All-Star Real Estate Inc. is a relatively new licensing and educational business on the outskirts of downtown Vancouver. Currently, it is housed in a three-story building with twelve presentation/ training/assessment rooms (on average, each room has 27 seats). As Vancouver is a real estate hotbed with lots of real estate activity, the ownership and management are trying to find ways of expanding business operations. Hence, they have contracted you, a talented team of MBAs with accounting/finance expertise, to supply a business report analyzing the current issues faced by the business with specific, detailed recommendations. All-Star attracts a mix of local and international customers. The institution offers competitive licensing and course/workshop enrollment rates to similar, smaller-sized businesses in the region, but All-Star has benefitted from the highest growth rate and, hence, now enjoys the largest employee and customer groups. The business has quickly filled to nearly 100% of its physical capacity in three short years (some availability must be maintained for emergency meetings and events). Hence, it needs to explore expansion options so that it can continue to serve new customers and generate higher profits. Based on sales data and surveying of customers, the top motivation for entering business with All-Star is to obtain realtor or real estate appraisal licensing- this is often the main goal of local customers. However, a close secondary goal for individuals outside the country has been to understand Vancouver real estate better. With this knowledge, they can make better investments or help wealthy clients, friends, and family members back home achieve their investment objectives in the Vancouver area. Some customers have even reported that they have opted to move to Vancouver after enrolling in a course with All-Star and seeing the beautiful city! The sales data and survey results have the marketing director, Shelly, reconsidering the business's marketing strategy. She is wondering if the business's marketing should promote an investment bridge, or even living bridge, into Vancouver- even though there are other factors which could impact one's ability to move or invest here. Shelly understands that advertising should be tasteful and ethical but also wants it to be effective so that she can impress the higher ups with her work. Local residents and news outlets have raised concern over the availability and cost of real estate in Vancouver. All-Star employees have heard a growing number of complaints from Vancouver residents about their part in making the local housing situation worse. Although they have pointed out that All-Star also offers workshops and courses on real estate development, and others on renting units out, All-Star seems to continue to get its share of hate in the city. Shelly wants advice on how the business can market itself for growth and still improve its brand locally. A real estate oversight board, managed by the BC government, has recently warned All-Star that it will be regulating the growth of such businesses/industries more closely in the upcoming year. In fact, it is highly likely that All-Star would need to cap customer numbers at end-of-2024 levels. Hence, management believes this to be the business's final real opportunity to grow without restrictions from the oversight board. The business's President, Don, is urging you to analyze two options under consideration carefully and give a detailed recommendation. As a starting point for analysis of expansion plans, Don is suggesting that you look at the financials for the year just ended. At the end of the year, the business had 2,420 currently-enrolled customers (the year had started with 1,780 customers) and had delivered over 400 courses/workshops in the year! Figure 1: Selected revenues and expenses for 2023: Revenues $22,600,000 Salary expense- Admin/staff 4,300,000 Salary expense- Trainers 5,200,000 Salary expense- Executives 1,900,000 Rent expense 3,000,000 Marketing expense 1,400,000 Interest expense 800,000 Supplies expense 300,000 Other expenses 200,000 Don mentioned that he considered the building's rental agreement to be quite favourable as the landlord has been great at addressing the institution's needs in a timely manner. Since the business moved to the space a year ago, many of its operating expenses have been included in the rental agreement including internet, electricity, natural gas/heating. The only significant recurring expenses All-Star covers are security and janitorial services- the admin/staff salary expense includes three security guards (one for each floor) and two janitors. Don mentions that as the business has roughly doubled in size over the past year, the following expenses have also roughly doubled: Salary expense- Admin/staff Salary expense- Faculty Supplies expense Other expenses Don states that the other expenses have remained about the same over time, except for the salary expense for executives. As reward for the business's impressive growth, the five executives, all of whom own sizeable chunks of the business (between 10% and 25% apiece) have tripled their salaries over the past couple of years. However, they have collectively agreed that they will not increase their salaries again until the business's revenues surpass $30 million. Despite being happy with the rental agreement, the business's owners wish to expand to a larger space as the business is currently getting more customer interest than it can feasibly capitalize on. Here are the two expansion options Don referred to earlier: Option A: McBain Tower In this scenario, the business would exercise the option of breaking its current lease for a penalty of $300,000. It would then relocate to a five-story space within McBain Tower. Since most of the space is already designed well for training, All-Star could make quick tweaks at an estimated cost of $150,000 and get things rolling very quickly. The lease would be a bit costlier- $300,000 a month, and the business would now need to incur added expenses of $50,000 a month for utilities. Don wants your help with projecting the other expenses. On the bright side, the business would now have sixteen rooms to work with (average size of 25 seats each). Shelly admittedly hasn't done much number crunching but believes she can boost enrollment by 25% if the marketing budget is increased by $300,000 to advertise the new larger location. Without the larger budget, she estimates that customer numbers would grow by 15% next year. Option B: BC Place With this option, All-Star would rent BC Place stadium on Tuesday and Wednesday afternoons (for ten weeks of the year), at a cost of $10,000 per afternoon (four hours). Since the large stadium has two ends, All-Star would run two three-hour workshops simultaneously and leave enough time for set-up and clean-up. Don envisions each of the two workshops having 150 customers each. The set-up, clean-up, and other costs (beyond rent) would be $1,000 a week. Since enrollment fees for each workshop total $150, Don believes that there would be more than enough revenue to cover the new expenses. Shelly believes that only a small marketing budget increase would be needed with the BC Place arrangement- $150,000 more would be sufficient to recruit an extra 5,000 workshop registrants. Due to the visibility and prestige of BC Place (as well as his familiarity and love for the current location), Don personally prefers Option B. However, he does admit that there is another piece needed to maximize the benefit of BC Place. A certain number of customers would need to be shuttled between BC Place and the permanent office if they are going to be able to attend courses or events at both locations on the same day. Hence, the business will need to buy or rent a large bus- this is something that management is considering anyway (for free morning and evening routes around the city to help customers out), even without the expansion to BC Place. If All-Star was to purchase the 50-seat bus and use it solely for shuttling between the office and BC Place, it would have the following expected costs: Figure 2: Bus costs Cost of bus, current $300,000 Driver salary, weekly $600 Repairs and Maintenance, weekly $200 Cleaning costs, weekly $300 Fuel costs, weekly $400 Insurance costs, annual $2,500 Expected sale price, 4 years later $200,000 Alternatively, renting the bus would cost $800 per afternoon (all expenses included). To purchase the bus, it is unclear if All-Star would pay cash or borrow the money from the bank at a 5% rate (the business has already negotiated a sizeable line-of-credit to borrow at this rate for any of its business ventures). Don wants a pros and cons analysis of buying or renting the bus, as well as the benefits and drawbacks of using the company's own cash to purchase an asset, or borrowing to do so. He also wants an idea of how the purchase of a big asset such as a bus would be accounted for. Finally, Don does not come from an accounting/finance background and wants some advice on evaluating performance . Introduction Briefly introduce All-Star Real Estate Inc. Explain the purpose of the report and the team's role. Provide an overview of the case study. 3. Current Business Overview Describe All-Star's current business operations. Discuss its customer base and growth. Highlight the motivation of customers. Explain the marketing challenges and local concerns