BUSI 460 Suggested Answers to Selected Review and Discussion Questions Lesson 10

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1 BUSI 460 Suggested Answers to Selected Review and Discussion Questions Lesson 10 Suggested answers using the resort property case. 1. Identification of 10 risks using the resort property case. 1. New Island Highway reduces traffic on the Old Island Highway reducing drive-by exposure to the subject property and resulting in lower occupancy. 2. Approval for sewage treatment plant is blocked by local community opposed to development; limiting expansion opportunities for the subject property. 3. The new airport terminal does not attract new international traffic resulting in no increase in demand for the additional units planned for the subject property. 4. The local tourism association is unable to attract new international traffic resulting in no increase in demand for the additional units planned for the subject property. 5. The original 30 motel units are not attractive to the new tourist demographic resulting in decreasing occupancy for the subject property. 6. A strong Canadian dollar makes the region less attractive to international tourists resulting in decreased occupancy for the subject property. 7. Expansion of the resort fails to attract sufficient new business resulting in an inability to service debt. 8. The addition of the spa or equestrian facilities fails to attract sufficient new business resulting in an inability to service debt. 9. Failure of the primary local industry depresses the local economy, reducing local business traffic, and resulting in lower occupancy. 10. Closure of Provincial government offices or armed forces base depresses the local economy, reducing local business traffic, and resulting in lower occupancy. 2. Risk event drivers and impact drivers. 1. Risk event: New Island Highway reduces traffic on the Old Island Highway. Impact: Reduced drive-by exposure to the subject property results in lower occupancy and lower NOI. Risk event driver: Higher speeds and lower commute times attract drivers to the new highway. Competing developments spring up on the new highway drawing tourists away from the subject s location. Impact driver: The resort relies on drive-by exposure to attract new customers.

2 460 Review and Discussion Questions: Answer Guide 10 Page 2 2. Risk event: Approval for sewage treatment plant is blocked by local community opposed to development. Impact: Limited expansion opportunities for the subject property reduce its value. Risk event driver: The local community is opposed to development so they put pressure on authorities to reject the sewage treatment plant application. Impact driver: The resort needs an expanded sewage treatment capacity to accommodate expansion. 3. Risk event: The new airport terminal does not attract new international traffic. Impact: No increase in demand for the additional units planned for the subject property. Risk event driver: Airlines do not anticipate sufficient traffic to open up new routes to the new airport. Airlines that do test the market find that the location is not attractive to international travellers. Impact driver: An expansion of the resort relies on growth in demand from international tourists. 4. Risk event: The local tourism association is unable to attract new international traffic. Impact: No increase in demand for the additional units planned for the subject property. Risk event driver: Marketing efforts are spread too thin to reach target markets in Europe and the U.S.A. Competing locations are more attractive as they offer better serviced airports. Impact driver: An expansion of the resort relies on growth in demand from international tourists. 5. Risk event: The original 30 motel units are not attractive to the new tourist demographic Impact: Decreased occupancy for the subject property and reduced NOI. Risk event driver: International tourists tend to be wealthier and, therefore, demand more modern rooms and facilities. Impact driver: Market analysis indicated that the growing market will be comprised of wealthy tourists from the U.S.A and Europe. As this market grows the resort will attract fewer tourists. The owner does not have a strategy to upgrade the existing units to make the whole property attractive. 6. Risk event: A strong Canadian dollar makes the region less attractive to international tourists. Impact: Decreased occupancy for the subject property and reduced NOI. Risk event driver: Strong international demand for Canada s exports drives up the value of the Canadian dollar. Economic turmoil in Europe depresses the Euro relative to the Canadian dollar.

3 460 Review and Discussion Questions: Answer Guide 10 Page 3 3. Probabilities Impact driver: Historic financial records indicate that during periods when the Canadian dollar was strong, occupancy suffered. 7. Risk event: Expansion of the resort fails to attract sufficient new business. Impact: Reduced NOI and inability to service debt. Risk event driver: The original 30 units and amenities detract from the overall impression (curb appeal) of the resort. Impact driver: The owner does not have a strategy to market the resort to take advantage of potential new tourists from Europe and the U.S.A. 8. Risk event: The addition of the spa or equestrian facilities fails to attract sufficient new business. Impact: Reduced NOI and inability to service debt. Risk event driver: The original 30 units and amenities detract from the overall impression (curb appeal) of the resort. Impact driver: The owner does not have a strategy to market the new facilities to take advantage of potential new tourists from Europe and the U.S.A. The owner has not done sufficient market analysis to determine if the new facilities will be attractive to tourists. 9. Risk event: Failure of the primary local industry depresses the local economy, reducing local business traffic. Impact: Decreased occupancy for the subject property and reduced NOI. Risk event driver: Reduced international demand for forestry and mining exports results in the closure of local employers. Local customers move away or curtail spending on travel. Impact driver: In the off-season the resort is able to attract local clients who use the resort for meetings and corporate retreats. 10. Risk event: Closure of Provincial government offices or armed forces base depresses the local economy. Impact: Decreased occupancy for the subject property and reduced NOI. Risk event driver: A change in government results in closure of government offices or the armed forces base. Local customers move away or curtail spending on travel. Impact driver: In the off-season the resort is able to attract local clients who use the resort for meetings and corporate retreats. 1. New Island Highway reduces traffic on the Old Island Highway reducing drive-by exposure to the subject property and resulting in lower occupancy.

4 460 Review and Discussion Questions: Answer Guide 10 Page 4 Probability of risk event: High (80%). Empirical evidence from other locations indicates that the traffic pattern will shift significantly with the completion of the new highway. Government studies completed prior to construction support this conclusion. Probability of impact: Low (20%). The resort is a destination for tourists that does not rely heavily on drive-by exposure. Signage on the new highway and marketing can offset any reduction in demand. 2. Approval for sewage treatment plant is blocked by local community opposed to development; limiting expansion opportunities for the subject property. Probability of risk event: Medium (50%). Although there has been some opposition to development it has been targeted at residential sprawl and conversion of agricultural land to residential development. Probability of impact: High (80%). Without expanded capacity of the sewage treatment plant, the resort cannot expand. The future value of the resort will be reduced when investors realize that expansion is not possible. 3. The new airport terminal does not attract new international traffic resulting in no increase in demand for the additional units planned for the subject property. Probability of risk event: Low (25%). Extensive studies completed in support of the construction of the new terminal indicate that airlines are prepared to open new routes to the new airport and that they expect to be able to fill airplanes with tourist traffic. Probability of impact: High (80%). The new highway is not expected to attract an increase in international tourist traffic; this traffic must come from the new airport. 4. The local tourism association is unable to attract new international traffic resulting in no increase in demand for the additional units planned for the subject property. Probability of risk event: Low (25%). The local tourism association has developed strong links with German and U.S. tourism industry and has invested significant money and resources in promoting the location as a preferred destination. Probability of impact: High (75%). The resort does not have the capacity or the contacts in Europe and the U.S. to market independently. If the local tourism association fails to attract new business the resort will not be able to generate this business on its own. 5. The original 30 motel units are not attractive to the new tourist demographic resulting in decreasing occupancy for the subject property. Probability of risk event: Medium/High (70%). Market analysis supports the conclusion that the growing tourist demand from Europe and the U.S. will demand modern facilities. Probability of impact: High (80%). Wealthy international tourists are the fastest growing component of the market. Failure to attract this market segment will undoubtedly result in significant loss of revenue. 6. A strong Canadian dollar makes the region less attractive to international tourists resulting in decreased occupancy for the subject property.

5 460 Review and Discussion Questions: Answer Guide 10 Page 5 Probability of risk event: Low (20%). Historic exchange rate trends indicate that periods of strength in the Canadian dollar are short-lived. Probability of impact: High (75%). Historic financial records support the conclusion that a strong Canadian dollar results in significantly lower revenue. 7. Expansion of the resort fails to attract sufficient new business resulting in an inability to service debt. Probability of risk event: Medium (50%). The owner has not invested in market analysis to determine if the expansion will be a success. Probability of impact: High (90%). The expansion of the resort requires a loan that depends on increased revenue to service the debt. 8. The addition of the spa or equestrian facilities fails to attract sufficient new business resulting in an inability to service debt. Probability of risk event: Medium (50%). The owner has not invested in market analysis to determine if the expansion will be a success. Probability of impact: High (90%). The addition of the facilities requires a loan that depends on increased revenue to service the debt. 9. Failure of the primary local industry depresses the local economy, reducing local business traffic, and resulting in lower occupancy. Probability of risk event: Low (20%). The local primary industries declined roughly ten years ago and underwent some rationalization and modernization. Since the downturn, business has plateaued and the long term trend is for stability. Probability of impact: Low (10%). Local business represents a very small component of the resort s traffic. The owner has a strategy to cut operating costs to offset any reduction in local demand by shutting down the resort during the off-season. 10. Closure of Provincial government offices or armed forces base depresses the local economy, reducing local business traffic, and resulting in lower occupancy. Probability of risk event: Low (20%). Provincial and Federal governments show no indication of downsizing or closing facilities in the Region. Probability of impact: Low (10%). Local business represents a very small component of the resort s traffic. The owner has a strategy to cut operating costs to offset any reduction in local demand by shutting down the resort during the off-season. 4. Prioritization of risks.

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460 Review and Discussion Questions: Answer Guide 10 Page 7 5. The client s risk tolerance level. The client is a small investor with a significant stake in the outcome of the resort.

7 460 Review and Discussion Questions: Answer Guide 10 Page 7 5. The client s risk tolerance level. The client is a small investor with a significant stake in the outcome of the resort. The client has saved and borrowed to purchase the resort and they are, therefore, cautious and thoughtful. Although your client believes very strongly in the potential of the region and the resort property, they fear losing everything on a gamble that expanding the resort will result in sufficient increase in NOI to cover the investment. 6. Action plan for shortlisted risks Shortlisted risks Action plan/strategies Approval for sewage treatment plant is blocked by local community opposed to development; limiting expansion opportunities for the subject property. Promote the resort as eco-friendly. Reach out to local environmental leaders to seek advice on reducing the impact of development of the resort. A strategy of aligning with vocal opponents of development may reduce or eliminate opposition from these individuals or groups. This is a high cost/benefit strategy. The original 30 motel units are not attractive to the new tourist demographic resulting in decreasing occupancy for the subject property.

8 460 Review and Discussion Questions: Answer Guide 10 Page 8 Conduct market research to determine what the tourist demographic demands. Invest in upgrades to the resort that address the highest profile items identified in the analysis. If possible, stage renovations to avoid a big up-front capital investment. Expansion of the resort fails to attract sufficient new business resulting in an inability to service debt. Conduct market research to ensure that there will be sufficient demand for the additional units. The addition of the spa or equestrian facilities fails to attract sufficient new business resulting in an inability to service debt. Conduct market research to ensure that there will be sufficient demand for the new facilities. Contact the owners of resorts in other Regions that also attract tourists from the target market to determine how successful the addition of these amenities will be. Conduct financial analysis to determine the impact on operating costs form the addition of a spa and/or equestrian facility. Consider partnering with local providers of spa/equestrian services. 7. Risk monitoring recommendations. Approval for sewage treatment plant is blocked by local community opposed to development; limiting expansion opportunities for the subject property. Make contact with the local approving authority. Periodically check in to determine if there has been any local opposition to the proposed application. Regularly review Op Ed pieces in the local newspaper looking for negative opinions about the development. Counter negative press and/or public opposition by promoting the green aspects of the development. Once approved the monitoring activities can be discontinued. The original 30 motel units are not attractive to the new tourist demographic resulting in decreasing occupancy for the subject property. Conduct market research to determine what the tourist demographic demands. Invest in upgrades to the resort that address the highest profile items identified in the analysis. If possible, stage renovations to avoid a big up-front capital investment. Expansion of the resort fails to attract sufficient new business resulting in an inability to service debt. Conduct market research to ensure that there will be sufficient demand for the additional units. Increase marketing efforts early in the development process to generate demand for the completed units. Utilize various internet based marketing platforms to ensure that tourists know that newly built units are available. The addition of the spa or equestrian facilities fails to attract sufficient new business resulting in an inability to service debt. Conduct market research to ensure that there will be sufficient demand for the new facilities. Contact the owners of resorts in other Regions that also attract tourists from the target market to determine how successful the addition of these amenities will be. Conduct financial analysis to determine the impact on operating costs form the addition of a spa and/or equestrian facility. Consider partnering with local providers of spa/equestrian services.

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Sada Reddy: Economic contribution of tourism the way forward

Sada Reddy: Economic contribution of tourism the way forward Speech by Mr Sada Reddy, Governor of the Reserve Bank of Fiji, at the Fiji Tourism Forum 2010, Suva, 20 August 2010. * * * The Attorney-General