Advisory & Interim Management
CASE STUDY 3
Often well conceived real estate developments start off with a bang, achieve strong brand awareness, enjoy high sales volume, and then stall for reasons not apparent to those involved in the initial phase of development.
As profits begin to shrink, and losses in operations become unsustainable, developers are often forced to seek consulting expertise to identify the factors that might be affecting bottom-line results and to define new, more effective strategies going forward. Often it is necessary to engage interim management to both implement these new strategies and to restructure and redirect the existing management organization….
This company was developing a 2150-acre, luxury, destination recreational/country club community. The amenities were comprised of two golf courses, a tennis center, a croquet center, three clubhouses, a stadium, and a polo and equestrian complex. It was targeted toward the international jet set market that either participated in, or was attracted by, polo and equestrian events and the social life that was associated with these activities.
Residences were almost entirely second homes, occupied only during the “season”, from January through mid-April. At the time of engagement the company had been losing $6 to $8 million per year since its inception, ten years earlier.
Located thirty minutes away from the area’s primary amenity, the ocean, the community was considered remote and inconvenient by many market sectors.
It had been developed to appeal to the wealthiest segments of international society and had successfully established this image in this market. However, very little attention was given to cost control, and lack of fiscal responsibility was pervasive.
Real estate price/value relationships had not been addressed in many years. As a result, the company was not realizing the values in its real estate sales which should have evolved from the considerable investment it had made in marketing and image creation over the previous ten years.
Incentives to third-party builders participating in the builder program which had been offered during the start-up phase of the community were continuing to be provided. Real estate sales had never exceeded a moderate pace.
None of the operations was profitable, and all were faced with the problems of extreme seasonality. The “season” was a period of unusually intense activity, characterized by several large, highly formal functions each week as well as numerous smaller parties. Normal operating problems and staffing issues were magnified considerably by the four month nature of these activities. And, as a private, exclusive club community, there were only limited opportunities to generate off-season activity.
The initial objective of the involvement was to move the company toward profitability. The company’s annual loss had been budgeted to be $5 million; however, at the time of Development Management Group’s engagement, which was six months into the fiscal year, it appeared that the prior year’s loss of $8 million might be exceeded. The board of directors of the parent company modified the objective less than one month after engagement to that of disposing of the company, regardless of any operating improvement which might be achieved.
The company had done a good job of establishing its image in the marketplace. However, it did not appear that the company had taken advantage of the branding it had accomplished and its significant investment in its extraordinary amenity base. While the company was incurring substantial annual losses, the builders in the community were making large profits.
Development Management Group enacted two fundamental changes upon engagement: the price for land sold to builders was increased, and the financing incentives that had been offered to the builders in the builder program were eliminated.
Highly targeted marketing, public relations and sales programs were immediately implemented to increase the pace of retail absorption. Tracking the results of marketing expenditures was emphasized, and individual sales production was closely monitored. Programs to use the existing property owners as a referral base were introduced as were efforts to have existing owners upgrade to new properties within the community.
New products were designed to broaden market appeal, to expand the range of alternatives available, and to update what had become an outmoded and a repetitious product line. Tracts were sold to builders with specific product strategies, and new builders were added to expand the builder program. New cost controls were put in place, and numerous categories of expenses were eliminated.
Simultaneously, an effort was commenced to identify prospective purchasers for the entire project. This was pursued vigorously to complete negotiations as rapidly as possible so that the newly achieved market acceptance would not be eroded.
The pace of retail and brokerage sales increased quickly during the immediate selling season as the new programs began to have an impact. This produced increased land acquisition by builders desiring to prepare new products for the following season.
Operating costs were brought under control, and employee concern for achieving profitability was established.
By the end of the fiscal year, an operating profit in excess of $3 million was achieved, the first profit in the history of the project. The budget for the following year anticipated an operating profit of $5 million.
Negotiations with several groups were begun during this period for the disposition of the remaining assets of the company. These were concluded successfully at the end of the first quarter of the new fiscal year.