October 2019

Recreational Properties
Tuesday morning, 3 March, 2014. Dolores Garcia was surprised when she answered the phone and
heard the voice of her old friend Anders Forsgren. Unfortunately, Dolores immediately realized
Anders’s call was not strictly personal. Anders thought his company, Recreational Properties, could
have lost several million pounds as a consequence of an unexpected adverse event.

Recreational Properties
After working for seven years as a Civil Engineer, Anders Forsgren decided he wanted to start his own
company. In December 2012, he raised £15 million from a group of UK investors and founded
Recreational Properties with a strategy to acquire land parcels or properties with recreational
potential. Recreational Properties often consolidated several parcels and obtained leases from the
European Union Environment Agency to create a desirable recreational property. Once the lease
had been obtained, Recreational Properties would either sell it to another developer or make initial
improvements themselves before selling. Recreational Properties had a policy against operating any
resorts and would only undertake 1 to 2 years of initial development, including roads, sewers, and the
core facilities. Initial development was aimed at demonstrating the potential rather than exploiting it.

The White Mountain Development

The problem Anders faces involves a set of land parcels in the White Mountain range, located
approximately 100 kilometres from a large metropolitan area and near two well-developed ski areas.
The elevation varied from 2,000 to 3,000 metres, and snowfall from December to March was usually
between 6 and 10 metres. Summer recreation was also possible since the property was split by a
river and had good access (15 minutes) to a lake large enough for water skiing and sailing.

In July 2013, Anders was looking at three parcels that would allow Recreational Properties to create a
ski resort tentatively named the “White Mountain Ski area”. The parcels have access to the east side
of White Mountain, which was managed by the EU Environment Agency. Recreational Properties
controlled these three parcels through a package of options that Anders bought in June 2013 at a
price of £500,000. The options gave Recreational properties the right, but not the obligation, to
acquire the three parcels in June 2014 at a price of £10 million.

To develop the parcels into a ski resort, Recreational Properties needed permission from the EU
Environment Agency. In fact, the Agency had not yet agreed to lease the east side of the mountain for
development as a ski area. However, when Anders had purchased the options in June 2013, he was
sure that a lease from the EU Environment Agency would be obtained before December 2013
because they already had agreed in principle. Unfortunately, in November 2013, five months after the
options were purchased, a group of conservationists had filed suit to stop construction of a ski resort
50 kilometres north of White Mountain. Their injunction was obtained by showing that the
environmental impact report, used as a basis for the construction permit, was inadequate. Since the
EU Environment Agency had been involved in the preparation of the report, and the agency was also
leasing part of the land to be used in the development, the injunction was directed at the EU
Environment Agency as well as the developers. Because of the suit, the EU Environment Agency
Commissioner refused to consider any new lease permits until the outcome of the suit was known.
He felt that there might be precedents that would serve as guidelines for future leases.

This case is prepared solely as the basis for class discussion, and is not intended to serve as a source of primary data, or as an
illustration of effective or ineffective management.
Recreational Properties

Anders believed that the situation was out of his control. He had already pursued all the political lines
available to him and the answer was consistent: “You’ll just have to wait until the suit is settled. There
is nothing we can do.” The suit was not scheduled to be heard until August 2014, which meant the
options would expire before Anders would know about the Environment Agency lease (see timeline
below). In fact, it seemed like a decision on the White Mountain lease would not be reached before
sometime between early February and late March 2015.

Today

June 2013 November 2013 June 2014 August 2014 February 2015
Options bought Lawsuit filed Options maturity date Hearings and Lease granted
ruling lawsuit Or rejected

At this point, Anders decided to ask his friend Dolores for help. After working for six years in the
European aerospace industry, Dolores had decided to get an MSc Management at UCL. At the
moment, she was extremely busy with coursework, but could not deny her help to Anders.

Dolores asked Anders what their chances were to obtain a lease. Anders said that before the lawsuit
was filed, he thought he would obtain the lease for sure. However, given the current situation, Anders
thought there was an overall 50% chance that the Environment Agency would grant the lease after the
conservationists’ lawsuit was resolved in late August.

Then Dolores asked about the value of the land. Anders said that if he did not obtain a lease, he
could not develop the ski resort and would have to sell the land. Anders estimates that in this case he
would be able to get £8 million for the parcels. To further complicate the problem, Anders’ preliminary
analysis of the best way to handle the property if a lease were obtained from the Environment Agency
was not conclusive. He was considering two alternatives (1) sell the property without any
development, or (2) install access roads, sewers, three ski lifts, and build the first wing of the lodge
designed for the area. The first alternative would undoubtedly take over a year and Anders estimated
that the land would sell for £14 million. One reason the second alternative was attractive was that
construction could be completed during that same year. Anders knew of several individuals who could
do a good job of organizing and managing the skiing activities. By selling the project after 1 year,
there was a good chance that considerably greater profit could be realized than with just the raw land,
and without any significant change in the timing of the sale. The added cost for this development
would be approximately £5 million.

The critical factor was the popularity of the facility. Anders and his advisors felt confident that the
resort would prove attractive to the intermediate and advanced recreational skier. However, popularity
would depend on several factors, including snow conditions, the quality of the ski runs etc.. Anders
had worked up two sets of figures, one assuming a good reputation and the other assuming a poor
reputation:

Reputation Selling Price

Good £ 21.8 million
Poor £ 16.3 million

Anders believed that the resort would have a good reputation, and estimated the likelihood of this to
be around 75%.

If Anders decided not to follow through on the White Mountain property, he had an option to
participate in another development, which would result in a certain £1.5 million profit.

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Recreational Properties

Assignment
Make a report up to 5 pages (excluding graphs and appendices) summarising your results, your
interpretation of the results and your conclusions and recommendations. For this specific case please
ignore time value of money. Also explain how you derived your results. In your reports, focus on the
insights, not merely state the results. In your report, follow the structure of the assignment, i.e. provide
results and recommendations for each of the questions separately. Please include all the trees and
graphs you used either in the main body or in the appendix of your report.

The due date is 25th November 15:00 (afternoon).

Please submit it electronically to eavgerinos@faculty.ie.edu. One report per group is sufficient. For
every hour that you delay 10 points will be deducted from your final grade!

1. [10] Framing the Decision

Structure the problem by answering the following questions:

 What does Anders want? (What is the objective of Recreational Properties in this specific
case?)
 What can Anders do? (List the decisions that Anders is facing)
 What should Anders worry about? (List the uncertainties and how they affect the value of the
White Mountain development)

TIPS
 Do not build a decision tree just yet (this is question 2). In this question, list the objectives,
alternatives and risks.

2. [20] The Emergency Meeting

Anders Forsgren has scheduled an emergency meeting with the board of directors of Recreational
Properties. He asks Dolores to find the best course of action under the current circumstances.

 What would you recommend? (Build a decision tree and discuss the optimal strategy. Discuss
the average profit and the risk profile).
 (Value of Control) How has the value of the White Mountain development changed due to the
unexpected conservationists’ lawsuit? In other words, what would be a reasonable investment
if Anders wanted to convince the Environment Agency to grant Recreational Properties the
lease, for instance by performing a sophisticated environmental impact report? (assuming the
report is positive and would secure the lease for sure)

TIPS

 In your decision tree for this question, there is no need to explicitly represent the outcome
of the lawsuit. What is relevant to Recreational Properties is only whether or not the lease
will be granted.
 When using PrecisionTree, do not change the value of numerical cells whose text is blue,
red, or green. PrecisionTree computes the values in these cells automatically. However,
you may change their format, for instance, you may use the percentage format for
probabilities and a currency format for monetary values in order to make the spreadsheet
clearer.
 To analyse alternative strategies, go to PrecisionTree/Analysis/Decision, select Analyse
all choices and click [OK].
 You can copy a decision tree from Excel into Word by selecting all the cells that contain
the decision tree (from top left cell to bottom right cell), and in Word, select Paste
Special/Picture.

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Recreational Properties

3. [18] Sensitivity Analysis

Save the decision tree you developed in Part 2 as “Recreational Properties 2”. Create a new copy of
the file called “Recreational Properties 3”.

After the emergency meeting, Dolores has second thoughts about the robustness of the strategy that
Anders presented to the board of directions. Especially Anders’ estimates of the likelihood of obtaining
the lease and of getting a good reputation seemed a bit rough. She thinks a sensitivity analysis of
these probabilities is in order.

 Perform a sensitivity analysis on these probabilities.

 What can you conclude?

TIPS
 Make sure that the probabilities of a chance node (uncertainty) always sum up to 100%.
Instead of entering all the probabilities as numbers, we suggest entering one probability
as a number (e.g. 30% in cell A4) and using “1-A4” for the other probability.
 To perform a sensitivity analysis using Precision Tree, select
PrecisionTree/Analysis/Sensitivity or select the tornado diagram icon from the Precision
Tree toolbar. This will bring up the sensitivity analysis dialog box. In “Cell to analyse”
enter a link to the cell in your tree where the average profit of the White Mountain project
can be found. In “Name” enter Average Profit. Fill in the Input Editor for each parameter
analysed. Select the Cell to be analysed, enter a Name, introduce a Minimum value of 0,
a Maximum of 1, and in Base introduce Anders’s estimate. Do not forget to press [Add]
once you have introduced all the data corresponding to one of the parameters. When you
have introduced all of the parameters, click Run Analysis.

4. [20] Extending the Option

Create a new copy of the file “Recreational Properties 2” and call it “Recreational Properties 4”.

After a brainstorming session with her fellow students, Dolores came up with an idea. Perhaps
Recreational Properties should negotiate a one-year extension of the options’ maturity date?

 Explain why Dolores thinks that this might be a good idea.

When Dolores mentioned her idea to Anders, he replied that he was already thinking about this, but
that he was unsure whether this would be a good idea, because a one-year extension, besides being
difficult to get, might be very expensive. Therefore, he would like to know before any negotiations
start, how much this would be worth to him?

 (Value of perfect Information) How much would a one-year extension on the options be
worth? (You can assume that the alternative investment opportunity generating £1.5 million is
also there one year from now.)
 How does this value compare with the loss of value caused by the conservationists’ lawsuit
(see question 2)? Interpret this result.

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Recreational Properties

5. [32] A First Meeting with the Landowners

Create a new copy of the file called “Recreational Properties 5”.

After a first meeting with the three property owners, it seemed that the owners were not inclined to sell
Anders the extension of the options. Anders thought he could negotiate at most a six-month extension
of the options’ maturity date, until December 1, 2014. This was the best he could hope for. Anders
was sure the court decision regarding the northern development would be made by late August.
However, he knew that no matter which way the court decided, a series of public hearings would have
to be held before the Environment Agency would decide on the White Mountain lease. These hearings
would not start until after the northern development court decision was reached in late August, and he
was confident the decision on the White Mountain lease would be reached sometime between early
February and late March 2015.

Anders thought there was a 50% chance that the law court would decide to halt the northern
development, as the case for and against seemed equally strong. However, a law court decision to
halt the northern development would not necessarily block the White Mountain development. If the
northern development suit was settled unfavourably, he thought the chance that he would obtain a
lease for the White Mountain development would be at most 20%. On the other hand, if the court case
turned out to be favourable, Anders considered he would be in a very strong position to obtain a
lease, at least an 80% chance.

Anders was meeting with the property owners the next day, and was trying to determine a reasonable
price for the six-month extension of the options’ maturity date:

 Determine a reasonable price for the six-month extension (value of imperfect information).
 How does this price compare with the price of a one-year extension? Interpret this result.