Financing your indoor waterpark resort (Part 1)
 
Financing your indoor waterpark resort (Part 1)
28 JUNE 2010 7:34 AM

Financing a new-build hotel and indoor waterpark resort remains extremely difficult. Here are the types of financing that are generally available, the characteristics of the developer, the lender and the typical indoor waterpark resort development.

The big question for 2010 is as follows: After two years of the frozen tundra in lending, are the capital markets beginning to thaw? Amid a plethora of opinions and sentiments, both positive and negative, where does reality come into play? Though some financing has become available and transaction volume has increased, there has not been any movement for new construction lending, similar to 2009.

David J. Sangree

Eric B. Hansen

The bottom line is that financing a new construction hotel and indoor waterpark resort remains extremely difficult.

Due to a lack of confidence in a market that has been ravaged by an economic recession, numerous bank foreclosures and uncertainty regarding future regulations, lenders have pulled way back on financing new construction projects of all types.

When capital starts to flow again, what will characterize the deal, the deal makers and the development project itself? This article describes the types of financing that are generally available, the characteristics of the developer, the lender and the typical indoor waterpark resort development. A discussion of the challenges to obtain financing is followed by suggestions to overcome those obstacles.

Financing indoor waterpark resorts

Indoor waterpark resorts have been financed through a variety of methods, including the following:

  • traditional banks;
  • investment bankers specializing in the hospitality industry;
  • wealthy individuals;
  • self-financed through cash flow of other properties; and
  • government backed bonds, loans and grants.

Our interviews with various lenders and developers reveal that high levels of persistence, innovation, capital and creativity are required in 2010 for pulling together project financing from a variety of sources.

We interviewed various lenders and investors concerning the financing of indoor waterpark resorts in June 2010. Similar to 2009, the overriding message lenders provided to us was there is a lack of financing for new-construction hotels with or without indoor waterparks, particularly for larger projects. Although a few hedge funds have started to offer money, their fees are extremely high for the borrower. Most banks are not interested in a hospitality loan unless the borrower is credit worthy.

The following chart summarizes the rates and types of financing commonly used with indoor waterpark resorts for a borrower who is creditworthy and has strong liquidity.

Indoor Waterpark Resort Financing Survey: June 2010
  Construction Financing Permanent Financing
Interest Rate (%) 7% to 10% 6.5% to 9%
Terms of Loan (Years) 2 to 3 years 5 to 20 years
Years Amortize Interest only 20 to 30 years
Debt Coverage Ratio 1.25 to 2.0 1.25 to 2.0
Loan to Value (%) 50% to 70% 50% to 70%
Source: Hotel & Leisure Advisors, LLC

The rates quoted for the 2010 survey indicate that lenders remain as cautious as ever. According to our survey, compared to 2009, loan-to-value ratios remain lower, although some lenders are willing to consider the 60-percent-to-70-percent-of-market-value range. The mezzanine loan market has begun to open up, and some mezzanine lenders are considering investing in hospitality projects. As of June 2010, lenders are considering new construction primarily for smaller developments of US$5 million to US$10 million or less, which typically can have a Small Business Administration guarantee, and larger projects are still having great difficulty finding interested lenders. We are aware of three separate larger projects that are working to utilize both tax-exempt and taxable bonds to develop the project.

About this series: This is the first 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.

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