New Wave Investments

Hotels with indoor waterparks are making a splash in drive-to markets.

By Jeff Coy and Bill Haralson

In 1994, resort pioneer Stan Anderson expanded his Wisconsin Dells, Wis.–based Polynesian Resort to include an indoor waterpark. Wisconsin lenders were willing to fund the development because they had been financing outdoor waterparks for years. Despite the steep construction costs, the project was a success, and soon hotels with indoor waterparks were viewed as even better hospitality investments than their outdoor counterparts.

Indoor waterpark hotels and resorts create weatherproof vacations and capture year-round revenues. In 2004, these resorts achieved higher occupancies and revenues than any other lodging investment. While the Midwest leads this trend — of the 62 U.S. hotels with indoor waterparks, 28 are in Wisconsin and 14 are in Minnesota — these drive-to resorts are becoming popular in several U.S. markets. The Northeastern and western regions have the next highest concentration of parks. By the end of this year, the number of parks will grow to 92 and will include more than 16,000 hotel rooms, a fourfold increase in the last five years.

Like other niche properties, hotels with indoor waterparks are unique development and investment opportunities that may provide greater returns than more traditional properties. Carefully examining these investments is the first step toward understanding the rewards and risks associated with indoor waterparks. Analyzing costs, development trends, demand, financing, and profitability can help commercial real estate professionals determine if these opportunities make sense in their markets.

Who’s Investing and How
A few specialized developers and family-run operators kicked off the indoor waterpark development trend, and now individual investors are gaining entry into the market by purchasing hotel-condominium units at these properties. In many instances, baby boomers are putting money into these higher-performing investments instead of the stock market. Beyond making money, individual investors like the idea of owning a place within a resort setting where they can spend time with their families.

Currently most indoor waterpark resorts offer condominium units for sale because it provides additional pre-construction revenue. While waterparks generate substantially higher incomes than ordinary lodging, they also are more expensive to build. A successful resort requires a large initial investment — indoor waterparks can cost as much as $300 per square foot to build, not including hotel construction costs. As a result, many indoor waterpark resorts cost between $40 million and $55 million, excluding land costs. Even with favorable financial terms, the sticker shock of these projects deters many investors. For that reason, pre-selling hotel suites to individuals as wholly owned condominium units offers benefits to both the resort’s developer and the condominium buyers.

The Condo Advantage
Currently, 11 percent of all indoor waterpark projects in the pipeline have a condominium component, and successful waterpark resorts are using this strategy. For instance, several Wisconsin Dells properties, including Kalahari Resort & Convention Center, Wilderness Hotel & Golf Resort, Great Wolf Lodge, and Chula Vista Resort, have developed condominium guest rooms that were pre-sold prior to construction.

The advantages to the developer are twofold. First, revenue generated from the condominium sales prior to construction reduces the project’s equity requirement and helps to secure a construction loan faster. Second, the developer benefits from splitting the revenue with individual condominium owners when units are rented out as hotel rooms.

Along with buying a condominium investment, unit owners gain access to the resort’s amenities — restaurants, bars, spas, golf courses, and recreation-entertainment facilities, including the waterpark. For example, in the Midwest, the attraction is similar to buying a vacation cabin on a lake; however the condominium investment requires little maintenance, provides year-round instead of seasonal use and possibly a better investment return, and offers additional income opportunities if the owner decides to rent the unit as a hotel room.

Condominium owners do not have to place their units in the hotel’s rental pool. They can opt not to rent their units or they also can choose an outside agency to handle the unit rental. However, research indicates that most condominium buyers choose to place their units in a resort’s rental pool.

Analyzing Costs
U.S. upscale resort projects cost from $66,400 to $323,500 per available room to build, with the average cost being $172,000 PAR. For a 300-room resort, that’s an average project cost of $51.6 million.

The additional costs associated with building an indoor waterpark as part of a hotel or resort vary. Low-end projects can cost around $167 psf to build, while heavily themed parks with state-of-the-art features such as sound, lights, and animation can run in excess of $400 psf, including furniture, fixtures, and equipment. Costs vary depending on the size, price tier, and entertainment value that the developer wants to achieve.

There is a direct relationship between the number of hotel guest rooms and the size of indoor waterpark the operation can support. The waterpark sizing multiplier accelerates with the number of hotel rooms. For example, while a 100-room hotel can support a 10,000-sf indoor waterpark, a hotel or resort with 200 or more rooms can support about 200 sf of waterpark per guest room. Therefore, a 300-room hotel or resort can support a 60,000-sf waterpark. A hotel developer considering the addition of a 60,000-sf indoor waterpark can expect to add about $18 million to the total project costs.

Calculating ROI
Despite steep development costs, hotels with indoor waterparks can be lucrative investments. A survey comparing total project costs with the amount of cash generated revealed that upscale waterpark resorts’ revenue more than offset building and operating costs. Due to higher occupancies, waterpark premiums, and higher food and beverage spending, these resorts generated a cash-on-cost return ranging from 14 percent to 24 percent compared to returns of 10 percent to 12 percent for comparable properties without waterparks.

Overall, research indicates that hotels with indoor waterparks achieve higher occupancies, higher room rates, and higher room revenues than traditional hotels. Still,
investors who are considering this niche property should conduct thorough market analysis and due diligence to arrive at an independent decision about a project’s viability. It’s critical to analyze the developer’s feasibility report; study the prospectus, public offering, and planning documents; review the financial projections; and understand the source, use, and distribution of funds.

Hotels with indoor waterparks are gaining popularity among hospitality investors and consumers alike. As these projects continue to expand into new markets, commercial real estate professionals should carefully analyze the associated costs, benefits, and risks to determine if hotel waterparks are a good investment for them.

Jeff Coy and Bill Haralson created Hotel Waterpark Research & Consulting to collect and report industry data. Coy is president of JLC Hospitality Consulting in Rochester, Minn., and Haralson is president of William L. Haralson & Associates in Dallas. Contact Coy at (507) 261-7474 or jeffcoy@jeffcoy.com. Contact Haralson at (972) 231-7444 or wharalson@comcast.net.

The 40,000-sf Breaker Bay waterpark is part of the $54 million, 17-acre Blue Harbor Resort & Conference Center, built on a former industrial site next to Lake Michigan in Sheboygan, Wis.

photo: World Waterpark Association

In May 2005, Boyne Mountain Ski Resort in Boyne Falls, Mich., opened a 200-unit condominium hotel and the 88,000-sf Avalanche Bay Indoor Waterpark featuring waterslides, a surf simulator, and a climbing wall.

photo: World Waterpark Association

Profitability Comparisons
Average income per available room before fixed charges
Upscale hotels $12,883
Luxury hotels $21,478
Resorts $24,238
Upscale hotels with indoor waterparks $33,597

Source: HOST Report/JLC Hospitality Consulting

6 Questions to Consider Before Dipping In

1 What locations make sense? Recreational locations with interstate highway access within 200 miles of major metropolitan areas are excellent targets for hotels with indoor waterparks. Families are willing to drive that distance to spend a weekend at an indoor waterpark. Resort destinations also are excellent locations for these investments: Ski, golf, beach, and lake resorts and conference centers all are ideal locations.

2 If you build it, will they come? Hotels with indoor waterparks consistently sell more room nights than hotels without them, according to research. In fact, they achieve occupancies up to 26 points higher than ordinary hotels. In the Wisconsin Dells, Wis., area, 18 hotels with indoor waterparks captured 75 percent of the total hotel market room revenue in 2001, 77 percent in 2003, and 81 percent in 2004.

3 How should the rooms be priced? Most hotels with waterparks combine room rates and waterpark admission into a package price that adds substantially to their average daily rate. An indoor waterpark can add up to $25 per person to the room rate for an upscale hotel or resort. For a party of six persons in a suite, that adds a waterpark premium of $150 to the normal room rate. The extent of the impact on ADR depends on the waterparks’ size and entertainment value.

4 What will they pay to play? Indoor waterpark attendance estimates are a calculation of available rooms, occupancy, customer mix, and persons per room/suite. For example, a 300-room waterpark resort running at 70 percent occupancy with a customer mix of 60 percent individual leisure guests times six persons per room could expect waterpark attendance of about 275,940 persons annually. To get a sense of revenue potential, multiplying the attendance figure by $25 per person adds nearly $6.9 million to room revenues. In addition, other incidental sales for food, beverages, gifts, and souvenirs add to the bottom line.

5 How expensive are they to operate? A typical upscale hotel or resort has departmental expenses that run from 43 percent to 45 percent of total revenues. Waterpark department expenses, such as labor and supplies, range from $15.31 per square foot to $25.51 psf. So, a 300-room hotel with a 60,000-sf indoor waterpark may have department expenses of $918,000 to $1.5 million compared to a revenue contribution of $6.9 million using the example above.

In addition, indoor waterparks add some incremental expenses to a hotel’s unallocated expenses, such as administration, marketing, energy, maintenance, and insurance. However, the single largest expense is energy costs, which can range from $13 to $21.39 psf of waterpark—that’s $780,000 to $1.2 million for a 60,000-sf indoor waterpark. Maintenance is another notable expense, which ranges from $7.64 psf to $10.18 psf of waterpark ($458,000 to $610,000 for a 60,000-sf indoor waterpark). In addition, insurance for a hotel waterpark resort ranges from $17 to $25 per thousand dollars of room revenue.

6 Are there risk factors concerning water supply, water conservation, or liability? Once the pools are filled, an indoor waterpark’s water recapture rate is very high. Regarding liability, hotels with indoor waterparks are classified as resorts by insurance carriers, while outdoor waterparks are considered as amusements. In both cases, wise owners and managers go through intensive risk management and safety training to reduce insurance costs and minimize liability.

In May 2005, Boyne Mountain Ski Resort in Boyne Falls, Mich., opened a 200-unit condominium hotel and the 88,000 square-foot Avalanche Bay Indoor Waterpark featuring waterslides, a surf simulator, and a climbing wall.