THE UKRAINIAN NATIONAL ASSOCIATION FORUM (11/25/01)

THE UKRAINIAN NATIONAL ASSOCIATION FORUM

Abridged report of the Standing Committee on Soyuzivka

During its annual meeting held in December 2000, the General Assembly of the Ukrainian National Association commissioned a standing committee to prepare a comprehensive analysis of the state of affairs of the Ukrainian National Association's resort, Soyuzivka. In the time since that December meeting, this standing committee analyzed the situation facing the resort, and reached a number of conclusions regarding its future. These conclusions were set forth in a 12-page report delivered to the Executive Committee in late April of this year, and in an enhanced report submitted in early July. The following summarizes the conclusions set forth in that report (the work of several committee members, foremost among them Stefko Kuropas, Taras Szmagala, Alexander Chudolij, Wasyl Szeremeta).

The report was divided into four sections: physical plant (summarizing necessary building renovations and reconstructions), financing alternatives (including charitable and for-profit capitalization options), operating analysis (including profit and loss projections) and future actions needed to be taken by the Executive Committee.

Physical plant

Based upon a review of an independent study of the Resort by Dayman, Lurie & Goldsbury P.C. in September 2000 (referred to below as the resort study), conversations with senior resort management and feedback from resort guests, the committee identified seven fundamental improvements initially needed at Soyuziuvka.

These improvements are as follows.

1. Remodeling of rooms. A total of 86 guest rooms are currently available for guest occupancy. Of these rooms, less than 30 are at least standard grade (i.e., include air conditioning, television, telephone and similar amenities). The remainder, while structurally sound, do not possess these basic amenities. Equipping all guest rooms with such amenities, as well as renovating their aesthetic appearance, is of primary importance in attracting guests. Estimated cost: $1,000,000.

2. Renovation of Main House into conference center: The resort study noted that Soyuzivka lacks conference and meeting rooms, which contribute to its underutilization for conferences. Current management views conferences (attracting both Ukrainian and non-Ukrainian organizations) as a potential additional revenue generator. Accordingly, the committee recommended a renovation of the Main House similar to that proposed in the resort study. Such renovation would create a large conference center, along with a renovated dining facility. Estimated Cost: $1,250,000.

3. Addition of spa and health center. A frequent complaint made by Soyuzivka guests is that "there is nothing to do when it rains." Indeed, lack of summer/good weather activities has hampered the resort's attractiveness. As a partial solution to this problem, the committee recommended that the current recreation hall ("Veselka") be converted into an indoor spa, health and entertainment center. Such a center would contain a spa, cardiovascular equipment, weights, and basic entertainment amenities such as a wide-screen television, pool tables, video games, board games and the like. Estimated cost: $300,000.

4. Grand ballroom: The committee recommended that a new grand ballroom be constructed on the site currently located between the Kyiv building and the camp. This new facility would be larger than the existing recreation hall, and would thereby allow for larger weddings and group functions. A new, modern ballroom would facilitate the marketing of Soyuzivka for larger, formal functions and would allow the resort to serve its existing wedding market more efficiently. Estimated cost: $1,000,000.

5. Renovation of camp facilities. Increasingly, Soyuzivka is being used as the site for summer camps. These camps provide an avenue to attract youth to the resort and a source of revenue, as well. However, the camp facilities are in need of an upgrade. Such upgrades would include a new camp barracks facility, as well as the addition of a small pool. Estimated Cost: $300,000.

6. Renovation of the bar: Historically a center of social life, the bar is in need of repair. Improving the bar facilities would attract (and permit) increased bar traffic. Estimated Cost: $250,000.

7. Construction of a "weather bubble": The addition of a bubble around the existing upper-level tennis and volleyball courts would enable use of these facilities on a year-round basis. This would also increase the activities available to guests during the off-season or on rainy days. Estimated cost: $100,000.

The above list represents what the committee determined as the most essential facility upgrades required for Soyuzivka. After due consideration of the resort study, discussions with resort management and the committee's collective experience as active members of the UNA, the committee determined that completion of these improvements are absolutely necessary for Soyuzivka to attract guests at a rate to enable it to operate at a break-even basis or better. Total cost of recommendations: $ 4.2 million.

Financing alternatives

Having examined the physical changes needed by Soyuzivka, the committee then evaluated a number of alternatives for attracting the capital necessary to finance those changes. After deliberation and discussion with outside legal and tax experts, the committee identified two financing structures, three fund-raising sources and management alternatives for the resort.

Of the two financing structures identified, one was based on a for-profit structure, while the other was based on a not-for-profit structure. Each had its benefits and drawbacks. However, in the time following submission of the committee's report, it has become apparent that only the not-for-profit structure will be considered by state insurance regulators.

Under the non-profit approach, the UNA would transfer Soyuzivka into a not-for-profit foundation organized under Section 501(c)(3) of the Internal Revenue Code. This foundation would comprise individuals who are, or represent, large donors to the foundation. The resort would be capitalized, in part, through donations of private individuals or institutions. Individual donors would be solicited using a professional fund-raising service, and institutional donors (such as Ukrainian credit unions) would also be solicited to participate in the capitalization.

A large part of the capitalization of the resort might also be derived from third-party hotel/resort managers can also be the source of strategic capital. Under this scenario, a third-party hotel management company would provide significant capital in exchange for the rights to manage Soyuzivka. While the committee did not favor this approach, as it significantly increases the risk that the resort will cease to be operated for the benefit of the Ukrainian community at large, it may be an option that the UNA will need to consider.

Regardless of the source of financing for operations and improvements, the committee determined that effective resort management (including programming, guest services, marketing and the like) is best handled by a third-party entity under contract with the entity that holds title to Soyuzivka. In fact, the committee expressed the opinion that third-party management is a key element in any plan to re-establish the resort as a profitable enterprise.

Finally, the committee acknowledged that the UNA cannot continue to subsidize the ongoing operations of the resort to a significant extent. Any relationship with a third-party service provider, whether or not an affiliate of the UNA, must then clearly provide that neither the UNA or its affiliates shall have any liability for the operating obligations of Soyuzivka.

Operating analysis

Soyuzivka currently generates an operating loss in excess of $500,000 per year. However, the committee determined that it is possible to generate a sufficient - if not superior - return on investment, given current market conditions, location and the potential cost savings that can be realized through improving current operations. This return on investment should facilitate the attraction of capital necessary to ensure the continued viability of the resort.

The committee outlined Soyuzivka's current financial and operating position. Based on the findings of the resort study, the committee noted a number of significant facts, including the following.

Revenue generated by the resort has remained constant during the past 10 years at approximately $425,000 per year.
In 1999, occupancy rates were estimated to be 35 percent, with an average daily rate of $39 per room. This revenue per room rate (known in the industry as "REVPAR") is 25 percent of the industry norm.
Soyuzivka incurs an abnormally high per room labor cost, meaning that the resort spends much more to maintain each room than the industry norm, as well as a very high food cost per room.
General and administrative expenses, on a percentage basis, are much higher than industry norm, as are heating and cooling costs, and basic maintenance expenses.
Marketing efforts are non-existent.
Use of information technology is rudimentary, at best.

The committee then noted that comparably placed facilities in the Catskill region of New York were performing much better. Specifically, three separate resorts in the area had double the occupancy rates, on average, with an average room rate of $180 to $200 per night. More to the point, the resort study suggests that Soyuzivka, with the physical plant renovations previously discussed, can competitively participate in a market in which approximately 68 percent of all available rooms will be occupied, at an average current-dollar room rate of $190, in the year 2003.

Given assumptions that the committee determined to be reasonable (and even somewhat pessimistic), the committee found that the local market is sufficient to generate a return on investment sufficient to attract the capital necessary to complete the renovations contemplated in the "physical plant" section above. In fact, the committee prepared a "rate of return" calculation taking into account the cost of the existing resort, physical plant improvements, operating losses spread over the next two years, taxes and depreciation. This calculation yielded, using pessimistic assumptions, an expected rate of return of 7.1 percent - quite sufficient to attract needed third party investment.

Future actions

On a going forward basis, the committee noted the need to follow-up on four areas: (a) identifying professional assistance in attracting charitable donations, (b) identifying interested institutional donors, (c) identifying candidates for third party management, and (d) finalizing the position of the state insurance commission on the committee's recommendations.

To a large degree, these steps will need to be undertaken under Executive Committee direction; however, the committee has indicated its willingness and interest in working with the Executive Committee in this regard.

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