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 http://www.usrc.com/files/Financing%20Challenges%20for%20Indoor%
waterpark resorts has proven to be more difficult than a typical hotel due to the size of the project and 20Waterpark%20Resorts.pdf
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
1
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;
2
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
The lender will utilize the appraisal as well as an analysis of construction costs in determining the

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
3
• 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.
4
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.
5

Financing Challenges for Indoor Waterpark Resorts Page 2

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
 Parking Space
Rooms
Lobby
Hallways
Water Park

Total 1,132,560
 Water Park Adventures & Hotel
60th Street North & Wes
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 Hotel is the ultimate experience in luxury, service, and fun. Start
your adventure off in our luxurious lobby where a free cookie and warm cup of Joe are always
available. You can then head over to our massive water park, kept at a constant 86 degrees. You
may be awestruck at the sheer amount of slides, rides, pools, and hot tubs all in one water park
area. And there’s much more.

Don’t miss our!

• Exotic themed restaurants

staurants
• Day spas
• fitness centers
• Exotic adventure themed hotel rooms

Water Park Adventures and Hotel is the ultimate

ultimate, year-round experience for any family.
family Come
join us for a fun filled family getaway.

Cordially,

David Otamendi
President, Waterpark Adventures and Hotel

Enclosure
 David Otamendi

Water Park Adventures and Hotel

=NOW()

Name Location Rooms Indoor WP Sq Ft Open Cost of Waterpark Items

Wilderness Hotel & Golf Resort Building Shell

Wisconsin Dells WI 593 161000 1995 Number of Rooms 85 299200
Indoor WP Sq Ft Wilderness Hotel & Golf Resort Kalahari Resort

Kalahari Resort Wisconsin Dells WI 378 125000 2000 Size of Indoor Waterpark 2720 Sq Ft HVAC 40800 Bavarian Inn Lodge* Grand Country Inn

Bavarian Inn Lodge* Frankenmuth MI 357 30000 1986 Pools & Mechanical 134200 180,000 Great Wolf Lodge Treasure Island
160,000
Grand Country Inn Branson MO 319 20000 2001 Spa Pools 15400 140,000
120,000 Chula Vista Resort Great Wolf Lodge
100,000
Great Wolf Lodge Wisconsin Dells WI 309 44000 1997 Snack Bar 17000 80,000
60,000 Great Wolf Lodge Great Bear Lodge
40,000
Treasure Island Wisconsin, Dells WI 302 65000 1999 Support Areas 15390 20,000
0 Hilton Center City (730)** BW Sterling Inn & Conference Center
Chula Vista Resort Wisconsin Dells WI 300 30000 1999 Theming 50000
Polynesian Resort Hojo Resort Conference Center
Waterslides & Recreation
Great Wolf Lodge Traverse City MI Equipment BW Ramkota Hotel & Conference Timber Ridge Lodge
281 38000 2003 115000

Grand View Lodge Arrowood Resort & Conference Ctr

Great Wolf Lodge Kansas City KS 281 38000 2003 Construction Costs 686990

Grand Harbor Resort & Waterpark Ramada Plaza

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/PR2003_2nd/May03_HotelWaterParkStudy.html

Polynesian Resort Wisconsin Dells WI 230 38000 1994

Hojo Resort Conference Center Wisconsin Dells WI 230 13000 1994

BW Ramkota Hotel & Conference Sioux Falls SD 226 3000 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)
Catherine Baker
David Kampmann April 22, 2010

Water Park Adventures & Hotel

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

•
• Indoor Water Park
• Over 120 rides and attractions
• Hotel and accommodations right on site
• $25 admission fee or $50 for an all year pass
• Room costs average

Please call 605-555-7982

7982 or go to our website at www.waterparkadventures.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 April 22, 2010

Work Cited

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