Indoor waterpark resorts have proven to be more difficult to finance than typical hotel properties or other commercial properties. The difficulty in financing an indoor waterpark resort comes, in part, from the fact that it is both a hotel and an amusement attraction. Below are characteristics of these unique properties that make financing them difficult:
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David J. Sangree |
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Eric Hansen |
Larger scale and greater costs
• They are bigger: Indoor waterpark resort projects generally are larger in scale and require larger development loans.• They cost more to build: The development costs for an indoor waterpark resort are typically much higher than for many hotel properties. Most properties can cost between US$200,000- and US$400,000-per-available-room when indoor waterpark costs are included. The indoor waterpark itself may cost from US$200- to US$600-per-square-foot of net indoor waterpark space.
Higher risk
• They are hotels: Hotel income, which relies on daily variations in occupancy, is less stable and predictable than income for properties secured by long-term leases. Therefore, they may be viewed by lenders as a high-risk situation.
• They are amusement facilities: The addition of an indoor waterpark to a hotel creates more of an entertainment destination, and, in spite of the success of many existing indoor waterpark resorts, some bankers perceive amusement facilities to be riskier than other types of commercial property.
• There are not many of them: The number of indoor waterpark resorts which exist in the United States is quite small—approximately 129 with indoor waterparks over 10,000 square feet. Therefore, lenders are generally unfamiliar with the dynamics of these properties. A developer may need to spend extra time to educate a lender when trying to acquire a loan.
• Seven indoor waterpark resorts have gone into bankruptcy or been foreclosed in the Midwestern states between 2009 and 2010. However, 122 properties in the U.S. are still operating and have not had documented lender problems.
Branding
• Developers find it easier to obtain financing for franchised properties than for independent properties because lenders tend to view franchised properties as more economically stable and less risky.
Overcoming the challenges
A developer may counter these difficulties in obtaining financing by preparing a comprehensive package of documentation for a lender. A developer should consider the following items when putting together a comprehensive loan package.
Lender education
• A loan officer’s familiarity with both the hospitality industry and amusement related properties are vital. An educated hospitality lender well-versed in waterpark resort projects will alleviate a lot of consternation and wasted time for the developer.
• Another aspect of lender education is market or location familiarity. Lenders are more willing to lend in their own back yard because they have insights into the local markets, which supports the trend toward regional lenders as a viable option for financing. However, our discussions reveal the basic operational understanding of a waterpark resort is just as important as local market familiarity.
• As the foundation for a developer’s loan package documentation, a comprehensive feasibility study describes the physical and economical characteristics of the proposed project. In addition, a well-documented appraisal will analyze construction costs and the market feasibility of the resort in determining the market value. Together, these documents provide the lender with solid information on which to base prudent and informed financing decisions.
• A thorough feasibility study will provide projections of revenues and expenses by outlining industry trends and successes. It will be market specific and realistic in its bottom-line net operating income projections.
• Projected strong occupancy and average daily rate performance combined with the most effective revenue streams and accurate development costs do not necessarily make a good deal for a lender. The lender is looking for the borrowing strength of the developer; the operational acumen of the resort and waterpark operator; the strength and cohesiveness of the business and marketing plan; and the personal guarantee of the borrower.
Timing
• Support material and data for an indoor waterpark resort development contained in a feasibility report needs to be current. In 2008 and 2009, a number of projects were put on hold and have been shelved. Like prescription medication, a feasibility study has a shelf life. The shelf life of a feasibility study expires within six to nine months of the study’s initial reporting date. It could even expire sooner, depending upon the market in which the project is located, as well as other external circumstances. If you go to a lender with an outdated report or with piecemeal data, it is inappropriate, and you won’t get far. The shelved feasibility reports need to be updated.
A developer should have a well-organized, professional loan documentation package that communicates all performance aspects and physical characteristics of the proposed resort in order to educate potential lenders about this area of real-estate development.
There are interested lenders who are looking at projects, but developers may have more difficulty finding the right fit for their individual projects. There are relatively few lending institutions actively soliciting these types of projects. However, we anticipate that financing could become somewhat easier as the credit markets thaw, lending institutions become more interested in new development hospitality projects, and the waterpark resort market becomes more prevalent as staycations become more popular.
Conclusion: The financing environment for indoor waterpark resorts remains difficult in 2010 due to a lack of lender interest and larger equity contribution requirements. However, these difficulties can be overcome for a solid project from a creditworthy developer with a well-documented market feasibility study and an appraisal report, which fully explain the market dynamics and income potential for the resort project and serve to educate the lender.
About this series: This is the third of three articles in a series that examines how to finance a waterpark at a hotel.
David J. Sangree (dsangree@hladvisors.com), a member of the International Society of Hospitality Consultants (www.ishc.com) is president of Hotel & Leisure Advisors.
Eric B. Hansen (ehansen@hladvisors.com), a member of the International Society of Hospitality Consultants (www.ishc.com) is director of development services for Hotel & Leisure Advisors.