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How to Perform a Feasibility Study for Indoor and Outdoor Waterpark Resorts
By David J. Sangree, MAI, CPA, ISHC
Before a developer or organization considers construction of a new indoor waterpark resort and/or outdoor waterpark, the mortgage lender and investors generally require a feasibility study. A feasibility study is typically performed by an independent third-party consultant who specializes in analyzing the performance of waterpark and hotel projects. The purpose of the feasibility study is to determine if the proposed waterpark development is economically feasible. A proposed project is economically feasible if the value of the proposed project equals or exceeds the development costs when completed and operational. The feasibility study will analyze revenues, expenses, and net income in determining the value of the proposed project and will compare it to projected costs of the development.
The purpose of this article is to analyze the major components of a feasibility study and the general areas that a feasibility study should review as part of determining the potential success of a waterpark project. The article will discuss key areas to analyze for both indoor waterpark resorts and outdoor waterparks. Hotel & Leisure Advisors defines an outdoor waterpark as those facilities offering three or more larger water slides and an indoor waterpark as a facility offering an aquatic area of 10,000 or more square feet. Hotel & Leisure Advisors defines an indoor waterpark resort as a lodging establishment containing an aquatic facility with a minimum of 10,000 square feet of indoor waterpark space and inclusive of amenities such as slides, tubes, and a variety of indoor water play features.
Major Components of a Feasibility Study
Area, Demographic, and Neighborhood Analysis
The area, demographic, and neighborhood analysis evaluates the local economy surrounding the proposed development. The area analysis focuses on the four forces – social, economic, governmental, and environmental - that influence the performance and valuation of a waterpark facility. Demographic information including population, households, income levels, employment levels, etc., should be reviewed in detail to calculate how many people and potential customers live within the local and regional areas. The following are some questions the study should answer.
A neighborhood analysis reviewing the nearby commercial and tourist establishments is an important component as successful waterpark projects are typically located in areas with complementary real estate uses. For example, the most successful indoor waterpark resorts are located near other major tourist attractions that attract overnight visitors. The most successful outdoor waterparks are typically located in areas where both local residents and tourists want to go and may be located near major retail outlets, beaches, or community facilities.
The site review evaluates the subject parcel concerning its size, access and visibility, topography, availability of utilities including water and sewer, and other site related attributes necessary for a successful waterpark project. The proximity to leisure guests for the waterpark is an important consideration as waterpark visitors for both indoor waterpark resorts and outdoor waterparks appreciate convenient access from area highways. Our firm typically analyzes a drive time or mileage radius and estimates the number of available youths and adults within a 30-, 60-, 120-, and/or 180-mile (or minute) ring from the subject property. We obtain the demographic data from sources such as Claritas or ESRI. The study should compare the number of youths and adults within specific drive times from the subject site with other successful waterparks (indoor or outdoor) that are located in different locations in the United States to see whether the subject site has an adequate population base. The following are some questions the study should answer.
Proposed Development Recommendations and Costs
The facilities recommendations and costs include an analysis of the scope of the project and the cost to develop the proposed project. Some clients provide the consultant with their plans for the development, and this section reviews the plans and recommends changes that the consultant may feel are appropriate to the development plan. Other clients request that the consultant analyze and recommend the scope of the development based upon their market research for the feasibility study.
In the case of an indoor waterpark resort, the scope of recommendations includes the number of guest rooms, size of indoor waterpark, rides and attractions for the indoor waterpark, size of outdoor waterpark, number of restaurants and lounges, amount of meeting space, size of gift shop, size of arcade, and other amenities to include.
In the case of an outdoor waterpark, the scope of recommendations includes the size of the outdoor waterpark, rides and attractions for the outdoor waterpark, food and beverage outlets, size of gift shop, size of arcade, and other amenities to include. The consultant may estimate a range of costs for the proposed development based upon other recently constructed waterpark projects, or the client may hire an architect and/or engineer to perform a formal costing estimate for the proposed development. The following are some questions the study should answer.
A thorough market analysis of the local hospitality and indoor waterpark resort market is an essential component of an indoor waterpark resort feasibility study. A thorough market analysis of the local and regional outdoor waterpark market is an essential component of an outdoor waterpark feasibility study. The projections of financial performance for the project will depend heavily upon the data gathered in this section. Typically an indoor waterpark resort will attract primarily overnight guests with some local users while an outdoor waterpark will attract primarily local guests with some overnight guests.
In doing a study for an indoor waterpark resort, the consultant should order a hotel market report from Smith Travel Research (STR). For an outdoor waterpark analysis, the consultant would want to analyze the performance of hotels in the market, but typically the overnight visitors constitute a smaller portion of the usage than for an indoor waterpark resort. An STR report profiles the daily, monthly, and annual occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of a market area. He or she should also conduct research on hotels in the market area that are in the development stages. Additionally, the consultant should interview the management of competitive hotels in order to gain a greater understanding of the state of the hotel market. The following factors are critical to the understanding of the hotel market.
Waterpark Resort Market
For studies on waterparks, an analysis of the existing indoor and outdoor waterparks’ attendance and pricing is very important to review. The consultant will need to do thorough research of a variety of published sources as well as interviews with managers of the various waterparks to determine the number of attendees, average prices, and total revenues at the comparable properties. In some cases, waterpark managers are unwilling to share this information, and there is no Smith Travel Research type organization that tracks attendance at waterparks. Our firm maintains proprietary databases concerning performance levels of properties, which we collect on a consistent basis. Below are things to consider.
Proposed Development Usage and Pricing Analysis
A thorough analysis of the projected usage and pricing is a key component of a feasibility study.
Indoor Waterpark Resorts:
For indoor waterpark resorts, the hotel is the key driver of operating performance for the property. In estimating the performance of a hotel, the study will project the number of occupied rooms, ADR, and usage levels for the hotel property. A detailed supply and demand model that calculates the historical performance of the market and makes projections for the subject property should be presented. The potential number of day pass users for the indoor waterpark should also be calculated through analyzing the number of overnight guests versus capacity for day pass users. The following are some questions to consider.
For outdoor waterparks, the key figures to estimate include the number of attendees and the average ticket price. Outdoor waterparks have a wide range of attendance depending upon their location, pricing, amenities, number of rides and slides, size, and marketing efforts. The study should thoroughly analyze each of these major issues. The pricing for outdoor waterparks will heavily depend upon the investor’s criteria. Many municipally owned outdoor waterparks charge much lower prices as they will not have to pay debt service, while most privately owned outdoor waterparks try to achieve the highest possible prices to provide sufficient funds for payment of debt service and a profit for the investor. The following are some questions to consider.
This section of the report analyzes a property's capacity to generate income, and makes financial projections for future years for the property. The estimation of the statement of annual operating results for the subject property involves an analysis of the subject’s scope and characteristics. The analysis should include a presentation of operating statements of comparable properties and industry standards to inform the reader of what other comparable indoor waterpark resorts or outdoor waterparks are achieving. The general steps include the following.
The economic value of an indoor waterpark resort or outdoor waterpark is calculated through a discounted cash flow analysis from the income capitalization approach. This analysis utilizes the property’s projected net income before debt service and applies a discount rate and terminal capitalization rate to determine the valuation. This is a common method utilized in a formal appraisal process. The discount rate is the average annual rate of return necessary to attract capital based upon the overall investment characteristics. The terminal capitalization rate is applied to a future year’s net income to calculate a potential sale price for the property in the future. The following is an example of valuation performed for a large 400-room indoor waterpark resort.
Comparison of Value Created to Projected Costs
The key component of a feasibility study is to determine if the projected value created as shown from the discounted cash flow analysis equals or exceeds the development cost for the proposed project. A feasibility study should present the projected value created after performing a detailed analysis of the market, projected usage, and financial analysis. In some cases, the consultant performing the feasibility study will not have the detailed costs available, and this conclusion will be determined at a later date after the client has costing estimates performed by building contractors and architects. In other cases, the client has estimates of construction costs, and the feasibility study will present these estimates and compare the value created to the development costs to determine if the project is feasible. The most viable projects, which have the greatest investor appeal, are those where the value created is greater than the development costs for the proposal. However, the value created may be less than the development costs, but the project may still be feasible if the municipality agrees to abate taxes or provide some capital assistance to the developer in terms of infrastructure. This would allow either for improved financial projections or for lower development costs.
Conclusion: The feasibility study of an indoor waterpark resort or an outdoor waterpark requires analysis and expertise beyond other types of commercial real estate. An indoor waterpark resort feasibility study requires a thorough market analysis involving a study of the economic and demographic factors as well as a review of the hotel and indoor waterpark resort markets. An outdoor waterpark feasibility study requires a thorough market analysis involving a study of economic and demographic factors as well as a review of the outdoor waterpark and amusement park markets. Both studies require a complete financial analysis, which looks at various revenue and expense categories. The purpose of the feasibility study is to provide honest and reliable information to the client to help them in their decision process on whether to develop the waterpark project.
This article appears in the World Waterpark Association’s 2012 Development and Expansion Guide.
David J. Sangree, MAI, CPA, ISHC is President of Hotel & Leisure Advisors, a national hospitality consulting firm. He performs appraisals, feasibility studies, impact studies, and other consulting reports for hotels, resorts, waterparks, golf courses, amusement parks, conference centers, and other leisure properties. He has performed more than 2,000 hotel studies and more than 200 indoor and outdoor waterpark resort market feasibility and/or appraisal studies across the United States and Canada. Mr. Sangree received his Bachelor of Science degree from Cornell University School of Hotel Administration in 1984. He became a certified public accountant in 1989. He became an MAI member of the Appraisal Institute in 1995 and a member of the International Society of Hospitality Consultants in 1996.
Since 1987, Mr. Sangree has provided consulting services to banks, hotel companies, developers, management companies, and other parties involved in the lodging sector throughout the United States, Canada, and the Caribbean. He has spoken on various hospitality matters at seminars throughout the United States and on Good Morning America and CNBC. Mr. Sangree was named one of Aquatics International Magazine’s “Power 25.” Aquatics International publishes an annual list of professionals it deems the most powerful people in the aquatics industry. Mr. Sangree was profiled as one of the first consultants serving the waterpark resort industry and for his expertise and experience in shaping some of the latest industry trends.
He can be reached at 216-228-7000 extension 20 or email@example.com.
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