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A feasibility study is an extensive and detailed review of all aspects related to the development and financial feasibility of a fractional project. All facets of the project are weighed, analyzed and provided in an easy to understand format for developers, owners, lenders or private equity investors.
It’s pretty safe to say that the reduction of costly expenses and the realization of stronger profits is the ultimate goal of any real estate developer. So what is the number one killer of the ultimate goal? Mistakes. Based on this logic, the top priority for real estate developers should be the elimination of as many mistakes as possible. Of course, not all mistakes are preventable. Some things just happen that no one can predict; take credit swaps and sub-prime lending for example. Those mistakes were made by others and were completely out of our control.
That being said many mistakes are of our own doing and can be prevented with up front planning, i.e. foresight. In the fractional real estate business, foresight is a bit more complex, as most land owners and developers simply are not familiar with what it takes to properly structure, market and sell a Private Residence Club (PRC). While their goals of minimizing mistakes are the same, the importance of mistake-minimizing tools is much greater.
Here I will provide a more detailed review of a crucial mistake-minimizing tool: the fractional feasibility study. I will review the logistics involved and list some of the important elements included in the study.
A typical Pierce Group feasibility study is approximately 30 to 40 pages and is delivered to the client in electronic (PDF) format. Copies of the report can also be printed with express delivery upon request.
A representative from Pierce Group will typically fly to the project destination on day one and spend two full days on-site and in the surrounding community performing the needed due diligence to complete the study. Departure will be either in the evening of day three or the morning of day four. The two day on-site due diligence will include the following:- Strategic meetings with the developer/land owner or representative(s)
- Tour of the project site and proposed amenities
- Tour of the surrounding community
- Tour of likely competing projects
- Meetings with top real estate brokers in the community
- Meeting with other local organizations – Chamber of Commerce, Property Management and rental companies for example
This schedule is important to help formulate a market analysis, learn the target market, understand tourism travel patterns, learn the real estate market and leave with a complete understanding of the project parameters.
Here is a list of some of the important elements of the final deliverable and why they are important. I. Market Analysis
This section is where we formulate our opinion on whether or not the project is viable fractionally. If not, we will make recommendations as to what other types of vacation ownership would be a better fit. - Resort Lodging Market & Economic Implications
To determine project viability, it is important to understand the lodging options that visitors to the area are presented with and how the current economic situation impacts those options.
- Seasonality & Demand
In addition to determining project viability, seasonality and demand are factors that are used in designing the club reservation system
- Competitive Implications
Understanding likely competitors helps us formulate our recommendations with regards to pricing, reservation system design and marketing strategy among other things.
II. Recommendations
The recommendations section is where we reveal our strategy as it relates to how the project should be structured and marketed in order to provide for the best possible sales results and ROI for investors.
- Resort Residence Mix – Fractional/PRC/Timeshare/Whole OwnershipIf fractional is not recommended we will provide our thoughts on what the highest and best use of the property is.
- Residence Design (if applicable)There are elements of the floor plan, FF&E and décor that are better suited for the fractional ownership lifestyle and some that are not. We will provide some insight on the current plans and provide recommendations as to how they can be improved for optimum fractional usage.
- Proposed Club Amenities Amenities are a crucial element in the fractional package and we will provide our thoughts on the planned amenities and provide recommendations on additional amenities if needed.
- Proposed Club Services Services to club owners are another important piece of the fractional puzzle and we will provide our recommendations as to the service offerings.
- Ownership Size, Structure and Design Based on our market analysis we will provide the optimal formula for owner to property ratio, reservation system type and reservation system design. This is an area where many common mistakes are made in building the ownership model.
- Pricing Schedule There are several factors that are at play with the formulation of the pro-forma price and pricing schedule. Mistakes in this area can be costly and even detrimental to the project.
- Marketing Strategy The most appropriate marketing plan will be recommended based on the results of our market research and competitive analysis. A review of the most appropriate advertising avenues will be provided and we will recommend a marketing budget to the developer/owner that will provide the best results for lead generation.
- Sales Strategy Once marketing efforts have generated leads, what is the most efficient way to move leads through the sales process to the closing table?
III. Project Financial Model
- Projected Sales Absorption Based on current economic and market conditions, seasonality and demand, projected closing and pricing schedules are combined to provide the owner with a clear vision of projected revenues.
- **Projected Revenues, Expenses & IRR Additional revenues are reflected along with every expense associated with the project. This in depth financial analysis will provide a projected IRR for developer(s), investors and/or lenders.
- **Recommended Capital Structure (if applicable) Based on the financial needs of the project we will provide the recommended avenues to best secure funding and provide assistance in securing that funding as well.
**These items are provided at the request of the developer for an additional fee.
IV. Project Time Line
- The project timeline is a helpful tool that helps developers understand the process more clearly and the projected time to reach the first sales closing. It also more clearly represents the effects of the project start up phase as it relates to the cash outlay that will be needed prior to the realization of revenues.
Private Residence Clubs Defined & FAQs
General information is provided here on the fractional category, how Private Residence Clubs work and the benefits to buyers.
Customized Reservation System by Pierce Group
An overview of how the project’s customized reservation system works. Pierce Group Sales & Marketing Services
In addition to project feasibility studies, Pierce Group provides ongoing sales and marketing management services. Please see www.PierceGroupLLC.com for more information and to contact us directly.
Pricing varies based on the size and scope of the project and study. However, Pierce Group feasibility studies typically do not exceed $20,000 even for the larger projects. Furthermore, we have reduced our prices across the board due to the current economic situation. We are fully aware of the struggles that most developers are facing now and believe it is only fair to adjust our business practices to better accommodate our clients.
Regardless of the outcome of a Feasibility Study, (i.e. a recommendation to move forward or to cancel the fractional concept and refocus on another format), a developer’s up front investment in the study will pay for itself many times over by reducing unnecessary future expenses.
As we like to say - Foresight Costs Less Than HindsightSM |
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