Chapter 9 Resort Operations: The Importance of Recreational Amenities.

Chapter 9Chapter 9

Resort Operations:Resort Operations:The Importance of Recreational The Importance of Recreational

AmenitiesAmenities

Stages of the Recreational Amenities Stages of the Recreational Amenities Process:Process:

Feasibility Analysis and PlanningFeasibility Analysis and Planning

ConstructionConstruction

Operations ManagementOperations Management

Feasibility Analysis and PlanningFeasibility Analysis and Planning

preliminary estimate is made of the likely preliminary estimate is made of the likely demanddemand

alternative sites are investigatedalternative sites are investigated

one is chosen for in-depth analysisone is chosen for in-depth analysis

development team is assembleddevelopment team is assembled

development concept is agreed upondevelopment concept is agreed upon

Feasibility Analysis and Planning Feasibility Analysis and Planning (cont.)(cont.)

detailed feasibility analysisdetailed feasibility analysis

concept may have to be refined or an alternative concept may have to be refined or an alternative site may have to be selected and the process site may have to be selected and the process begun againbegun again

product programming is put into placeproduct programming is put into place– type and mix of residential, timeshare, and type and mix of residential, timeshare, and

hotel products are determined, an association hotel products are determined, an association structure and amenity program agreed on, structure and amenity program agreed on, and the phasing of the development set upand the phasing of the development set up

Feasibility and Analysis (cont.)Feasibility and Analysis (cont.)

approvals from necessary agencies and approvals from necessary agencies and citizen groupscitizen groups

plan finalized in detailplan finalized in detail

financing is securedfinancing is secured

marketing beginsmarketing begins

Construction and Operations Construction and Operations ManagementManagement

Planning, construction, and marketing activities Planning, construction, and marketing activities overlapoverlap

Operations/ManagementOperations/ManagementThe various stages of development may overlapThe various stages of development may overlap

specialized management services may be specialized management services may be requiredrequiredtransfer of community management to transfer of community management to associations of owners or membersassociations of owners or membersconsider renovation and repositioning of the consider renovation and repositioning of the resort resort

Elements involved in creating an amenity Elements involved in creating an amenity strategy and the impact on the development strategy and the impact on the development

process.process.

An amenity strategy is a “clear understanding of the role An amenity strategy is a “clear understanding of the role of recreational facilities within an overall project.”of recreational facilities within an overall project.”The elements are:The elements are:– Provide what the market wants.Provide what the market wants.– Provide for the changing role of the amenity package Provide for the changing role of the amenity package

over the life cycle of the development.over the life cycle of the development.– Balance the cost of the amenities with the revenue Balance the cost of the amenities with the revenue

they generate.they generate.– Guarantee developer control in the early steps of the Guarantee developer control in the early steps of the

project.project.– Provide for an orderly transfer of control from the Provide for an orderly transfer of control from the

developer to residentsdeveloper to residents

Impact on the development processImpact on the development process

An amenity is “a rather broad concept that can An amenity is “a rather broad concept that can encompass virtually any feature that is attractive encompass virtually any feature that is attractive to a given market and thus adds value to land.”to a given market and thus adds value to land.”

There are two basic reasons for including There are two basic reasons for including amenities in a recreational development:amenities in a recreational development:– they increase the value of the real estatethey increase the value of the real estate

– amenities give marketing leverageamenities give marketing leverage

Impact on the development process Impact on the development process (cont.)(cont.)

Downside: substantial costs are involved in Downside: substantial costs are involved in providing what is often a seasonal attractionproviding what is often a seasonal attraction

The key is to achieve a balance between the The key is to achieve a balance between the cost of providing the amenity with the sales cost of providing the amenity with the sales generated by its presence.generated by its presence.

The relationship between developers and The relationship between developers and managers of an amenity package in terms of managers of an amenity package in terms of

successful planning and implementation.successful planning and implementation.

An operational plan is needed that identifies:An operational plan is needed that identifies:– who will develop, own, and operate the facilities and for how who will develop, own, and operate the facilities and for how

longlong– who will use the facilities and on what termswho will use the facilities and on what terms– precisely what the expected relationship will be between real precisely what the expected relationship will be between real

estate and recreational amenitiesestate and recreational amenities

Development must balance the cost of constructing the Development must balance the cost of constructing the amenities with revenue generated by their presence amenities with revenue generated by their presence

Recreational amenities should be developed up front Recreational amenities should be developed up front and used to draw guests or stimulate real estate sales. and used to draw guests or stimulate real estate sales.

Relationship between developers Relationship between developers and managers (cont.)and managers (cont.)

The developer should continue to control The developer should continue to control construction, operation, and maintenance of the construction, operation, and maintenance of the amenity package throughout developmentamenity package throughout development

The rule of thumb is that the developer retains The rule of thumb is that the developer retains control until at least 50% of the project is control until at least 50% of the project is completedcompleted

Relationship between developers Relationship between developers and managers (cont.)and managers (cont.)

Once the recreational amenity has served Once the recreational amenity has served its primary purpose of selling real estate, its primary purpose of selling real estate, its value to the developer declines while its value to the developer declines while the carrying costs increase. The amenity is the carrying costs increase. The amenity is then either given away or sold to the then either given away or sold to the residents of the project.residents of the project.

Developers have little or no leverage at Developers have little or no leverage at the end of the build-out phase. Therefore the end of the build-out phase. Therefore it is a good idea for the developers to it is a good idea for the developers to negotiate at the beginning of the projectnegotiate at the beginning of the project

The role of the developer in the various The role of the developer in the various types of community management structurestypes of community management structures

Communities Communities – can be managed through municipal can be managed through municipal

corporations and community improvement corporations and community improvement districts, nonprofit tax-exempt organizations or districts, nonprofit tax-exempt organizations or community associations.community associations.

Government bodiesGovernment bodies– the developer has no control as the residents of the developer has no control as the residents of

the municipality elect the governing body, which the municipality elect the governing body, which makes most operating decisionsmakes most operating decisions

Role of the developer (cont.)Role of the developer (cont.)

Nonprofit tax-exempt organizationsNonprofit tax-exempt organizations– developer could select and control the board indefinitelydeveloper could select and control the board indefinitely– nonprofit organization does not have the authority to nonprofit organization does not have the authority to

enforce covenants which are usually desirable in a enforce covenants which are usually desirable in a master-planned developmentmaster-planned development

– this type of organization is best used in conjunction with this type of organization is best used in conjunction with other types.other types.

Community associationCommunity association– gives most flexibility for a resort communitygives most flexibility for a resort community– various classes of membership can be designed so as various classes of membership can be designed so as

to allow the developer to control the community until it to allow the developer to control the community until it can be transferred to the owners latercan be transferred to the owners later

Compare and contrast the opportunities for Compare and contrast the opportunities for effectively structuring the management of a effectively structuring the management of a

community and its amenities.community and its amenities.

There are four common structures:There are four common structures:– Equity ClubEquity Club– Right-to-Use ClubRight-to-Use Club– Convertible Club ProgramConvertible Club Program– Association MembershipAssociation Membership

Equity ClubEquity Club

Developers can transfer ownership of the Developers can transfer ownership of the recreational facilities to a separate nonprofit recreational facilities to a separate nonprofit while retaining the right to operate the facilities while retaining the right to operate the facilities until most of the residential property is sold. until most of the residential property is sold. Developer is protected by ensuring that the Developer is protected by ensuring that the amenities will not be operated in a way that amenities will not be operated in a way that adversely affects sales of the remaining real adversely affects sales of the remaining real estate unitsestate unitsDeveloper contributes the recreational amenities Developer contributes the recreational amenities in return for the right to sell equity memberships in return for the right to sell equity memberships to real estate ownersto real estate owners

Equity Club (cont.)Equity Club (cont.)

Club members pay annual dues for the Club members pay annual dues for the right to use the facilities and benefit from right to use the facilities and benefit from any increase in the value of the amenitiesany increase in the value of the amenities

If property purchasers inherit the equity If property purchasers inherit the equity membership of owners the value of the membership of owners the value of the equity membership is increasedequity membership is increased

If all memberships are sold, new owners If all memberships are sold, new owners must wait for one to become available must wait for one to become available before they can participate in the amenity before they can participate in the amenity program.program.

Right-to-Use ClubRight-to-Use Club

Developer retains ownership and control of the Developer retains ownership and control of the facilitiesfacilitiesMembers buy the right to use the amenitiesMembers buy the right to use the amenitiesDeveloper decides whether the initial payment is Developer decides whether the initial payment is a fee or a deposita fee or a deposit– Fee program: a member who resigns from the Fee program: a member who resigns from the

club may receive all, some, or none of the club may receive all, some, or none of the deposit backdeposit back

– Deposit program: members receive the full Deposit program: members receive the full deposit when they resign, but not until 20 to deposit when they resign, but not until 20 to 30 years after their acceptance into the 30 years after their acceptance into the programprogram

Convertible Club ProgramConvertible Club Program

Program begins as a right-to-use club, but Program begins as a right-to-use club, but members are made aware up front of the members are made aware up front of the intention to turn it into an equity club. intention to turn it into an equity club.

One-time fee or deposit is refundable and One-time fee or deposit is refundable and may be applied to the equity club may be applied to the equity club membership.membership.

Association OwnershipAssociation OwnershipHomeowners’ association is set up to represent Homeowners’ association is set up to represent the surrounding property units. the surrounding property units. Association members do not buy memberships Association members do not buy memberships but can pay off the debt through assessments but can pay off the debt through assessments and user feesand user feesMemberships may be sold to owners who want Memberships may be sold to owners who want preferential treatmentpreferential treatmentDeveloper recovers the cost of building the Developer recovers the cost of building the recreational amenities through means other than recreational amenities through means other than the sale of real estatethe sale of real estate

Comparison of Basic OptionsComparison of Basic Options

Up-front cost is highest for the equity clubUp-front cost is highest for the equity club

The membership price on an initial right-to-use club is The membership price on an initial right-to-use club is even highereven higher

Cost is reduced by the original initiation feeCost is reduced by the original initiation fee

No up-front cost for the association ownership unless No up-front cost for the association ownership unless annual memberships are sold. Even then, the annual annual memberships are sold. Even then, the annual cost is relatively low.cost is relatively low.

Gross proceeds from the membership program are Gross proceeds from the membership program are greatest with the right-to-use club, although the income greatest with the right-to-use club, although the income is dependent on the selling of membershipsis dependent on the selling of memberships

Comparison of Basic Options Comparison of Basic Options (cont.)(cont.)

the income is less in an equity club, the the income is less in an equity club, the guarantee that the money will be realized is guarantee that the money will be realized is greatergreaterconvertible program produces less gross incomeconvertible program produces less gross incomeassociation management produces no gross association management produces no gross income at all unless annual memberships are income at all unless annual memberships are soldsoldinitial operational cash flow is low with both initial operational cash flow is low with both association management and an equity club and association management and an equity club and moderate with the other two optionsmoderate with the other two options

Comparison (cont.)Comparison (cont.)

sell-out operational cash flow is greatest in an sell-out operational cash flow is greatest in an equity club, slightly less in a right-to-use club, equity club, slightly less in a right-to-use club, and lower in the other two options.and lower in the other two options.because association members own and operate because association members own and operate the recreational facilities, a greater sense of the recreational facilities, a greater sense of community exists among themcommunity exists among themsense on community remains good in an equity sense on community remains good in an equity club, less so in a right-to-use club because of club, less so in a right-to-use club because of the loss of owner control and uncertainty over the loss of owner control and uncertainty over the amenities, and even less in a convertible the amenities, and even less in a convertible club program because owners have no control club program because owners have no control over the facilitiesover the facilities

Comparison (cont.)Comparison (cont.)

developer has the greatest flexibility under a developer has the greatest flexibility under a convertible club program and none with association convertible club program and none with association ownershipownershiplitigation risk to the developer is low in both an litigation risk to the developer is low in both an equity club and association membership, moderate equity club and association membership, moderate to low in a right-to-use club, and greatest when a to low in a right-to-use club, and greatest when a developer sells the amenities in a convertible club developer sells the amenities in a convertible club program.program.convertible club program is the best option where convertible club program is the best option where nonowner access to club facilities is importantnonowner access to club facilities is importantin an equity club, access is limited to available in an equity club, access is limited to available memberships until a cap is reachedmemberships until a cap is reached

Comparison (cont.)Comparison (cont.)

in a right-to-use club, access is good until in a right-to-use club, access is good until conversion takes placeconversion takes place

access varies in association ownership access varies in association ownership depending on the regulations set by the depending on the regulations set by the members themselvesmembers themselves

convertible club program is the best option convertible club program is the best option where nonowner access to club facilities is where nonowner access to club facilities is importantimportant

Comparison (cont.)Comparison (cont.)

in an equity club, access is limited to in an equity club, access is limited to available memberships until a cap is available memberships until a cap is reachedreachedin a right-to-use club, access is good in a right-to-use club, access is good until conversion takes placeuntil conversion takes placeaccess varies in association ownership access varies in association ownership depending on the regulations set by depending on the regulations set by the members themselvesthe members themselves

The End!The End!