By now, you have succeeded in attracting the interest of some bankers by pointing out the profit potential in the fractional vacation home ownership industry and in your proposed development. Good job! Now, it’s time to get to the negotiating table—that is, to present your business plan to your financing sources.
II. Getting to the Negotiating Table—Presenting Your Business Plan
Following are some sections you may consider including in your business plan:
A. Executive Summary.
Present briefly in two to four pages the basic facts of the deal and its financial highlights, especially the return of and on investment.
B. Feasibility Study.
Cite historic and current real estate data showing that the demand for vacation lodging is greater than the supply currently available and there is a market need for your development. Offer projections of future visitor growth, and cite demographic and psychographic reasons for this expected growth.
The study needs to present fractional and whole ownership real estate closing prices in your area—both recent past and present—to demonstrate that there is good reason to believe the project will compete successfully against primary, secondary and tertiary competitors.
Maps showing accessibility to feeder markets, charts illustrating growth trends in the area and real estate trends may be presented.
C. Description of Project.
Describe the property to be developed. This should include: location and size of the land parcel, its ownership or terms of its control, proximity to vacation attractions, proposed number of units and size of units to be developed, amenities to be offered, status of permits and so on.
Include pictures, site maps, renderings, floor plans, unit plans and elevations, etc., as appropriate,
D. Owner Usage Plan.
Describe how the usage plan/reservation system will respond to the vacation patterns and needs of prospective owners.
E. Marketing and Sales Plan.
The success of your development depends substantially on effective marketing and sales programs.
Describe the demographics and psychographics of the target audience. Create a market positioning statement that conveys the unique vacation benefits and services that the property offers to owners.
Present a detailed strategy for appealing to your target audience across multiple channels—website, email, social media, local programs, broker programs, co-marketing initiatives, public relations and others.
Estimate what percentage of sales will result from each marketing initiative. Set up systems for calculating the cost of each program and measuring response from each. Cut back or eliminate programs that are found not to be cost effective.
Establish your average expected sales price and calculate initial pricing and anticipated price increases. Include in your sales price the cost of incentives to help close sales.
Determine your marketing and sales goals. Create month-by-month spread sheets projecting anticipated marketing and sales response.
Describe what sales training will be offered, what incentives will be offered to sales people and how the sales team will be managed.
Include descriptions of how all programs and personnel will be monitored so as to ensure prompt feedback and cost-effective operations.
F. Financial Projections.
List your “Sources of Funds.” This category may include: Developer Investment, Outside Capital Investment and Sales Revenues.
List your “Uses of Funds.” This category may include: Property Acquisition/s, Construction, Marketing and Sales, Professional Fees, Financing Costs and General and Administrative.
Projections need to be made by year and also spread by month.
Show line item detail for each sub-category under Sources or Uses.
It is essential to footnote the assumptions on which your projections are based. Otherwise, your projections may lack credibility, and bankers may relegate your presentation to their circular file.
On your overall financial summary sheet, present your total Sources of Funds and subtract from it the total Operating Cash Flow. The result will show distributions available to outside capital and to the developer.
Remember Murphy’s Law: “If something can go wrong, it will.” It is essential, therefore, to anticipate problems that may arise and show how you plan on dealing with them. Your projections need to show a likely “base case,” a “best case” and a “worst case” along with how unexpected events will be handled.
G. Track Record of the Development Team and Associated Professionals.
Demonstrate the relevant experience of the team and associated professionals and cite their track records of success.
H. Investment Risks and Measures Taken to Mitigate Risks
Cite relevant risks that may affect the success of the development such as unanticipated weather events, prices rises, market changes, construction delays and so on.
Include measures you will take to mitigate risks to the banks’ investment. This may include: frequent monitoring of all operations so that small problems are not allowed to become big ones; maintaining sufficient contingency funds to cover unexpected expenses; carrying sufficient insurance; and so on.
I. Home Owners’ Association (HOA) Budget.
Present an HOA budget sufficient to ensure that the property will be maintained and operated in a way to preserve its market value. This mitigates some lender risk and protects against owner dissatisfaction that can lead to mortgage defaults.
Consider these “insider tips” when crafting your business plan.
- Anticipate the “hardball” questions your capital source may raise and deal with them pre-emptively in your presentation.
- Distinguish between issues of “principal” and of “principle.” Your banker may make “pesky” requests for, additional information. If complying with these requests will not cost you significant money (i.e., “principal”), don’t resist them by reason of “principle.” Provide the information rather than waste time and good will by objecting.
- Include in your business plan a detailed, regular program for ongoing communications with your lender. You should deliver the unfavorable news as rapidly as the favorable. Provide for periodic comparisons of actual vs. projected results, and, where actual results fall short of projections, describe the steps you will take to meet these challenges.
- Distinguish between “growth” and “seed” capital. Since many, if not all, institutions are reluctant to provide “seed” capital, it is important that your business plan make clear that you are seeking “growth” capital. Your presentation will be viewed more favorably, if you provide this data:
a) Amount of developer investment (i.e., “seed” capital already raised);
b) Amount of “growth” capital being sought;
c) What benchmarks of progress (permits, pre-sales, etc.) will be reached prior to the bank’s investment; and
d) Whether the project team has previously worked together or not.
Do you have any “insider tips” for crafting a business plan that you can share with fellow site visitors?
Part 3 will follow
David M. Disick, Esq. is president of The Fractional Consultant. His company helps developers in the U.S. and abroad secure financing. He is an internationally recognized authority on fractional real estate and has written a book on the subject.
Disick will chair the fractional panel of OPP’s Property Investor Show in London on October 13-15, 2011. He will also take part in panels on investors and on the U.S. economy.
He can be reached at http://www.TheFractionalConsultant.com, where his book may be ordered.