Crave Real Estate EBook May 2012

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Is my resort worth saving?

4 Secrets to help Asset Managers evaluate underperforming properties.

by Lorne Bassel

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ABOUT THE AUTHORLorne Bassel has close to three decades of real estate development experience in both urban and resort locations throughout the world. He is President and CEO of The Crave Group, a real estate development firm who are asset managers and General Partners for financial institutions.

In this article Lorne takes a lighthearted approach to addressing a very prevalent and serious matter in the resort industry.

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CONTENTIntroduction

It’s hard to have clear vision while sitting in a hot tub.6

Secret 1 - History of ResortingDon’t ask other people to change their behavior to support your dreams.

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Secret 2 - Natural AttractionA cliff is not a mountain; a swamp is not a preserve.

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Secret 3 - Nuclear Hurdle FreeMake sure you’re not ignoring a nuclear problem.

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Secret 4 - Financially ReasonableIt’s the cash flow stupid.

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RecapAsk the tough questions, get the real answers.

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It takes courage and clear-headed focus to evaluate your resort objectively. Lord knows it’s easier to keep your head in the sand. After all, a rolling loan gathers no losses, right? Not really. The truth is the problems will only grow with time, and dealing with them now is best. The good news is, if you’re reading this article chances are you already have the courage to face them.

I use this analogy all the time with partners and clients facing tough decisions about a resort’s future. More so than other assets, we tend to become emotionally engaged with resort investments. And while emotional engagement might be exactly what one wants from the paying public, when it comes to evaluating risk/return scenarios, it frequently leads to poor (read: costly!) decision making.

And are there ever decisions to be made. During the last real estate boom, a large number of new resorts were built with an “If you build it they will come” approach. That was all good and well for developers until the financial downturn forced investors to look closer at their balance sheets. The end result? A lot of Asset Managers today are holding the reins of properties that are bleeding money. Some are properties that should never have been built in the first place.

How can you tell if yours is one of them? You’ve probably vacationed at numerous resorts and

have a well-formed opinion from the paying guest’s perspective. Developing a professional understanding of a place when you’re assessing it from a business standpoint is an altogether different affair. Answering that nagging question, “am I throwing good money after bad money” is not only vital for the project at hand, but possibly for your firm and organization as a whole.

If you want to know if you should cut your losses or press forward, read on. Based on three decades of resort real estate experience all over the world, the next 4 key criteria are the elements crucial to your success. If you have these 4 – they will come. If you’re missing one, it may be time to move on to a project with better prospects. While this quick check list may not be all inclusive, it is a simplified way to examine what may be a very complicated situation.

Its hard to have clear vision while sitting in a hot tub.

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HISTORY OF RESORTING Don’t ask other people to change their behavior to support your dreams.

In case you didn’t soak that in, this point bears repeating. Mark my words: “Don’t ask other people to change their behavior to support your dreams.” Countless bright, visionary developers have been romanced by a place and decided to build where they had no business building a resort. I’m referring to places in regions with no history of resorting. Places bought and developments attempted on the assumption that with all this beauty they will surely come. The majority of these developers will confess that they underestimated the manpower and financial resources required to get people to visit a place they have never heard of before.

A destination constructed in a resorting vacuum presupposes that you can change human behavior simply by building beautiful buildings and grooming the landscape. Even with a disproportionately large

marketing budget to woo would-be guests, vacationers will tend to go where the tribe goes. Namely, to destinations that have a history of resorting already going for them. Simply put, it’s all about momentum. A destination with loyalists and an existing customer base provided the best platform for success.

Consider the cautionary tale of Lake Las Vegas, a.k.a. the “Candlelight in the desert.” Just 20 minutes off the Vegas strip the developers felt certain buyers would fall in love with the romantic setting, twinkling night sky and desert lake. I know – I was one of them. In hindsight, we were asking people to leave Las Vegas to come to our place. Ever wondered how much it would cost to get people to leave the strip? A whole lot more than makes sense, it turns out. We might have been close to Vegas, but we were 10 feet off the money.

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The point is, the area in which your resort is built should have a solid traffic base already in place. That goes double if you intend to sell real estate. Our experience has proven that a buyer typically has an 18-month history of resorting with a given destination before purchasing a property. As a catalyst to sales, you need a foundation of visitors whom you know will be returning repeatedly.

ASK YOURSELF1. Is there already a following of loyalists who love this area and talk it up?

2. Is there a clear major market that you can economically speak to?

3. How much marketing budget will be required to convert your target market?

If your place has a strong history of resorting and the marketing costs look reasonable, you’re one step closer to success.

NATURAL ATTRACTION

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A cliff is not a mountain; a swamp is not a preserve.

At the peak of the last real estate and resorting boom, it was common to see swaths of valley land alongside highways get earmarked as choice destinations for ski resorts. Swamps are not preserves, man-made ponds are not lakes and mountain homes that require you to remove skis and cross major thoroughfares are not - I am afraid to say – ski-in/ski-out real estate. Resort homes along side major highways with no land to move are not tranquil retreats. (Just look at the enormous real estate bust in Spain as proof). The simple truth is, people can spot a “fake” from a mile away, no matter how real you make it feel.

Your resort needs to be – or be surrounded by – real attractions: stunning mountains, pristine lakes, warm oceans. Think about it: resort operators can charge you 70 euros to ride the lifts at Les Arcs, France, because as you ski down you enjoy the view of Mont Blanc and the alpine villages dotting the valley below. That and 425 kilometers of already developed ski trails. Even before Les Arcs resort was built, the area’s natural beauty was a compelling attraction that made it a must-see (or must-ski) destination.

ASK YOURSELF1. Does my resort have a natural, sustainable attraction that people value? If not, is there a man-made attraction that is supportable and meaningful to others?

2. Does the surrounding landscape support a variety of outdoor experiences, for a variety of age groups?

3. Are there other rituals and festivals that bring people to the area and form a part of the attraction?

The point is: don’t expect your resort property to do ALL the heavy lifting. You need natural attraction to drive visitation. Be honest and frank about the allure of your natural attraction.

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NUCLEAR HURDLE FREE

Make sure you’re not ignoring a

nuclear problem.

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Developing resorts ain’t for sissys. Many have one or several major hurdles to overcome, whether environmental, political, physical or other. Just because you might be situated in gods paradise doesn’t mean there aren’t snipers out there committed to taking your resort down. Enthusiastic developers often understand the challenge, but underestimate its consequences. With a Superman Complex and can-do attitude, some developers fail to acknowledge the Elephant in the room. Instead they minimize critical issues and ride hopefully on their optimism.

Be warned! The truth is, such a challenge can become the focal point of your team’s day. How can you go out and win customers when you’re spending all your time struggling internally? Not only will it exhaust all your resources, it can virtually eliminate all creative thinking and behavior. When you develop in a resort you are under a microscope. With the world of social media and increased government regulation many resorts are not just hampered by these nuclear problems, they are stopped dead in their tracks.

Tremblant Resort in Quebec is a great example of the success possible in the absence of such hurdles. When we purchased Tremblant ski area in the early 90’s, we worked with the community and provincial government to bring them on board. Impressed by the company’s vision, officials fast-tracked improvements that would help ensure Tremblant’s success. Even

the highway was extended to improve access to the mountain. By working with locals and being open about development plans, citizens came on-board with developers and supported the project. Tremblant now consistently ranks amount the best resorts in North America.

ASK YOURSELF1. Are there any political obstacles to my resort’s success? How much energy and resources do these obstacles absorb?

2. Does the surrounding environment and zoning support my resort?

3. If people are telling you that they can solve existing problems, are they credible? Have you challenged them about their abilities? What is your own opinion? How would you decide if this was an issue in a conventional urban setting?

Don’t fight a battle you can’t win. Taking a realistic pulse of where things are at is crucial in determining your resort’s viability.

FINANCIALLY REASONABLE

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It’s the cashflow stupid.

The excitement of getting to work where we play creates an emotional attachment in which Asset Managers can have difficulty making sound decisions. Thinking clearly in the magical mountains of Chamonix comes less easily than in an industrial park in New Jersey. But it’s not called a balance sheet by chance – things simply have to add up right when you consider how much goes in, how much comes out, and for how long.

Anyone who has developed large scale, mixed-use projects will tell you that they can be a perennial money pit, particularly when compared to conventional real estate. That’s exactly the saga that befell the Palm Islands in Dubai. Construction of the artificial archipelago and

mixed-use development began in 2001 and was slated to take 10 to 15 years. But even the developer’s deep pockets could not sustain it when the financial crisis rocked Dubai. With so much cash flow invested in infrastructure development, things took a serious downturn when sales slowed to a trickle.

The financial model of this project would not make sense to private developers, investors and most governments. There are numerous economic and land models that can and should be your bible – get on the right model and stick to you.

ASK YOURSELF1. From a purely numbers perspective, does your resort make sense?

2. Are there any significant hidden costs that no one wants to talk about?

3. What do your 5, 10 and 20-year projections look like?

At the end of the day, your resort’s viability all comes down to the cash flow. It’s very simple math. Everything else is commentary.

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RECAP

In my experience, these 4 secrets – in combination – are something all successful resorts have in common. The questions for evaluating them are simple; what’s hard can be getting management to agree on the answers. Still, keeping these 4 points in mind and returning to them again and again will keep you focused on the right objectives. Good luck!

Ask the tough questions, get the real answers.

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DOES YOUR RESORT HAVE WHAT IT TAKES?

YES NO

History of Resorting

Natural Attraction

Nuclear Hurdle Free

Financially Reasonable

www.craverealestate.com