Is Your Minnesota Resort at Risk?
There are many joys and challenges associated with owning and running a Minnesota Resort. Resort owners love to share their ideas about what they perceive is their biggest obstacle to success and the biggest risks to the industry. Some owners will get political, some will blame invasive species, others will blame VRBO rentals, still others will blame the rising costs associated with insurance, property taxes and mortgage interest rates. The list goes on and on.
In the 1970s, there were over 3000 Minnesota resorts and today there are less than 700. The question is: What happened to those that disappeared?
The answer is simple. The resort land became worth more than the resort business.
LOTS of resort owners have realized this fact, so why waste a whole column talking about something obvious? The reason your resort business may be endangered is because of the current real estate market and property valuations. Keeping your business valuation greater than your property valuation has become more difficult in this frenzied market.
What does this mean in real terms? Let’s look at the numbers:
Let’s say the county had a property valuation on your resort in 2020 of $1 million. To keep your resort business equal to the county valuation, you would need to have an Adjusted Net Income* (ANI) of somewhere between $80,000 (8% Cap Rate) and $120,000 (12% Cap Rate) per year.
If your resort’s county property valuation went up 20% because of rising property values and it is now valued at $1.2 million now your ANI will need to be between $96,000 and $144,000 (20% higher).
If your resort is valued higher, the total dollar impact is even more severe. Consider that a resort valued at $4 million in 2020 needs an ANI of $320,000 – $480,000 and it needs to increase by 20% to $384,000 – $576,000 per year in this same example.
Anyone who has been in the resort business for a while will tell you that a 20% increase in revenue in one year is tough. A 20% increase in ANI in one year is even tougher – especially if all you do is continue to run your business the same each year.
What can you do about this?
1. Every year you should increase your rental rates, increase your occupancy, or add another revenue stream (spa, boat rentals, guide service, dock rentals, boat gas, etc) to make up for the change in property valuations. A 20% sales increase in a short season is really tough, but you should not be someone who undervalues your services and you should always be planning for the future. Once again, this is obvious to most resort owners. What is often missed is the challenge of increasing your ANI to keep pace with property valuation.
2. County assessors are required to look at recent sales to determine property valuations and to keep the valuations within a certain range as prescribed by the state. If you argue about your property valuations, they will say “don’t worry, your taxes aren’t going to go up because everyone’s valuations are going up 20%” – and they are right, in most cases your taxes may not go up.
The caveat here is that they need to look at recent sales of similar properties to determine valuations – in your case they should be looking at recently recorded resort sales. This is a hard job for many assessors because there may not be any recent resort sales in your area. The default is to just lump you in with residential sales.
If your assessor has done this, you should plead your case and if you don’t get a reasoned response – in writing – you should consider legal avenues. When I was at our resort, I “hired” a professional to fight my valuation and I won. The fee that I paid the professional was one third of the taxes he saved me for three years. I learned about professionals like this at a resort and tourism conference. Attending conferences and continued learning are always important and hiring professionals can be a real value.
3. You could consider an alternative business model. There are lots of creative ways to structure the ownership and operation of your resort. Ultimately, the goal is to provide transient access to the lake for multiple families – lots of different business models accomplish this goal. You’ve heard it said at conferences many times, that the neighboring resort is not your competition – the world is your competition for vacation dollars. Those smart people are right. Your resort and business model should reflect that you have to keep up with the competition.
The transition of your business model involves many different moving parts and takes some time. Be sure to consult people with experience in this area – not just a lawyer who can put together a Common Interest Community declaration and a surveyor who can put together a plat.
4. Some resort owners will say, “I don’t care about all this because I am just going to sell my resort to a “developer” and I want the valuation number to be as high as possible”. This is perhaps the most misinformed statement a resort owner can make.
Real estate developers are always weighing the value of different investments – apartments; single-family rentals; retail space; etc. The development and rental of resort units is no different. The major difference is the risk associated with the short Minnesota season and the costs of management. I will not deny that people do win the lottery and go out and overspend on items, but I doubt you have ever heard of a lottery winner who went out and bought a resort.
The developer business model and their return structure should be understood before you can understand why the simple “I’ll just sell it to a developer” statement doesn’t hold water (unless they have just won the lottery). In future articles/newsletters I will talk about the numbers behind what a “developer” is looking for. Once you understand the math, it all makes sense.
I enjoy good conversation and learning from everyone in all walks of life. If you’ve got a varying opinion, I’d love to hear it. Feel free to email me anytime at: firstname.lastname@example.org.
*ANI – Broadly defined, the Adjusted Net Income is your Net Income (Gross Sales – Cost of Goods) minus the “True” Resort Operating Expenses* as reflected on your Income Tax Statements.
*”True” Resort Operating Expenses are somewhat like Earnings Before Interest, Depreciation and Amortization (EBIDA), but also considers things like accelerated depreciation on capital expenses, personal expenses (like your housing) that may be bundled into the Overall Resort Expenses. A good accountant will set things up so you properly account for these items and a good Realtor will ask hard questions about expenses to maximize your return.