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. 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.

Methodology for an Appraisal

The purpose of a typical appraisal is to estimate the market value. Market value is defined in the Uniform Standards of Professional Appraisal Practice, 2003 Edition as follows:
 

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, and from owners/investors, 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 at the site, 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; comparable improved sales; land sales; comparable development costs; and any other information pertinent to the valuation of the subject property. 

Applicability of Approaches

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 especially 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 2003, 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. 

Applicability to Appraisal Assignment: The Income Capitalization Approach is deemed the most applicable method to estimate market value for an indoor waterpark resort or any hospitality property. The Sales Comparison Approach and the Cost Approach should be utilized to provide additional points of reference. 

Financing of Indoor Waterpark Resorts

Indoor waterpark resorts have been financed through a variety of methods. They include the following:

• Traditional banks
• Investment bankers specializing in the hospitality industry
• Wealthy individuals
• Self financed through cash flow of other properties
• Governmental backed loans and grants

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 40 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.

David J. Sangree, MAI, ISHC interviewed various lenders and investors concerning the financing of indoor waterpark resorts in September and October 2003. The following chart summarizes the results from our interviews.
 

Typically, lenders require a higher equity contribution than would be applicable on a more traditional hotel loan. Many of the traditional hotel lenders that we interviewed indicated they would not be interested in lending on an indoor waterpark resort as of Fall, 2003. 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 show strong performance, we anticipate that financing will become somewhat easier.

Conclusion:

The appraisal for an indoor waterpark resort requires additional analysis and expertise as compared to a typical hotel appraisal and especially compared to other commercial real estate appraisals. The analysis requires the appraiser to analyze various revenue categories and to understand the waterpark usage issues. The financing for indoor waterparks is currently difficult with lenders requiring larger equity contributions.

David J. Sangree, MAI, CPA, ISHC is President of Hotel & Leisure Advisors, a national hospitality consulting firm specializing in appraisals, feasibility studies, and impact analysis for hotels, resorts, waterparks, and other leisure real estate. When this article was published, David Sangree was Director of Hospitality Consulting with US Realty Consultants and a Principal in the Cleveland office. 

David J. Sangree, MAI, CPA, ISHC
Hotel & Leisure Advisors
14805 Detroit Avenue, Suite 420
Cleveland, OH 44107-3921
216-228-7000 Phone    216-228-7320 Fax
[email protected]
www.hladvisors.com

US Realty Consultants
216-221-9191 Phone     216-221-9097 Fax 
www.usrc.com