Full Service Hotel

A hotel that has a dedicated F&B component and offers a full range of amenities and services such as concierge service, bars and restaurants, pool and spa, etc. Full service hotels have high fixed costs and appeal to the more affluent casual and business travelers who are able to afford the higher-than-average room rate.

See: Limited Service Hotel

Putting ‘Full-Service Hotel’ in Context

Scenario Overview

RiverCity Development Group, a Texas-based real estate developer, is planning a new development near the Henry B. González Convention Center in San Antonio. The property, to be branded as the Hilton San Antonio RiverView, will be a 300-room full-service hotel catering to business travelers attending conventions and affluent leisure guests visiting the city’s famous River Walk.

The Opportunity

The convention center attracts over 1.5 million visitors annually, including a mix of business travelers attending trade shows, conferences, and exhibitions. Market studies indicate a shortage of full-service hotel options within walking distance of the convention center, especially those with a nationally recognized brand and comprehensive amenities. Recognizing this opportunity, RiverCity Development Group secured a centrally located 1.5-acre parcel of land for $12 million, less than two blocks from the convention center.

The Full-Service Hotel Plan

Food and Beverage (F&B): The hotel will feature a fine-dining restaurant offering local Tex-Mex cuisine, a rooftop bar with panoramic views of the River Walk, a lobby café, and full room-service capabilities.
Amenities: Guests will enjoy a luxury spa, fitness center, resort-style pool deck, business center, and 20,000 square feet of flexible meeting space suitable for corporate events and smaller conventions. Concierge services will assist with restaurant reservations, tour bookings, and other personalized services.
Flag and Management: Hilton will both flag and manage the property, ensuring operational excellence and access to the Hilton Honors loyalty program, enhancing repeat business.

Financials and Risk

As a development project, this investment is considered opportunistic, involving construction risk and a longer timeline to stabilization. The total project cost is estimated at $105 million, broken down as follows:

Land Acquisition: $12 million
Hard Construction Costs: $75 million
Soft Costs (Architecture, Engineering, Permits): $8 million
Pre-Opening Expenses: $5 million
Financing Costs: $5 million

RiverCity Development Group has secured $65 million in construction debt from a national lender at an interest rate of 6.5%, reflecting current market conditions. The remaining $40 million will be raised through equity, with $10 million contributed by the principals of the development firm.

Projected Financial Performance

Once stabilized, the hotel is projected to generate $27.375 million in annual revenue, with a Net Operating Income (NOI) of $9 million, resulting in an anticipated stabilized yield-on-cost of 8.57%.

Detailed Financial Projections

Revenue Projections

Average Daily Rate (ADR): $225
Occupancy Rate: 75%
Annual Available Room Nights: 300 rooms × 365 days = 109,500
Annual Occupied Room Nights: 109,500 × 75% = 82,125
Rooms Revenue: 82,125 nights × $225 ADR = $18.478 million
Food and Beverage Revenue: Estimated at $6 million annually, including restaurant sales, bar sales, room service, and event catering.
Other Revenue: Spa services, meeting room rentals, and other ancillary services estimated at $2.897 million annually (approx. $35 per occupied room night).
Total Annual Revenue: $18.478 million (Rooms) + $6 million (F&B) + $2.897 million (Other) = $27.375 million

Operating Expenses

Rooms Department Expenses: 25% of rooms revenue = $4.62 million
F&B Department Expenses: 75% of F&B revenue = $4.5 million
Other Department Expenses: 50% of other revenue = $1.448 million
Undistributed Operating Expenses:
- Administrative and General: $1.5 million
- Sales and Marketing: $1 million
- Property Operations and Maintenance: $1 million
- Utilities: $1 million
Fixed Expenses:
- Property Taxes: $1.5 million
- Insurance: $500,000
- Reserve for Replacement: 4% of total revenue = $1.095 million

Total Operating Expenses: Sum of all expenses = $18.375 million

Net Operating Income (NOI)

NOI: Total Revenue ($27.375 million) – Total Operating Expenses ($18.375 million) = $9 million

Yield-on-Cost

Yield-on-Cost: NOI ($9 million) / Total Project Cost ($105 million) = 8.57%

Implementation Challenges and Risk Mitigation

Construction Risk: To mitigate construction delays and cost overruns, RiverCity will engage an experienced general contractor with a guaranteed maximum price (GMP) contract.
Market Competition: While there is demand, competition from existing hotels requires a strong marketing strategy. Partnering with Hilton provides brand recognition and access to a global reservation system.
Operational Risk: The complexities of managing a full-service hotel are addressed by Hilton’s management expertise, ensuring operational efficiencies and high service standards.
Financial Risk: A higher yield-on-cost makes the project more attractive to investors, providing a buffer against potential market fluctuations.

Putting It All Together

The hypothetical development of the Hilton San Antonio RiverView exemplifies the characteristics of a full-service hotel and aligns with market demand. By offering multiple dining options, extensive amenities, and comprehensive guest services, the hotel is well-positioned to attract both business and leisure travelers.