July 8, 2008, should have been a happy day for Joan and Bob Lipsitz, owners of the Double JJ Ranch, Waterpark & Golf Resort, and their partner, Wally Wojack. It was the middle of the summer tourist season and their Rothbury, Mich., property had just hosted the successful Rothbury music and art festival, which drew an estimated 40,000 attendees.

But instead of celebrating, that day, the owners faced a grim reality: BankFirst of South Dakota officially filed a foreclosure lawsuit in the Grand Rapids, Mich., U.S. District Court against the resort, seeking $18.7 million. Currently, the involved parties are awaiting a decision from on the future of the property. The presiding judge is weighing three options:

(1) immediately sell the resort, for nearly $20 million under value; (2) withhold any sale until markets have rebounded; (3) accept a proposed Chapter 11 reorganization plan proposed by the Lipsitzes, which would refinance or sell the resort via Associated Ventures, LLC, of Los Angeles.

“The Double JJ is a wonderful resort,” Joan Lipsitz says. “We’re hopeful that the doors will reopen, but it’s [out of our] hands now.”

The Lipsitzes’ aren’t alone. The credit crisis and resulting economic turmoil is forcing many new waterpark resort projects to be scaled back, halted or just plain shelved.

Meanwhile, operators already open for business are running on fear. Nervous about consumer reaction to the times, many have started cutting back. A number of properties — including Splash Lagoon in Erie, Pa., and Maui Sands, Castaway Bay and Great Wolf Lodge, all in Sandusky, Ohio — have closed their waterparks during slower midweek days, or shortened weekday hours. Similarly, in Queensbury, N.Y., Six Flags Great Escape Lodge & Indoor Waterpark is on a weekend-only schedule. You’re probably somewhere between shaking in your boots and waiting out the tempest as well.

So exactly what’s going on? Is the worst over? And how can you make sure you’re not one of the casualties? Industry experts and economists agree it’s hard to predict whether the new administration, the $700 billion bailout package, interest rate cuts and other measures will right financial markets again. But operators can take comfort in the fact that even though the economy is struggling and waterpark resort operators are feeling the pinch, the industry is in a good position to come out of the turmoil strong.

The credit crisis
In the short term, the biggest problems stem from lack of available credit, according to financial experts.

“In a market where banks aren’t even lending to banks, it becomes an almost impossible challenge for people like waterpark resort operators to get a line of credit,” says Curt Caffey, vice president of investments at CNL Lifestyle Co., based in Orlando, Fla.

That’s why many projects — such as the proposed Glacier Lakes Resort, Indoor Waterworld and Conference Center in Farmington, N.Y.; the $10 billion Wet Las Vegas, a large indoor waterpark, ski slope, casino and hotel project; and the Crescent Pointe waterpark resort and retail project in Hazelwood, Mo. — are in limbo until credit markets open back up.

In February 2008, Jeff Coy, president of JLC Hospitality Consulting in Cave Creek, Ariz., documented a total of 55 new resorts or expansions set to open within the year. As a result of the fallout from the troubled financial markets, Coy later revised that number to 25, nine less than the 34 completed projects he documents for 2007.

Because completed projects likely received financing during early 2007, a look at the total number of projects under construction provides a better indication of the effect of the credit crisis. In his February 2008 Construction Report, Coy estimated 83 projects would be under construction in 2008. He has since revised that number to 66, and estimates only 15 new properties or expansions will open this year.

Steve Dooner, CEO of Thousand Oaks Calif.-based Wet Holdings was forced to put his Wet Las Vegas complex on hold. He says the project has been pushed back a year, with phase one now scheduled to open in 2010. By delaying, he believes Wet Holdings “dodged an artillery shell.”

Effect on existing operations
How are existing properties being affected by the lack of credit? Simply put, they no longer have easy access to capital they may need just to sustain operations. As a result, highly leveraged businesses may not survive.

That’s what happened at the Double JJ, which opened in 1937. When the Lipsitzes and their partner, Wojack, took over in 1998, times were good and they implemented an aggressive expansion program that ultimately included construction of the 60,000-square-foot Gold Rush indoor waterpark, completed in 2006. To finance the project, they took out a multimillion-dollar construction loan and, according to Joan Lipsitz, the intent was to offset the expense with sales of resort condominiums added in another phase of expansion.

But the economy was hit particularly hard in Michigan and 98 percent of the condos that were sold never closed. That left the trio with only one option, borrowing more money, which they weren’t able to do in the souring credit market. With outstanding loans due, along with back taxes and construction liens, they were faced with the inevitable foreclosure.

“Our formula was a good one,” Lipsitz says. “It would have worked if the condos had closed. But how were we to guess that the economy would fall the way it did, and as fast as it did?”

The good news is that such situations are still the exception, not the rule. While within the industry, overall ADR growth has slowed, it seems to be holding steady. According to Nashville, Tenn.-based Smith Travel Research, it was at $100.79 for 2007; YTD for 2008 is $102.81. RevPAR numbers reflect a similar pattern.

Overall, the waterpark resort sector appears to be outpacing the lodging industry. STR’s numbers show RevPAR for lodging down 1 percent in the 2008 third quarter, and growth is estimated at less than 1 percent for the year. In comparison, YTD, the waterpark resort segment is projected to grow 1.3 percent.

Strong drive markets
One reason the waterpark resort sector is holding its own is that some operators may actually be benefiting from economic factors, such as last summer’s high gas prices and expensive airfare, says Vail Brown, vice president of global sales and marketing at STR. Many waterpark resort properties are located in what she calls “strong drive markets,” and travel trends indicate consumers are choosing to remain close to home to save on transportation costs.

Great Wolf Resorts is another operation that seems to be benefiting from this trend. The firm is a good barometer of the industry because it encompasses 11 properties nationwide. It’s also the only publicly traded company, which makes it possible to examine its operations.

“We believe today’s consumer values a family-oriented experience and is continuing to do so even in light of a down economy,” says Steve Shattuck, corporate director of communication at Madison, Wis.-based Great Wolf Resorts. “People are choosing shorter vacations closer to home, and that’s contributed to our positive sales figures.”

For the 2008 third quarter, the company-reported net income was $2.2 million (7 cents per share), up from $1.8 million (6 cents per share) for the same period a year earlier, and total revenue was $69.4 million, up from $50.9 million.

Additionally, same-store revenue per available room (RevPAR) increased 0.6 percent on occupancy rates of 71.6 percent, compared with an occupancy rate of 70 percent a year ago. Looking at just the larger and newer properties, RevPAR showed greater increases. It was up 3.5 percent in the quarter.

But even large operations such as Great Wolf Resorts have not escaped totally unscathed. Due to lower group bookings, Great Wolf Resorts’ October same-store RevPAR was down approximately 7 percent (compared with 9 percent in the overall lodging industry). Additionally, the 2008 full-year EBITDA range midpoint was adjusted from $66.5 million to $65.0 million.

Kalahari Resorts owner Todd Nelson agrees. He says his company posted record month-of-October profits in autumn 2008, and his existing properties in Wisconsin Dells, Wis., and Sandusky, Ohio, are benefiting from consumers’ desire to stay close to home.

A rocky road
Looking ahead, the hospitality industry overall is directly related to the national economy, so future waterpark resort business
depends on when markets swing upward again.

But given the uncertainty over how things will shake out, its hard to buy whether this is what will happen. “The economy and consumer confidence will have to balance out and until it does, it is hard to predict 2009,” Brown says. Here are STR’s latest projections for 2009:

• 3.5 percent year-over-year decline in
  occupancy to 59.1 percent — the lowest level since 2003, when it was 59.2 percent
• 1.0 percent year-over-year increase in ADR to an all-time industry best of $108.5
• 2.5 percent year-over-year decline in RevPAR to $64.1
• 2.4 percent year-over-year increase in supply, and a 1.0 percent decrease in demand.

“Overall, the national economy is projected to show signs of decline into 2009, and so will the indoor waterpark resort and hospitality industry,” predicts David Sangree, president of Hotel & Leisure Advisors, LLC, in Cleveland.

“We project that the nation will start to see growth in occupancy and average daily rate performance levels in many markets in 2010, compared to the previous year, as the economy starts to recover from the recession” he adds.

Given these early 2009 projections, there are likely to be more casualties before things fully turn around. Perhaps as many as half a dozen properties may change hands in the next year, some experts suggest. Sangree says most of the struggling operators, if not all, are located in the Midwest, which has been hit particularly hard by the economic downturn.

“With properties that are struggling, it’s due to poor management and marketing, or a bad location [that’s either too remote or has to much competition],” he says.

On the flip side, those that survive will be the ones with strong, savvy management teams and enviable locations. These property operators are likely find ways to maximize their assets and come out of the downturn even stronger.

Among existing waterpark resorts, the fact that a number of projects have hit roadblocks as a result of the credit markets mean less competition, at least in the short term. But when the dust settles, foreclosed or bankrupt properties may represent either stronger competition or new opportunities for operators.

Foreclosed properties are likely to be sold at prices that make more economic sense, and properties that file bankruptcy will have a renewed opportunity to reorganize, says Michael Conaghan, a partner in Capital Square Partners of Minneapolis. “These [properties in trouble] will be sold at greatly reduced prices, and will probably continue to operate as resorts because that is their highest and best use. And, at a lower cost basis, it makes economic sense for the new buyer,” he explains.

But the failure of even a small number of waterparks will make funding new projects appear more risky to potential investors. Add in the fact that once markets open up, lenders probably will be much more conservative and it means those seeking funding for projects may need to carry more equity.

“Since equity returns are higher than first mortgage debt returns, the overall cost of capital is higher,” Conaghan says. “The higher cost of capital will make some marginal properties economically unfeasible. Strong properties with sponsors who can access the additional equity will be built, and those properties can be refinanced after completion and demonstration of the projects’ ability to produce economic returns — and thus lower their cost of capital.”

Reason for optimism
Despite expectations for a tougher 2009, optimism endures among operators. Dooner is hopeful the economy will turn around sooner rather than later. He sees the bailout bill of last autumn as an opportunity to help some investment entities regroup. That, in turn, could open up credit to businesses such as waterpark resorts, some of which might have loans coming due and need to refinance.

Kalahari Resorts owner Todd Nelson is not complaining either. Though actual construction on his Fredericksburg, Va., property won’t begin until financing becomes available — he’ll have to borrow a reported $230 million — Nelson says future bookings at his existing properties in Wisconsin Dells, Wis., and Sandusky, Ohio, look solid at this time. To keep financials in the black, Kalahari Resorts is offering more package deal incentives and has cut unnecessary expenditures.

Great Wolf Resorts also reports future bookings (holiday season 2008) close to 2007 numbers.

These positive viewpoints appear warranted. According to Smith Travel Research, even though the lodging industry may see as much as a 2.5 percent decline in 2009, demand in the waterpark resort sector is still outpacing supply. And it’s been said more than once that the indoor waterpark resort business model is “recession proof.”

“We learned from 9/11 that American families will still take summer vacations. They just may travel a bit differently to meet household budgets,” Brown says.

Ultimately, consumers will always want quality family entertainment at a good value. Despite all she’s been through, Joan Lipsitz concurs. “I still believe in the waterpark resort formula,’ she says. “[An indoor waterpark] is a great thing to add to a resort. It really impacts your business, especially in the off-season. You have to be able to afford the construction and have people come in the door.”