is used to determine the merits of a development or expansion project for a business.
Feasible does not equal possible. What is feasible is practical, sensible, and reasonable.
Feasibility studies have become popular in Outdoor Hospitality with the growing prevalence of development and expansion of Outdoor Hospitality businesses. Government-backed lenders often require feasibility studies completed by qualified third parties before approving loans.
What is a feasibility study for Outdoor Hospitality?
As the development and expansion of outdoor hospitality businesses have become more prevalent in recent years, so have feasibility studies for these projects.
Feasibility studies are common requirements among government-backed commercial loan underwriters when evaluating loan requests that involve development, construction, or any other type of business expansion.
Defining “Feasibility”
Before we dive into the outdoor hospitality industry specifics, let’s start with the basics and focus on the word feasibility.
This word is often misunderstood, which also causes feasibility studies to be misunderstood. Grammarly.com even has an article contrasting the words “feasible” and “possible” here.
Grammarly says:
“Feasible refers to something that is practical, achievable, and viable given the current circumstances and resources. Possible simply implies that something can happen or be done, without taking into account the practicality or likelihood of being accomplished…
…Use the word feasible when discussing options that are reasonable to implement or achieve. It emphasizes practicality and the presence of a sensible route to success. It's most appropriate when evaluating plans, proposals, or scenarios that require a combination of resources, time, and effort that are within reach.”
So, when we discuss feasibility as it pertains to the development or expansion of outdoor hospitality businesses, we’re talking about evaluating the practicality, reasonability, and sensibility of completing such a project successfully (not just what is possible).
Feasibility Studies As Lender Requirements
The debt markets have largely determined the form and function of feasibility studies for outdoor hospitality projects.
Most outdoor hospitality entrepreneurs who seek feasibility studies do so because they are seeking a government-backed commercial loan (SBA, USDA, etc.), and they are required to submit a feasibility study report from a qualified third party by the lender.
Most of these feasibility study providers seem to focus on investment return metrics to determine feasibility. In other words, they look at the projected cost and timeframe to develop/expand and the projected revenues, expenses, and cash flows from said development/expansion. Usually, this is reflected through a calculation of IRR (internal rate of return), which is a way to determine the value of cash flows over time.
However, I don’t believe this method paints the whole picture of feasibility. Let’s dive a little deeper.
What SHOULD a feasibility study determine?
When I think about determining the feasibility of an outdoor hospitality project, I think about the following:
Team constraints
Is there a qualified team in place to plan and execute the development and operations of the project and business (and to properly evaluate all of the constraints below)?
Physical constraints
How much buildable land/space is there?
Does the land’s topography create challenges that make the project impractical?
How many campsites/units can practically be built on the land?
Regulatory constraints
How do the building and zoning codes impact the practicality of the project?
Does zoning or land use need to be changed?
How is community input expected to impact the project?
Will jumping through regulatory hoops prove too costly or time-consuming?
Market constraints
How do supply and demand within the local/regional market impact the project’s practicality?
Does the existing demand in the market support the added supply from the project?
Is there/will there be too much supply in the market for the project to be practical?
Financial constraints
All of the constraints above have a significant impact on the financials of your project and determine the following:
What is the cost and timeframe for developing/expanding my business?
Can I generate enough revenue/investment return to justify the investment to develop/expand my business?
Can I generate enough revenue to support the expected loan terms/debt service?
Risk constraints
Do any of the constraints above create a risk/reward dynamic that is out of balance?
When all the factors above are considered, what is the confidence level that the proposed project can be completed as planned, on time, and on budget?
If you’ve been thinking about developing or expanding an outdoor hospitality business, I hope this week’s newsletter helps get your wheels turning on how to best evaluate the feasibility of that project.
If you’re interested in learning more about this subject, stay tuned. We’ll be expanding on the following areas in the future:
Why and when you should get a feasibility study completed
How we approach feasibility studies
What to look for in a feasibility study provider
Reply here if you’re looking for a recommendation on getting a feasibility study for your project!
That’s all for this week. Thank you so much for reading!
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