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What Are the Risk Factors of a Hotel Waterpark Investment? | By Jeff Coy and Bill Haralson

14 December 2005

Thinking about investing in hotel waterpark resorts?

Here are the risk factors you need to consider:

Seasonality

Weather

Location

Room occupancy

Average room rates

Indoor waterpark attendance

Waterpark admission prices

Revenues

Expenses

Profitability

How Are Investors Getting Into Hotel Waterpark Resorts?

In the cases of both Boyne Mountain and Silver Mountain, individual investors are getting involved with hotel waterpark resorts through the purchase of hotel rooms that have been condominiumized for sale. In May 2005, condo-hotel projects were a very hot part of the real estate market. The huge baby boomer market, coupled with a dull stock market and low mortgage rates, is investing their money in resort condos, vacation homes and second homes (even third or fourth homes) because real estate appreciation is running very high. Beyond making money, these individual investors like the idea of owning a place within a resort setting, where they can play with their kids and future grandkids.

Condominium hotels are now part of almost every hotel waterpark project. The good news about waterpark resorts is that they generate substantially higher incomes than ordinary lodging. The bad news is that they are expensive to build. The success of a hotel waterpark resort requires a large investment --- not only in the hotel, but also in the indoor waterpark, which can cost $300 per square foot. As a result, many hotel waterpark resorts, such as Great Wolf Lodges, can cost $40 to $55 million excluding the cost of the land. Some developers/investors are not inclined to spend that much, even with favorable financial terms. So, pre-selling hotel suites to individuals as wholly-owned condominium units is an alternative method that is good for both the resort developer and the condo buyer.

What’s the Impact of Condominiumizing the Hotel Rooms?

Several of the larger hotel waterpark resorts in the Wisconsin Dells have pursued this strategy with success. Kalahari Resort & Convention Center, Wilderness Resort, Great Wolf Lodge and the Chula Vista Resort have all developed condominium guest rooms, which were pre-sold prior to construction.

The advantages to the developer are two-fold. First, he generates revenue from the condo sale prior to construction, thereby reducing his equity requirement and getting his construction loan faster. Second, he benefits from a revenue split with the individual condo owner when the condo is rented as a resort suite by hotel management.

The advantages to the individual condominium buyer are also two-fold. By owning a unit, the condo buyer is gaining access to all of the amenities --- restaurants, bars, spas, golf courses and recreation-entertainment facilities --- that are typically associated with a resort. Adding an indoor waterpark to the resort makes the condo purchase much more attractive to families. In addition, the condo owner is buying into an investment.

Condominium buyers are not required to place their unit in the hotel’s rental pool; rather, they may opt not to place their unit in any rental pool, or may opt to use an outside agency to handle their unit’s rental. However, we determined that most condominium buyers choose to place their unit in the resort’s rental pool.

What Is the Cost to Build a Hotel Waterpark Resort?

Upscale resort projects in the USA cost from $66,400 to $323,500 per available room to build --- with average being $172,000. For a 300-room resort, that’s a project cost that runs from a low of $19.9 million to an average of $51.6 million.


Upscale Hotels & Resorts
Costs Per Available Room


The cost of constructing an indoor waterpark building including all FF&E (plumbing, pools, waterslides and play structures) ranges from a low of $167 per square foot of waterpark for spartan-looking economy facilities to a high of $400 per square foot for heavily-themed, state of the art waterparks with “Disney-rocks,” sounds, lights and animation. The variation in cost depends on the size, price tier and entertainment value that the developer wants to achieve. To put costs into perspective, the average is about $300 per square foot for an upscale hotel waterpark resort. There is a direct relationship between the number of guest rooms and the sizing of the indoor waterpark. With 300 rooms, the rule of thumb is 200 sf per guest room to determine the average size indoor waterpark that can be supported by the operation. Obviously, some waterparks are larger and some are smaller in relation to the room count.

A resort hotel considering the addition of 50,000 sf indoor waterpark can expect to add an estimated $15 million to its total project costs. Any investor can feel more comfortable when they know the rationale for sizing and costing the indoor waterpark.

What’s the Return on Investment?

We surveyed a group of upscale hotel waterpark resorts to compare their total project costs with the amount of cash they generated. Due to running higher occupancies, capturing the waterpark premiums and achieving higher levels of spending for food & beverage compared to properties without indoor waterparks, these properties more than offset the cost of building and operating the waterpark. This group of upscale hotel waterpark resorts generated a cash-on-cost return from 14% to 24% --- compared to returns of 10% to 12% for comparable properties without waterparks.

Is there a Market for Updating Older Properties?

Yes, we call it the add a box market. It consists of both new and older properties that could benefit from attaching an indoor waterpark to the hotel.

Every hotel owner and developer will DO SOMETHING with water. Projects will come in all sizes and shapes --- ranging from enclosing the outdoor pool to raising the roof for waterslide towers and adding water play equipment to existing pools. Not all pool enhancements will compete on the resort level. Major indoor waterpark projects will continue to be announced in the top 25 markets, while smaller waterparks will become part of suburban hotels. Projects will be both new construction as well renovation and expansion projects. Older properties are a huge market for small to medium-sized waterpark projects.

Hotel Waterpark Resorts: are they a good investment?

Based the higher occupancies, higher room rates and higher room revenues of hotel waterpark resorts compared to traditional hotels combined with the geometric increase in new construction and development activity each year, it is clear to us that waterpark resorts generate higher returns compared to costs. But that’s our opinion, based on our research.

The investor should conduct his own due diligence to arrive at a totally independent decision. Ask the developer for a copy of his feasibility report. Study the prospectus, public offering and planning documents. Review the financial projections. Understand the source of funds, use of funds and the distribution of funds.

After a review of this information, the investor should be in position to determine whether or not hotel waterparks are a good investment.

Jeff Coy is president of JLC Hospitality Consulting based in Cave Creek AZ. You can reach him at 480-488-8050 or email him at jeffcoy@jeffcoy.com or go to www.jeffcoy.com. Bill Haralson is president of William L. Haralson & Associates of Richardson TX. You can contact him at 972-231-7444 or email wharalson@aol.com or go to www.wlha-inc.com.

Contact

Jeff Coy, ISHC
Mobile: 480-488-3382
Email: jeffcoy@jeffcoy.com

Organization

JLC Hospitality Consulting, Inc.
www.jeffcoy.com
P.O. Box 4090, 39401 N. 67th Place
USA - Cave Creek, AZ 85327-4090
Phone: (480) 488-3382

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