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Financing Challenges for Indoor Waterpark Resorts

Thursday, April 22, 2010 10:31 AM

Financing Challenges for Indoor Waterpark Resorts By David J. Sangree, MAI, CPA, ISHC Indoor waterpark resorts are a relatively new phenomenon in the United States and are spreading to new locations across the country. Many of the indoor waterpark resorts are achieving occupancy levels and average daily rates well in excess of hotels without indoor waterparks. Financing of new indoor waterpark resorts has proven to be more difficult than a typical hotel due to the size of the project and related development loan, as well as the increased risk inherent in an amusement oriented resort property. A well-documented appraisal is required to attain financing. The appraisal of an indoor waterpark resort has many similarities to the appraisal for a typical hotel property with some important differences in analysis and scope of the project. As an indoor waterpark resort is an entertainment based hospitality property, it has the potential to achieve substantially higher revenues than a typical hotel property although it also has additional risk inherent in its operation. This article will discuss methodology for preparing an appraisal on an indoor waterpark resort as well as financing for resorts in this difficult lending environment. Indoor Waterpark Resort Overview: We define an indoor waterpark resort as a hotel facility connected

to

an indoor waterpark with a minimum of 10,000 square feet of indoor waterpark space and inclusive

of

amenities such as slides and tubes. Many hotels with large swimming pools claim to have an indoor

waterpark; however, our definition of a 10,000 square foot minimum waterpark space restricts the use

of the term resort to those facilities which have a variety of slides, pools and tubes. The following table

indicates the current supply of indoor waterpark resorts in the United States. Number ofAverageResortsRatioRoom CountAverageHighLowFranchised1229%24218,42551,50010,000Non - Franchised2971%24134,883160,00010,000Total41100%Note: Resorts have a minimum of 10,000 square

feet of indoor waterpark spaceSource: US Realty Consultants, 216-221-9191 (August 2004)USA Indoor Waterpark Resorts Supply AnalysisIndoor Waterpark Square Footage

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Many new indoor waterpark projects have been proposed at new resorts and existing hotels throughout

the northern United States and Canada. As of August 2004, we are tracking 70 proposed indoor

waterpark resort projects which include additions to existing hotels as well as new construction resorts.

If all of these projects were built, they would total 13,347 new guestrooms with 2,949,980 square feet of waterpark space. Methodology for an Appraisal The purpose of a typical appraisal is to estimate the market value. Market value represents the most

probable price which a buyer and seller would agree to in a sale transaction. The scope of an appraisal for an indoor waterpark resort property involves the systematic research and analysis necessary to reach a value conclusion for the property. The initial step is to inspect the subject, neighborhood, and general market area. Market research should include data from public records, real estate specialists, governmental entities, real estate publications, owners/investors, and from management and hotel managers at comparable properties both locally and at other locations where indoor waterparks are successful.

A thorough market analysis of the local hospitality and indoor waterpark resort market should be

included within the appraisal. Management of hotel and indoor waterpark resort comparables should be interviewed. If the property is proposed and will be the only indoor waterpark resort in the area, the appraisal should include a thorough analysis of other markets with indoor waterpark resorts to make comparisons between the markets. The market analysis should analyze occupancy, average daily rate, market penetration, and waterpark usage figures. Information from the market area is analyzed to determine the influences which will impact the surrounding market area and the value of the subject

property. Calculating the impact of the indoor waterpark is a significant component of the analysis, and one which makes the analysis more complex than for a stand alone hotel. Information concerning the subject’s ad valorem taxes, zoning information, sales history, governmental restrictions, environmental regulations and other factors which may affect the subject property should be collected. If the property is existing, management should be interviewed to understand the operation as it currently exists. Extensive data should be collected from the property including building plans, financial statements, market segmentation reports, usage figures, and other statistics to understand and report the historical performance of the property to allow the appraiser to properly make projections.

If the property is proposed, the appraiser should review the plans for the property and analyze the

developer's budget. The appraiser should compare the proposed budget with actual operating results of other indoor waterpark properties in comparable locations with comparable sizes. Research should be

conducted relevant to the valuation process, including gathering income, expense, capitalization rate, and discount rate data;

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comparable improved sales; land sales; comparable development costs; and any other information pertinent to the valuation of the subject property. The appraiser performs three approaches to value and reconciles them into the market value conclusion:

The Income Capitalization Approach: This approach analyzes the property's capacity to generate income (or other monetary benefit) and converts this capacity into an indication of market value. The approach

is particularly suitable to hospitality properties and indoor waterpark resorts as their value is primarily

based upon the cash flow which they generate. The discounted cash flow (DCF) analysis is most appropriate for this analysis as it is a market reflective method of estimating the present worth of anticipated income benefits. The appraiser should analyze the occupancy, average daily rate, and various revenue and expense categories in determining the projected net operating income and value for the property. The appraiser should analyze the various departments of an indoor waterpark resort including outside waterpark sales, arcade revenue, gift shop, restaurants, lounges, meeting space, telephone, and other departments. Expenses for each of these departments should be estimated based

upon an analysis of historical results and results from comparable indoor waterpark facilities. The discount rate and terminal capitalization rate for the analysis should be estimated based upon the industry surveys for hospitality properties taking into account the unique risk and income characteristics

of an indoor waterpark resort property.

The Sales Comparison Approach: This approach compares the property to other properties that have changed hands fairly recently, at known price levels. The approach is most meaningful when there is adequate market data involving comparable properties. Reliability of this approach varies directly with the quantity and quality of available market data. This approach is more difficult for indoor waterpark resort properties due to the shortage of actual sales of these types of properties. As of 2004, there have only been a few sales of indoor waterpark resorts. As of the writing of this article, there are additional listings of indoor waterpark resorts in the Wisconsin Dells which, after selling, will provide a better indication of value for these types of properties. The Cost Approach: In this approach, the cost to replace the improvements is estimated. A deduction is made for any depreciation, and the result is combined with the estimated value of the underlying land. The approach is applicable particularly for a proposed development where development budgets and land cost are available. Financing of Indoor Waterpark Resorts

http://www.usrc.com/files/Financing%20Challenges%20for%20Indoor%

20Waterpark%20Resorts.pdf

Financing Challenges for Indoor Waterpark Resorts Page 1

The lender will utilize the appraisal as well as an analysis of construction costs in determining the prospective loan for the project. Indoor waterpark resorts have been financed through a variety of methods. They include the following:

Traditional banks

Investment bankers specializing in the hospitality industry

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Wealthy individuals

Self financed through cash flow of other properties

Governmental backed loans and grants

To obtain financing for an indoor waterpark resort, a developer needs to have strong management expertise and character to demonstrate to the lender that they have the necessary experience for developing and operating the property. The developer needs to have sufficient collateral and capital so the lender can feel that the loan will be paid off. Most importantly, the property must have sufficient projected cash flow to easily cover the projected debt payments with clearly defined and reasonable basis for these projections.

Indoor waterpark resorts have proven to be more difficult to finance than typical hotel properties. Part

of the difficulty in financing an indoor waterpark resort stems from it being both a hotel and an

amusement attraction.

• Hotels are more difficult to finance than other types of commercial property. Their income, which

relies on daily variations in occupancy, is less stable and predictable than income for properties secured

by long-term leases.

• The addition of an indoor waterpark to a hotel creates more of an entertainment destination, which

some bankers perceive to be more risky. However, the success of many of the existing indoor waterpark resorts indicates that there is a strong demand for these types of entertainment theme properties.

• The number of indoor waterpark resorts which exist in the United States is quite small - less than 50

with indoor waterparks over 10,000 square feet. Therefore, lenders need an educational process to help them understand the dynamics of these properties.

• The development costs for an indoor waterpark resort are typically much higher than for many hotel

properties with some properties costing between $150,000 and $250,000 per available room including the indoor waterpark. The indoor waterpark itself may cost from $200 to $500 per square foot of net

indoor waterpark space.

A developer may counter these difficulties in obtaining financing by preparing a comprehensive package

of

documentation for a lender. A thorough feasibility study will provide documentation as to projections

of

revenues and expenses by outlining industry trends and successes. The study also educates lenders

about this relatively new area of real estate development. A strong business plan illustrates the developer's expertise and commitment to success. A well-documented appraisal will analyze construction costs and the market feasibility in determining the market value. Together these

documents provide the lender with solid information on which to base prudent financing decisions. David J. Sangree, MAI, CPA, ISHC interviewed various lenders and investors concerning the financing of indoor waterpark resorts in August 2004. The following chart summarizes the results from our interviews.

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Indoor Waterpark Resort Financing Survey Interest Rate (%) 6% to 8% Approximately 2% to 2.5% over the prime rate Terms of Loan (Years) 3 to 10 years Years Amortize 20 to 25 years Debt Coverage Ratio 1.5 to 1.7 Loan to Value (%) 65% to 70% Source: US Realty Consultants, 216-221-9191, August 2004 Typically, lenders require a higher equity contribution than would be applicable on a more traditional hotel loan. Our interviews with hotel lenders indicated that they are beginning to look with increased

interest at indoor waterpark properties as compared to 2003, when there was limited interest. However, at this time, there still are relatively few lending institutions actively soliciting these types of projects. As hotels are already a more difficult type of real estate to finance compared to other commercial properties, the indoor waterpark resort is currently very difficult to find financing for. As more properties are developed and have shown strong performance, we anticipate that financing will become somewhat easier. In addition, the planned IPO by the Great Lakes Companies will increase Wall Street’s knowledge of this specialized area of the hospitality industry. Conclusion: The financing environment for indoor waterpark resorts is currently difficult with few lenders interested in this product type, and lenders requiring larger equity contributions. A new project requires well-documented market feasibility study and appraisal reports which fully explain the market dynamics and income potential for the resort project. David J. Sangree, MAI, CPA, ISHC is Director of Hospitality Consulting and a Principal with US Realty Consultants, a national hospitality consulting and real estate valuation firm, in the Cleveland office. He has conducted over 1,000 hotel studies since 1987. He has performed market feasibility studies and appraisals on a wide range of existing and proposed indoor waterpark resorts throughout the United States and Canada. He can be reached at 216-221-9191 or at dsangree@usrc.com.

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Water Theme Parks

a. Starting

i. Before You Hire Designers

b. Expenses

i. Costs for a Water Park

c. Investors

i. How Are Investors Getting Into Hotel Water Park Resorts?

ii. Water Park Finance; What Investors Require

d. Seasons

i.

Summer

ii.

Fall

iii.

Winter

iv.

spring

e. Investments

i. What is the Return on Investment?

ii. Hotel Water Park Resorts: are they a good investment?

f. Older properties

i. Market for Updating Older Properties

g. Development

i. Theme Park Development

h. Risk factors

i.

Seasonality

ii.

Weather

iii.

Location

i. Room occupancy

i. Average room rates

j. Revenues

i. Water park admission prices

ii. Profitability

80,000 410,000 90,000 40,000 512,560
80,000
410,000
90,000
40,000
512,560
 

Parking Space

 

Rooms

 

Lobby

 

Hallways

 

Water Park

Total

1,132,560

Water Park Adventures & Hotel 60th S treet North & Westport Avenue (123) 456-7891 April

Water Park Adventures & Hotel

60th S treet North & Westport Avenue (123) 456-7891

April 20, 2010

David Kampmann Instructor Southeast Technical Institute 2320 North Career Avenue Sioux Falls, SD

Mr. Kampmann,

Water Park Adventures and Hote el is the ultimate experience in luxury, service, a nd fun. Start your adventure off in our luxurio us lobby where a free cookie and warm cup of Joe are always

available. You can then head ove r to our massive water park, kept at a constant may be awestruck at the sheer a mount of slides, rides, pools, and hot tubs all in area. And there’s much more.

86 degrees. You one water park

Don’t miss our!

Exotic themed restaurant s

Day spas

fitness centers

Exotic adventure themed hotel rooms

Water Park Adventures and Hote el is the ultimate, year-round experience for any family. Come join us for a fun filled family get away.

Cordially,

David Otamendi President, Waterpark Adventure s and Hotel

Enclosure

Water Park Adventures and Hotel

=NOW()

Name

Location

Rooms

Indoor WP Sq Ft

Open

Cost of Waterpark Items

Wilderness Hotel & Golf Resort

Wisconsin Dells

WI

593

161000

1995

Number of Rooms

85

Building Shell

299200

Kalahari Resort

Wisconsin Dells

WI

378

125000

2000

Size of Indoor Waterpark

2720 Sq Ft HVAC

40800

Bavarian Inn Lodge*

Frankenmuth

MI

357

30000

1986

Pools & Mechanical

134200

Grand Country Inn

Branson

MO

319

20000

2001

Spa Pools

15400

Great Wolf Lodge

Wisconsin Dells

WI

309

44000

1997

Snack Bar

17000

Treasure Island

Wisconsin, Dells

WI

302

65000

1999

Support Areas

15390

Chula Vista Resort

Wisconsin Dells

WI

300

30000

1999

Theming

50000

Great Wolf Lodge

Traverse City

MI

281

38000

2003

Waterslides & Recreation Equipment

115000

Great Wolf Lodge

Kansas City

KS

281

38000

2003

Construction Costs

686990

Great Bear Lodge

Sandusky

OH

271

33000

2001

Cost per sf of waterpark

253

Hilton Center City (730)**

Milwaukee

WI

250

20000

2001

(Total)

=SUM(K4:K13)

BW Sterling Inn & Conference Center

Sterling Heights

MI

250

22769

2001

http://hotel-online.com/News

Polynesian Resort

Wisconsin Dells

WI

230

38000

1994

Hojo Resort Conference Center

BW Ramkota Hotel & Conference

Wisconsin Dells

Sioux Falls

WI

SD

230

226

13000

3000

1994

2002

Timber Ridge Lodge

Lake Geneva

WI

225

30000

2001

Grand View Lodge

Nisswa

MN

200

7500

2000

Arrowood Resort & Conference Ctr

Alexandria

MN

200

21000

2003

Grand Harbor Resort & Waterpark

Dubuque

IA

194

25000

2002

Ramada Plaza

Fargo

ND

185

10000

1996

http://www.hotel-online.com/News/PR2003_3rd/Sep03_WaterparkReport.html

TYPICAL COST FOR UPSCALE HOTEL WATERPARK RESORT

Category

Per Room

Amount

% of Total

Land

14400

4320000

7.9

Design

3500

1050000

1.9

Development

10800

3240000

6

Construction

119000

35700000

65.6

FF&E

14600

4380000

8

Construction management

1600

480000

0.9

Pre-opening

4800

1440000

2.6

Working capital

2000

600000

1.1

Financing

8300

2490000

4.6

Contingency

2500

750000

1.4

Total Project

166700

54450000

=SUM(D29:D38)

David Otamendi

Indoor WP Sq Ft Wilderness Hotel & Golf Resort Kalahari Resort Bavarian Inn Lodge* Grand
Indoor WP Sq Ft
Wilderness Hotel & Golf Resort
Kalahari Resort
Bavarian Inn Lodge*
Grand Country Inn
180,000
160,000
Great Wolf Lodge
Treasure Island
140,000
120,000
Chula Vista Resort
Great Wolf Lodge
100,000
80,000
60,000
Great Wolf Lodge
Great Bear Lodge
40,000
20,000
0
Hilton Center City (730)**
BW Sterling Inn & Conference Center
Polynesian Resort
Hojo Resort Conference Center
BW Ramkota Hotel & Conference
Timber Ridge Lodge
Grand View Lodge
Arrowood Resort & Conference Ctr
Grand Harbor Resort & Waterpark
Ramada Plaza
Catherine Baker David Kampmann   April 22, 2010   Water Park Adventures & Hotel High
Catherine Baker David Kampmann   April 22, 2010   Water Park Adventures & Hotel High

Catherine Baker David Kampmann

 

April 22, 2010

 

Water

Park Adventures & Hotel

High quality, and tons of fun, thi s water park is a one of a kind. Going from tube slides to drop offs, all the way to relaxing in a comfortable Jacuzzi, or hitting the spa in ou r elegant hotel.

 
   
 
 

Indoor Water Park

Over 120 rides and attract ions

Hotel and accommodatio ns right on site

 

$25 admission fee or $50 f or an all year pass

Room costs average

Please call 605-555-7982 o r go to our website at www.waterparkadv entures.com

Please call 605-555-7982 o r go to our website at www.waterparkadv entures.com

Please call 605-555-7982 o r go to our website at www.waterparkadv entures.com

Catherine Baker David Kampmann

April 22, 2010

In order to have a profitable Water Park, you have to think of some very important

questions. One of those questions would be something along the lines of is the property

within a 120 to 180 mile radius of a town that has an increasing population? Or another

good question to look into would be transportation. The next question to look at would

be the risks involved in setting up an indoor water park, and if it is going to be worth the

effort of having a hotel with the Water Park. Then it would be a good idea to look at the

finances that will be needed to start up and keep up an indoor Water Park/Hotel. Next a

good thing to consider would be looking into investors, and what the return on the

investments would be. Then it would be a good time to consider marketing factors and

what your game plan for that will be.

Now going back to the first question asked. Is the property within a 120 to 180 mile

radius of a town that has an increasing population? If so then the next step would be to

look at family households and how many of them have children. Simply because water

parks, indoors or out, are typically places that attract people with a more average income

level then those with a higher income level and most of the popularity comes from pre-

teens and teens. And this would then be considered your target market for you marketing

strategy. (Heuertz).

Another important factor to look into would be the transportation available in the

town. Checking out the bus routes, and how much it would cost to take a taxi from say

the other side of town. This would be worth knowing because, then you need to plan out

if you are going to pay to have your own transportation from different points within the

Catherine Baker David Kampmann

April 22, 2010

town to your Water Park; and if so how much you are going to charge the customer for

the use of that transportation. Or consider if it is even needed at all.

A good question to start looking at would be the risks indoor Water Parks avoid

and the risks involved in opening a Water Park/Hotel. That way you know if it is worth

the trouble. The growth of indoor Water Parks and Hotels is annually within the range of

23 to 29 percent. Now days there are over 60 nationwide indoor Water Park/Hotels.

Whereas ten years ago there were only 18 (Heuertz).

Normally most tourist attractions have to worry about seasons. Like how they are

going to make the budget work when they only have a good business year of around 100

days. However indoor water parks no longer have this risk involved. Because they are

indoors and have a hotel built right in they are generally 100 percent full every weekend

and every school brake. Thus they just expanded their good business season from around

100 days to a full year round season. It is proven that hotels with indoor water parks have

better profits and have a more successful room rate than those without. Hotels with an

indoor water park typically do not have to worry about the weather factor simply because

the group of people attending the event can stay the night if the weather gets too bad

(Haralson).

In the year 2,000 indoor water parks took a full 75 percent of the total revenue in

the hotel market. By the year 2,003 they took a complete 18 percent of the total profits. A

lot of hotels with indoor water parks are combining the admission price of the water park

into their room rates. This can boost their ADR, or average daily rates, as much as 25

Catherine Baker David Kampmann

April 22, 2010

dollars per person, per night. Thus having the 25 dollars be your admission price to enter

the water park. Most hotels with indoor water parks do not open their water park doors

to the public. However there are a few, they generally have day passes for that purpose.

But they would need to oversize their water park while still in the design phase

(Haralson).

The next risk to look at is expenses. Investors will generally insist that the person

running the hotel and water park have two teams running the expenses of the hotel and

water park separately. Thus there is less room for error. Or in a sense have someone else

running the water park for them. A few of the expenses that go with the water park are:

insurance, energy, maintenance, and marketing (Haralson).

To finance a hotel and indoor water park you need to read the reports that others

have. They might want to consider looking at banks that specialize in hospitality rather

than just traditional banks. Then figure the cost of land, construction, labor, and time

into the design. Once all of that is done the owner will need to figure the cost of energy,

up-keep, water production, and food supplies into your design (Sangree).

Now would be a good time to look into investors. Maybe looking into family

members or getting donations. There are a lot of ways to get the money you need. It is

just a matter of coming up with them, because the banks will not give the entrepreneur

all of the money they are going to need. Another factor to look into is the unexpected.

After all of these things are done, it will be time to get started on the makings of the hotel

Catherine Baker David Kampmann

April 22, 2010

and water park. This helpful information would be just the thing needed for someone to

get started.

Catherine Baker David Kampmann

Work Cited

April 22, 2010

Haralson, Jeff Coey & Bill. "What are the risk factors in a Hotel & Water Park invesment." Condo Hotel Center. 10 April 2010 <http://www.condohotelcenter.com/articles/a96.htm>.

Heuertz, Daniel A. "Summary of Water Park Research." Business Interest Inc. 21 April 2010

<http://www.sugar-grove.il.us/Dept_CD/SDD5.pdf>.

Sangree, David J. "Financing Challenges for Indoor Waterpark Resorts." U.S. Realty Consultaints, Inc. 22 April 2010

<http://www.usrc.com/files/Financing%20Challenges%20for%20Indoor%20Waterpark%20Resort

s.pdf>.

Joel Gutierrez

208 N. Hillside Pl. Sioux Falls, SD, 57107

joel.gutierrez@southeastteh.edu

Cell: 605-413-9323

Objective: Seeking a position as an M3 Accounting

Education:

The University of Texas, Austin, Texas, BBA Degree August 2012-May 2014

Southeast Tech, Sioux Falls, SD, Associates Degree in Accounting, December 2011

Roosevelt High School, Sioux Falls, SD, May 2010

Experience:

Worked for M3 accounting services July 2014- May2015

Used the system and help out to make any changes

Directed Sales and marketing initiatives

Nelson and Nelson Accounting, Sioux Falls, SD, March 2011-Present

Internship

Bookkeeper

Updated data on the compute

Analyzing work for other accountants

Balanced sheets and profit/loss statements

Olive Garden Restaurant, Sioux Falls, SD, September 2008-Present

Host

Buss boy

Kitchen work

Activities:

Work out at Planet Fitness, Sioux Falls, SD, January 2010-Present

Roosevelt soccer, Sioux Falls, SD, August 2009-October 2009

Hispanic Soccer league, Sioux Falls, SD, May 2009-August 2009

Sioux Falls Spitfire soccer, Sioux Falls, SD

Skills:

Speak Spanish

Proficient in Microsoft Office and Excel

Using M3 in a hotel, making it easy for the business

References:

Available upon request