I have been working on the downhill ski lodge (DHSki or Lodge) project since joining the General Plan Committee (GPC) three years ago. I continue to learn from colleagues and experts as the GPC and Lodge Task Force work with management towards a proposal for consideration by the Board of Directors. The project will be the largest capital spending project in the last 50 years. At an estimated cost of $700 per square foot, the total costs for alternatives currently under consideration range from $11,200,000 (16,000 sf) to $17,500,000 (25,000 sf). With 6,473 lots, the differential between largest and smallest alternatives is nearly $1,000 per Tahoe Donner lot. The source for capital spending is the owners’ annual assessment. (Note that “excess capacity” at the ski hill can be sold to the public, which currently comprises about one-third of users. Should that activity result in positive net cash flow, some of the additional investment can be recovered by the Association. This poses obvious risks in a time of climate change but it certainly will be a discussion point in final decision making.) My personal journey to find the right answer began with an examination of less expensive remodeling options and the long-term prospects for skiing at 7,000’ altitude in the Tahoe Sierra. A new building will have a useful life of 40-50 years. During this period, climate change and demographic changes pose increasing challenges to the viability of ski resorts, generally. This is particularly relevant to expectations for public ski ticket sales. Note that about 30% of Tahoe Donner owners use the ski lodge in winter. What follows:
Dear board members, Unfortunately, due to business travel delays I will not be able to attend the Saturday board meeting in person or by phone. One agenda item that is of particular interest to me is the downhill project where Jim Beckmeyer is scheduled to present subcommittee findings and recommendations. I served on the committee and started with an open/skeptical attitude about the key questions of (1) remodel or replace and (2) if replace, how big? I have reached the personal conclusion that (1) replacement is the best long term option, (2) replacement at about the existing size (approx. 16,000 sf) is justified and (3) to commit to the project and start/finish as soon as possible. I served on the committee and started with an open/skeptical attitude about the key questions of (1) remodel or replace and (2) if replace, how big? I have reached the personal conclusion that (1) replacement is the best long term option, (2) replacement at about the existing size (approx. 16,000 sf) is justified and (3) to commit to the project and start/finish as soon as possible. Key factors in my thinking include:
ii. The increased use of a (x) larger deck (perhaps 2,000 sf) on (y) more non-stormy days (consistent with climate change). Taken together these factors suggest that the overcrowding in a 16,000 foot well-designed replacement lodge will only occur an average of 3-5 days per year or even less. It is only on these days that a larger new lodge would provide any benefit to users (about half of whom are owners). Given the estimated cost of $650,000 per 1,000 foot of construction, I do not think it is a justifiable or prudent use of Tahoe Donner funds to expand the size of a new lodge. I have additional thoughts on the financing of the project and manner of interactions with our co-owners that can be addressed later. In summary I believe it important to clearly communicate and justify the project and its cost to our owners.” End of letter to the board of directors. ********** I did not start with a conclusion that a new lodge should be built. My initial thinking was that the existing lodge might be efficiently remodeled. At a minimum, I believe it important to investigate this option and justify its rejection to owners. I created the following three slides to organize my own thinking about these matters and for sharing with the General Plan Committee during my first year of service. Risk Factors. I developed and shared these as part of my General Plan Committee work.
TAHOE DONNER DOWNHILL RESORT RISK FACTORS and MITIGATION STRATEGIES Draft April 30, 2019 Downhill Ski operations and financial results are subject to various risks and uncertainties that could adversely affect our financial position, results of operations and cash flows. In developing long-term plans for the development and operation of the facility, the risks described below should carefully be considered and managed or mitigated as possible. Risks Related to the Business of Operating a Ski Resort Introductory Note. Tahoe Donner (TD) operates a downhill ski facility for the benefit or owners and guests and, to the extent that it can be done cost effectively and without overburdening the facility, the public. Taken together, this is a business operation which must be operated within the charter, mission and limitations of the entire Tahoe Donner Association, including its ability to raise the capital necessary to develop, preserve and operate all TDA facilities, open space and operations. Capital is raised through assessments on all owners. Project decision making for facilities open to the public must balance the enjoyment of owners and the needs of public customers. This requires that the Association must understand the economics of serving the public and specifically whether doing so makes the facility “more cost effective” and not “overburdened.”[1] For that reason, decisions on projects where additional capital or operating costs are incurred to serve the public are a more challenging than projects that only serve the needs of TD owners and guests. (The following discussion borrows from deep ski resort experience of Vail Resorts, specifically in its annual 10-K disclosure to shareholders. The topics below are presented in the order of priority used by Vail Resorts in its 2017 and 2018 disclosures, with significant deletions of material that is irrelevant to Tahoe Donner.) Environmental Risks.[2] TD is vulnerable to unfavorable weather conditions and the impact of natural disasters. Downhill skiing visitation is influenced by weather conditions and by the amount and timing of snowfall during the ski season. Unfavorable weather conditions can adversely affect skier visits and our revenue and financial results. Unseasonably warm weather may result in inadequate natural snowfall and reduce skiable terrain, which increases the cost of snowmaking and could render snowmaking wholly or partially ineffective in maintaining quality skiing conditions, including in areas which are not accessible by snowmaking equipment. Change in average spring temperatures in the Tahoe Sierra are on a projected track to increase by 7 degrees F by the end of the century.[3] In addition, a severe and prolonged drought could affect otherwise adequate snowmaking water supplies or increase the cost of snowmaking. Conversely, excessive natural snowfall may significantly increase the costs incurred to groom trails and may make it difficult for guests to obtain access to our mountain resorts. Since 2009, the TD ski facility has received between 13 inches and 475 inches of annual snowfall.[4] However, there can be no assurance that the facility will receive seasonal snowfalls near its historical average in the future. For example, we experienced very poor conditions during the 2012/2013, 2013/2014 and 2014/2015 ski seasons. Past snowfall levels or consistency of snow conditions can impact the levels of sales of season passes. The potential effects of climate change could have a material adverse effect on our results of operations as warmer overall temperatures would likely adversely affect skier visits and our revenue and profits. Lacking geographic diversification to help mitigate the impact of weather variability, there is no way for us to predict future weather patterns or the impact that weather patterns may have on our results of operations or visitation. Additionally, the early season snow conditions and skier perceptions of early season snow conditions can influence the momentum and success of the overall ski season. Unfavorable weather conditions can adversely affect public ticket sales as guests tend to delay or postpone vacations if conditions differ from those that typically prevail at such resorts for a given season. Mitigation Strategies
Other Natural Disasters. Truckee is a CalFire recommended Very High Fire Hazzard Severity Zone.[5] A severe natural disaster, such as a forest fire, may interrupt our operations, damage our properties, reduce the number of users who visit our resorts in affected areas and negatively impact our revenue and profitability. Damage to our properties could take a long time to repair and there is no guarantee that we would have adequate insurance to cover the costs of repair and recoup lost profits. Furthermore, such a disaster may interrupt or impede access to our affected properties or require evacuations and may cause visits to our affected properties to decrease for an indefinite period. A severe forest fire or other severe impacts from naturally occurring events could negatively impact the natural beauty of Tahoe Donner and have a long-term negative impact on our overall user visitation as it would take years for the environment to recover. Consumer Revenue Risks. The non-owner component of the Tahoe Donner downhill ski business is sensitive to the willingness of customers to travel and to changes in consumer tastes and preferences, particularly those affecting the popularity of skiing and snowboarding. A significant decline in skier visits compared to historical levels would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. The key customer segment for Tahoe Donner ski are beginner, primarily children. Marketing is focused on a “best place to begin” theme and operations cater to packaged rental/lesson/ticket sales. Children are most often accompanied by non-skiing visitors who may be non- or low revenue but still increase demand for lodge space. However, California’s population is aging[6] and examination of Department of Finance detailed projections show that the critical age 5 – 9 cohort is not projected to increase in spite of a total population increase of about 20%. The business is highly seasonal. For Fiscal 2018, __% of total revenue was earned during our second and third fiscal quarters. This seasonality is partially mitigated by the sale of season passes (which for Fiscal 2018 accounted for approximately __% of the total lift revenue). In addition, the timing of major holidays and school breaks can impact vacation patterns and therefore visitation at the resort. Our history demonstrates that significant deterioration in our operating results during our peak periods cannot be fully recovered due to the seasonality of our business. Mitigation Strategy. Our key mitigation strategy to snowfall variability and unpredictability is snowmaking. The facility currently has capacity for the beginner slopes. Plans are underway to develop snowmaking for additional intermediate slopes in the ski bowl. Competition. The ski resort industry is highly competitive. Six ski areas exist in the North Tahoe region (Northstar, Squaw-Alpine, Sugar Bowl, Boreal Ridge, Donner Ski Ranch, Soda Springs), four if which have significant snowmaking capabilities). Two addition ski areas are in the Nevada side of north Lake Tahoe (Mt. Rose/Slide Mountain. and Diamond Peak). Tahoe Donner users can choose from any of these alternatives. Mitigation Strategy. Tahoe Donner has an advantage based on certain factors:
The high fixed cost structure of mountain resort operations can result in significantly lower margins if revenues decline. Any material declines in the economy and/or significant changes in historical snowfall patterns, as well as other risk factors discussed herein, could adversely affect revenue. As such, our margins, profits and cash flows may be materially reduced due to declines in revenue given our relatively high fixed cost structure. All capital for development and all losses from operations are borne by TDA assessments and reserves. Long term financial support for the ski resort will be determined by future Boards of Directors. Using the Net Operating Revenue (NOR) model, ski hill operations have on average contributed positive NOR of $__ to TDA finances. Mitigation Strategy. The NOR model does not account for capital and overhead expenses, so it is to be determined whether significant expansion of the lodge to serve public users is cost effective. Staff and the GPC plan to complete this analysis in Summer 2019. This should equip the committee and staff to make a full recommendation to the Board of Directors on the lodge project, snowmaking and other downhill related projects. [1] Tahoe Donner Association First Restated Declaration of Covenants and Restrictions, Art. II, Sec. 1(a). [2] Climate Change recommended reading:
[4] https://www.onthesnow.com/california/tahoe-donner/historical-snowfall.html?y=0 [5] http://www.fire.ca.gov/fire_prevention/fire_prevention_wildland_zones_maps_citylist [6] California Department of Finance, April 2017. See http://www.dof.ca.gov/Forecasting/Demographics/Projections/ for relevant reports.
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