The Grossinger\'s Catskill Resort Hotel in the Catskill Mountains in Liberty, Ne

Question

The Grossinger's Catskill Resort Hotel in the Catskill Mountains in Liberty, New York was the inspiration for screenwriter Eleanor Bergstein when writing the Dirty Dancing movie screenplay. Her ficional Kellerman's was a family resort full of activides such as swimming, tennis, and dancing. Opened in 1919, Grossinger's contained 35 buildings and attracted up to 150,000 guests per year in the 1960s and 1970s. It was the first place to use arificial snow on its ski slopes. It had its own airstrip, bowling alley, ballrooms, post office, golf courses, and auditoriums Grossinger's closed in 1986 and has fallen since into disrepair. Several of the original buildings have been removed. The property's real estate developer, Louis Cappelli, has applied for funding from the New York State Department of Environmental Conservation to clean up environmental contaminaton on the site, which is the first step in renovating he resort Cappelli ultimately wants to build a conference center, housing, spas, and chalet-style lodging on the sprawling site. While Cappelli has indicated that most of the remaining buildings on the property will be removed, he wants to retain some of the character of the resort. Cappelli feels that now is an opportune time to redevelop the resort because there is a $750 million Resorts World Catskills casino opening in the area in 2018. This new casino should attract more visitors to the area. While Cappelli has not indicated the cost of the proposed redevelopment of Grossinger's, it will take millions of dollars to rebuild the resort Questions 1. What managerial accounting tools could Cappelli use to help detemine whether it would be proftable to redevelop the Grossinger's property? Would the original price that Cappell paid in 2013 to purchase the Grossinger's be relevant to decisions now about how best to redevelop the property? Why or why not? 2. 3. What specific information or estimates would Cappelli need to evaluate whe ther Grossinger's should be redeveloped?

Explanation / Answer

1. Managerial Accounting Tools: The important points to consider in re-developing a property is the initial investment and the recurring cash flow that the property is likely to generate and the likely appreciation. The following are the ratios we consider for property development:

1) Investment amount 2) Debt: Equity (Minimum 50:50), 3) Rental Yield/Operational Income yield 4) Terminal value of the property at the end of investment period. Once we have these information, we calculated the Net Present Value, Pay pack period and internal rate of return for the investment. If the Internal Rate of return exceeds the expectations, then the investor will develop the property

2) For Capital Budgeting decision sunk costs (already incurred costs) are irrelevant. However, if the property has a resale value on "as is where is basis", then the developer can consider this as an opportunity cost to evaluate his internal rate of return

3) The Specific information or estimates cappelli need for evaluation are:

a) Initial investment required

b) Expected visitors per annum

c) If the property is planned to be operated by a brand, then brand fees and commission

d) Associated F&B revenue and other operating department revenues like laundry

e) Assumption on room rate per day and occupancy

f) Capitalisation rate assumption at the end of investment period

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