The Economic Impact of Hotel Development by: Alan Suzuki
Presented by: Alan Suzuki, Senior Consultant – Pinnacle Advisory Group
Hotels are considered an important economic component to any community. In some cases, cities and municipalities will offer incentives in order to stimulate hotel development. These incentives can be in the form of tax breaks, favorable land leases, or assistance with financing. Prior to establishing incentives for hotel development, a city or municipality should conduct an economic impact study to estimate the economic benefits that results from the development. This assessment should evaluate the economic benefits of the initial investment both in the short term and over the long-term. The economic impact to local and regional economies from hotel development is typically separated into four categories: direct, fiscal, indirect, and induced.
Direct impact includes all projected revenues that will be generated from consumers at the new hotel. This will include all rooms revenues, food and beverage revenues from restaurants and banqueting, as well as other potential revenue sources such as spa or parking. Direct impact also includes total payroll paid out to employees hired at the hotel as well as all payroll paid out to temporary construction workers who construct the hotel.
Fiscal impact refers to all federal, state, and local taxes that will be collected from the development and operations of the new hotel. Taxes include all sales taxes collected in association with the hotel generated revenues, as well as all payroll related taxes collected from full-time hotel employees and temporary construction workers. Local governments will also collect new property taxes from the operation of the hotel. Many local governments will also collect revenues through lodging taxes.
In addition to local governments and hotel owners/employees, contractors and suppliers to a newly developed hotel will also benefit. Indirect impact includes all jobs and income generated by businesses that supply goods and services to the hotel. Examples of businesses that will indirectly benefit from the development of a hotel include suppliers of rooms related goods (housekeeping supplies, room amenities, etc), telecommunication vendors (internet, cable, etc.), utility companies, food and beverage suppliers, and other hotel related vendors.
Induced impact refers to economic effects generated when employees (full-time and temporary) and suppliers re-spend their wages on local consumer purchases. For example, an employee may purchase gas for their car on their way home from work.
Calculation of Impact
Pinnacle Advisory Group has conducted several economic impact studies as a result of hotel development. In most cases, direct and fiscal impacts can be calculated with relative confidence and accuracy. A hotel pro-forma will calculate the revenues in direct impact, while full-time and temporary payroll projections can be calculated from the preparation of staffing schedules combined with knowledge of local wages.
Indirect and induced impact, on the other hand involves a certain degree of subjectivity. While expenditures of goods and services can be estimated, it is difficult to accurately calculate how much of those expenditures will be generated from contractors and suppliers from the local area. Induced impact, which results from the re-spending of wages on local consumer products, is also difficult to estimate. Several complex models have been created by various economists that recommend multipliers that can be applied to total direct impact dollars. In general, depending on several factors including the size and economic diversity of the regional economy, multipliers typically range between 1.1 to 2 of total direct impacts.
A hotel’s impact to the local community is often more than just job creation and additional tax revenue. When all economic considerations are accounted for, the calculation of total direct, fiscal, indirect, and induced impact can give the public a more universal understanding of a hotel development’s impact.