Project Repositioning & Turnaround
CASE STUDY 3
Markets change, but real estate stays where it was built. Communities that were developed to appeal to markets that no longer exist often languish for decades and can become unsustainable drains on the corporate interests that have to pay the operating bill annually. When the original market for the resort community described below dissolved, steps were taken to pivot toward another potential source for real estate sales and hotel occupancy. The key, however, is recognizing this reality before it is too late to make the necessary changes.
Development Management Group was retained by a large U.S. corporation that had assumed ownership of an approximately 3,000 acre resort and residential community when it bought the assets of another company. This property was part of the portfolio of assets and was included in the sale. Located in the Caribbean, this community had been under development for decades but had gone through a series of reversals. It had been deeded back to its original lenders in a bankruptcy and was subsequently purchased out of bankruptcy. But with virtually no management or controls on development, this large destination resort and residential community was now floundering and requiring significant cash infusions by the new corporate owners to maintain its operations. This property was also burdened with inherent competitive challenges including: its remote location was close to two hours from the international airport; its superior competition was uniformly regarded by the local market as a more sophisticated resort property and was located closer to transportation and urban amenities; and its reputation as a poorly managed, low-end community with little in the way of amenities and activities increasingly failed to attract the affluent local market.
Moreover, this property had been originally conceived as a resort and second home community, intended to primarily target the mainland U.S. market. However, as the U.S. tourism market evolved and sought newer products and properties, little had been done to restructure the original marketing efforts, and no effort had been made to cultivate alternative sources of revenue. The original second home property owners were now in their retirement years, and the hotel, golf course, tennis center and other amenities had not changed in over 20 years.
From a purely structural perspective, this property had seen better days and was seriously in need of renovation in all aspects of its products and programs. And from an organizational perspective, it still operated as if it existed on the U.S. mainland: no upper management spoke the local language; morale among employees was extremely low and resulted in poor resort guest reviews and a damning 2% return ratio; and local crime was increasingly a problem for guests and residents alike.
Notwithstanding the property’s superior beaches and reliably sunny and drier weather pattern, this large recreational and residential resort community had become an unsustainable economic burden on its corporate owners.
There were, however, some opportunities on the horizon that, if properly utilized, could assist in the turnaround of this property. The local government had recently announced its desire to increase the contribution of tourism to its GDP from 7% to 15%, and it was prepared to offer new tax incentives to resort developers in order to achieve this objective.
When DMG was engaged, annual losses were approximately $10 million, and hotel occupancy was at all-time lows. During the preceding years when the property had been in bankruptcy, the covenants and restrictions that had been placed on the property by the original developer had not been enforced. As a consequence, several sub-standard developments had been constructed by local builders that did not reflect the architectural controls envisioned in the community’s master plan. A time-share project had been developed, and because of lack of oversight by management, it had become a hang-out for unaccompanied teenagers and a magnet for drug activity within the community. Additionally, the original marina had deteriorated and was now becoming known as a drug transport site. Crime had escalated in spite of a robust 60 man security force, and a recent spate of crimes had occurred on the golf course, including one robbery by a man on horse-back.
The reputation among the local population had reached new lows, and antipathy toward the property’s corporate owners had emerged among local residents of the community. Management was regarded contemptuously by residents, and the property owners association became resistant to any efforts by the company to remediate problems.
Exacerbating this schism between the developer and the community was the fact that, among upper management, only one senior executive spoke the local language. This lack of cultural sensitivity served to increase the tension within the community and maintain low morale among the employees. People who worked in the community as hotel employees, in landscaping, and as lower-level managers, did not feel part of the organization. They took little pride in their job and felt no loyalty toward management. This problem impacted the resort guest experience and resulted in lost marketing dollars due to poor guest reviews and virtually no return visits.
Upon engagement, Development Management Group undertook a comprehensive analysis that led to the identification of 6 key strategic initiatives necessary to reposition this property and begin to reverse its losses. They were:
- A pivot away from the U.S. market for second home real estate sales and a robust marketing effort to attract the local market for both second homes and primary home real estate sales.
- The necessity of establishing a private community K-12 school to attract primary home sales among the local market.
- The development of a local retail shopping center so that residents and guests could find convenient access to groceries, home services, clothing etc.
- The establishment of productive relationships with government agencies so that new roads to the property could be constructed, connectors and access to main highway networks would be established, and travel time to the property could subsequently be reduced to less than one hour from the airport.
- The establishment of a large, flagged resort hotel that would attract and appeal to international tourists. This hotel would be financed with funding obtained from the local government.
- Additional tax incentives would also be sought to encourage real estate investment within the community by the local population. These efforts were consistent with the government’s overall objective to increase the tourism sector of the economy.
All objectives were achieved or underway in less than three years. Additionally, because DMG INC. had been engaged to provide direct management, it was able to design and implement several local marketing initiatives such as: a highly successful island-wide food, wine and art festival; numerous formal events hosting celebrities who were visiting the island; and numerous sporting events to both improve the local image of the resort and to enhance community relations by fostering a sense of pride among property owners.
These efforts helped to re-brand the property as a more sophisticated second home or primary home alternative for the local market. Local public relations yielded very positive responses and began to generate interest in new real estate products developed by the company.
Current residents were invited to participate in the development of these public events and to take part in the establishment of the new K-12 community school. These initiatives dramatically improved the soured relationship between the developer and the residents of the community and permitted new avenues of communication where grievances could be resolved and cooperation could be stimulated. Real estate sales targeting the local market generated significantly increased sales and a surge in single-family home construction.
Additionally, because corporate culture had been refocused and changed, and all upper management was now required to attend foreign language classes 4 days per week – paid for by the company, a new sense of cooperation with the company was achieved among employees and among community residents. Regular meetings between company executives and staff were made open to all employees, and all major announcements were presented in both the local language and in English. These measures generated a renewed sense of loyalty to the company and personal pride within the community that was reflected in both, the quality of the resort experience, and the demand for new real estate product.