Basalt Study Fails "Business Plan Test"

September 7th, 2006 at 11:49am Michael Brylawski 133

The Aspen Times article "Study: Basalt economy scores big with Roaring Fork Club expansion" set off some alarm bells for me, and not just due to a title that solidly falls into the Aspen paper "spin zone".

(Again, the 'mainstream' papers don't fail in putting a subtle spin in their reporting. At least in blogland we wear our spin, proudly, on our sleeves.)

The alarm rung when I saw what the "big score" was for the economy: $895k in revenue, and $5k in tax surplus.

That solidly flunks what I call the "business plan" test. If I'm submitting a business plan to an investor, I have to bring a solid business case and numbers that justify investment.

Well, the Roaring Fork business plan would not get me too many meetings with VCs. Or even people susceptible to the "I'm royalty in Nigeria" email scam. Less than $1 million in revenues for the community for a tax effect that is claimed to basically break even is not a good deal.

I will explain. But first, let's review the situation:

• My understanding of this issue (like the Snowmass base villiage, limited as I was gone during most of the debate) is that the Roaring Fork Club is trying to extend its development, against the already set guidelines of the Basalt Town Master Plan.

• It is reluctant to re-open the Master Plan to open community debate, and wants to push development through.

• Accordingly, it has created a PR-campaign centered on showing the value of this expansion to the community, and enlisting "stakeholders"--from people living in the trailer parks who would supposedly get to live in the affordable housing, to now local merchants--to help lobby for the development

Personally, I am pro-development--clearly there is a need for more housing in the valley. But I'm also pro-process, in that the community needs to shepherd development in a very open, deliberate, and fair manner to all citizens. I'm skeptical of developers who want to skirt community processes. Generally, if a development is a good idea and good for the community, it will pass through the established channels.

So if this development is legitmately a good idea, go through the channels, change the Master Plan, and work with the town to build it.

But don't sell me a bill of goods. Without even seeing the report and being able to question the assumptions, and just going on the Times article, the "big" benefits look to be quite small:

• $895,000 in revenue does not mean Basalt will get $895,000. It means it will get that in gross dollars--but only a small fraction in net.
• Most people in business know that when you look at an income statement, only a fraction of revenues end up going in the pockets of locals. There are costs of goods sold--in grocery stores, for instance, the costs of food, almost none of which are grown or made in Basalt and labor, almost none of whom live in Basalt (most can not afford to live in Basalt on $10 an hour). There are depreciation costs (e.g., the building, displays, computers, etc.). There is interest to the banks. There are taxes to the Federal government.
• In the end, you get net income, which for restaurants and grocery stores (which the Times indicates gets most of the revenue) typically hover around 5-6% according to S&P. Thus the $895k is more like $50k.

If you are looking at a business plan, you look at revenues mainly for growth, particularly in the early years of a business. Since this revenue is flat, you look at earnings, and a stream of $50k earnings a year frankly is not that impressive--particularly if it invovles a massive (for the scale of the town) new development that violates a carefully established, community developed town plan.

And this assumes the numbers in the report are solid (e.g., the projected real revenues per house are 12% higher than the estimated spending in the existing cabins), and that the town would really net $5k in taxes (most new developments, while projected to be revenue generators, are shown in action to be tax sinks due to unanticipated costs during new road construction, utilities extension, etc.).

Because most numbers in plans and reports tend to be off--often by a significant margin--they are usually presented with ranges and/or sensitivities (which this is not), and the investor discounts the numbers heavily--upwards of 40% for most new businesses.

Thus an undiscounted $50k a year, with only $5k projected net tax benefits, fails (strongly) the business plan test.

Basaltines need to critically examine this development and its proposed benefits. If you buy my logic, does Basalt really want this development for $50-55k a year? If so, how much do the developers get out of it (probably a lot more than $50k a year)? Can the town appropriate more of the benefits?
From an economic standpoint, it seems like a bad deal. If I lived in Basalt now (I lived there from '98-02), I'd either consider it on non-economic factors, or try and negotiate a much better deal from the developers.

Entry Filed under: Aspen