Business experts have warned that a community buy-out of the Glenfarg Hotel would face significant hurdles.
Owners say the business is no longer viable but their plans to convert the building into flats has sparked anger among residents.
Locals are now considering taking on the hotel themselves.
But Perth and Kinross Council’s business development team has warned that a public buy-out may not be a success.
In a letter to planning officers, team leader Finlay Kerr said the hotel’s operators had “made every effort to trade through a very difficult economic period”.
He added: “Unfortunately, circumstances outwith their control are probably the cause of the decline in business, rather than the applicant’s inability to run the business.”
He said that damaging factors including the recent change in drink-drive laws and competition from “branded restaurants”.
Mr Kerr added: “A rather idealistic solution would have been for a community purchase to run and deliver an enterprise to suit their needs, as outlined in the objections.
“However, a community-run enterprise would face the same challenges as a privately operated business and would need to engage a suitably qualified and experienced team to deliver on their vision.”
He said: “In terms of economic impact, there is no doubt that residential use has less of an impact in the longer term.”
There will be a short-term boost from construction, Mr Kerr said, and an increased population would have a “positive impact” on other businesses.
A decision on the plans will be made later this year.