Business Plan for Proposed Corporate Center / Banquet Hall

•  Building the Corporate Center / Banquet Hall at Deer Ridge will require the Home Owners Association (HOA) to front about $100,000 to cover negative cash flow from operations and start up costs.
•  The above $100,000 assumes that the cost of construction is 100% covered by both the interim construction loan and permanent loan.
•  During the first five years or construction and operation, the property will only, at best, breakeven cash flow wise with a significant risk of substantive negative cash flow.
•  As a consequence, based on the current analysis, it is strongly recommended that the Corporate Center / Banquet Hall NOT be built so that homeowners at Deer Ridge are not at risk from this business venture.

The most fundamental question and point of issue arising from this plan is:

•  Where will the $100,000 required to fund the Center come from over the next 12 months? 
  • Operating reserves? 
  • Working capital loan? 
  • Special Assessment to all owners?
•  Both the answers to this question, and the fundamental and critical question itself, appear to have been either overlooked or ignored.

At this point, the HOA has already lost nearly $30,000 on this project.  The property has also lost a substantial amount of managerial and Board time that could have been more judiciously spent. This time and dollar loss to the owners could have been avoided if this kind of business plan analysis had been properly undertaken before expending so much money on detailed architectural drawings.  

However, by completing this plan now and cancelling this project - prior to moving forward with construction and operational implementation, all homeowners at Deer Ridge can avoid the much larger, significant financial risk that can now be averted.

Bottom Line Recommendation:  Vote AGAINST Building the Corporate Center / Banquet Hall.

Download Full 40 Page Business Plan

Please click Full Business Plan to download the complete 40 page report that includes the below email, prior emails relating to the Plan and all projections, charts and tables for the five year analysis. Once the download is complete, you can click Save a Copy to have a copy on your own hard drive.

Full Report to the Board

The following is the full text of the email that was sent to the Board regarding the Center recommending cancellation of the project.  Prior emails regarding this matter are included in Section 1.1 of the full business plan.

•  The timeline assumption is that it will take a month to get any potential Owner approval to move forward with building the Center, so the starting date for this business plan is October 2006.
•  It is assumed that it will take six months to construct the Center once the approval is obtained.
•  Start Up Costs are assumed to be the already sunk costs of $26,000 for the current plans plus I added $1,000 for special brochures to push revenues for the Center.
•  Based on Joe’s numbers, the current construction numbers are $267,000 with the land valued at $70,000.  He assumes that we can get an 80% LTV that would allow us to borrow the full $270,000 cost to construct.
•  Note:  This amount does NOT include any hard or soft costs related to construction or permanent financing.
•  Assuming we borrow that amount and get a 9% interest, 20 year amortization, loan, our monthly payments would be $2,429.26 NOT counting taxes and insurance.  Even before the building is complete, we will have construction interest and possibly points. 
•  I have assumed that taxes on the finished, improved property will be $2,000 a year and that full insurance coverage will be $5,000 a year.  (If these are not correct, let me know ASAP.)
•  If the above numbers are correct, the HOA will have a PITI on the loan of about $3,100 per month.
•  The business plan assumes that RML pays the HOA this same $3,100 per month in rent, starting in Month 1, October 2006, to cover construction costs, etc.  Originally, Joe had included a rent payment of only $1,821 so the above number is a major change from prior drafts.
•  I have not changed any of Joe’s assumptions on revenues or their timing.  Of course, the major risk of most new ventures is that ramp up of sales always takes longer and costs more!  However, as stated, Joe’s numbers remain unchanged.
•  The assumption is that there will be some increase in personnel as a result of having the Center.  Joe had originally included 3 new people to mostly handle the marketing and other functions that would be incrementally required for the Center.  After seeing that the numbers made no sense, his suggestion was to remove all of them so the numbers work. 
•  Even without the Center, there seems to be a high level of complaint that all functions at Deer Ridge are understaffed.  If this is so, intuition would require that there would be some level of increased staffing to handle the increased load on all functions at the property that would result from building and operating the Center.
•  Since this increase in personnel may not be directly hired for, or have a job description that relates, to the Center, I have included a single $30,000 salary line item for Year 1, increasing 10% per year after that..  My guess is that there will be major requirements for some body, or bodies, added to the staff and this is my best guess at this point as to what it will REALLY cost us.
•  With incremental personnel costs, there are also incremental increases in both employee benefits and payroll taxes.  These are included in the plan.
•  Joe had included $10,000 for tables and chairs.  Those are included.
•  However, if we are to really be a business center, we need to have adequate A/V equipment to meet the needs of those users:  Wireless PA system, screen, overhead projector, notebook computer projector, podium, white board and easel, markers, big TV, VCR and DVD player.  I have estimated these at an additional $12,000.
•  I have increased several line items that were previously zero, again, with the full expectation that incremental business in a new service area requires incremental cost increases over and above what is currently spent.  These increases include:
  • Advertising costs - $100 per month.  Minor and assumes mostly leveraging our existing web presence.
  • Promo items - $100 per month.  Deer Ridge pads, pens, incentives, gift bags, free golfing, etc.
  • Mileage - $30 per month for the incremental driving by staff members.
  • Conferences and meals - $20 for any wining and dining.
  • Printing costs - $25 for increased sales and leasing brochures that will be handed out to everyone possible.
  • Miscellaneous costs - $50 per month.  For all the things none of us are smart enough to come up with!
•  I have changed utilities to be a flat, average of $350 per month and taken out the insurance figure since that seemed to be double counting.

Current Conclusions

•  The HOA will need to provide $100,000 in addition to signing the $270,000 loan.  This $100,000 will be used to pay for negative cash flow from operating deficient, from start up costs, construction costs and to cover the slow ramp up of sales.
•  According to these numbers, the cash balance remaining from this $100,000 gets to a cash balance low point of $29,000 next April.  This is not much in the way of contingency reserves for all the things that can go wrong, get delayed, cost more or extend our ramp up time for occupancy.
•  We lose $40,000 from a P/L point of view in our first 12 months of operation starting in October 2006; make a whopping $4,500 in Year 2; $14,000 in Year 3; $16,000 in Year 4 and $21,000 in Year 5. 
•  The above totals about $55,000 for the four years after the first year loss of $40,000 for a net positive of $15,000 for the five years. 
•  Considering Start Up costs, it appears to me that the Center, based on these numbers, is a loss.
•  This does not take into account any incremental rental activity for owners in the rental pool.  However, all owners are NOT in the rental pool and as a result will not see any potential revenue to compensate them as home owners for the risk of construction, operating losses, etc. 
•  As such, this venture is particularly risky for the 12 to 14 owners not in the rental pool and since even as a minority, their interests must be considered and protected.
•  Likewise, as I see it, there is NO benefit to the 15% to 20% of us who are not in the rental pool unless the Center’s operation offsets what we as owners have to pay to support the property though our HOA fees each month and actually reduces our HOA fee. 
•  Actually, just the opposite will probably occur – the property could bear a significant increase in wear and tear from any potential increased traffic caused by the Center which costs us all in either increased monthly assessments or in special assessments to go fix what gets broken or worn out.
•  As with most new ventures, there are a LOT of variables here.  If Joe is right and there will really be NO increase in staff whatsoever over the next 5 years as a result of the Center, the numbers greatly improve.  If both Joe and I are wrong and even my estimates for personnel are low, we could have a guaranteed loss.
•  The even bigger issue is the estimate on when and how many folks will use the Center and what they will be willing to pay. 
•  If Joe’s numbers are overly conservative, there is much bigger upside.  If Joe’s numbers are overly optimistic, all owners bear the risk of losing more than the $100,000 up front that the Center will cost to construct and fund.
•  The other question is:  Where will the $100,000 required to fund the Center come from over the next 12 months?  Operating reserves?  Working capital loan?  Special Assessment to all owners?

Please discuss all of this in the Board meeting tomorrow and mark up one copy of this document with the consensus opinion.  I will then revise accordingly and give you a summary set of numbers with my analysis to send out to all owners.
 
My hope is that the this effort on actually using a business planning approach for deciding on building the Center has been helpful for all of us gaining the clarity that has been needed from the beginning.
 
Robert
A-202