HFT 4755: Theme park and Attraction Management

1
HFT 4755 Theme park and Attraction Management

• Financing Fun

2
Today

• Sources of funding for the development and/or
  expansion of theme parks and attractions.
• Broome (1998) indicates 9 alternatives in
  accessing capital which fall along the equity to
  debt spectrum
• Most major projects require a mix of financing
  alternatives (Broome, 1998, 1)

3
Sources of Capital

• Equity
• The residual value of a business or property
  beyond any mortgage thereon and liability
  therein (Broome, 1998, 1)
• Relinquishing a share of the ownership for
  financing
• The benefit to the equity investor is the
  dividends paid and/or future profits
• Good for large projects and new locations
• Suggestions
• Maintain majority ownership
• Plan a strategy to buy-back shares

4
Sources of Capital

• Venture Capital
• Groups of professional investors seeking high
  rates of return.
• Venture capitalists seek
• New rapidly growing businesses with a minimum of
  1 million investment.
• Potential growth should reach 25 million in
  annual sales.
• 500-1000 percent return on investment
• 25-70 percent ownership in the business

5
Sources of Capital

• Sponsorships
• Good examples are soda, beer, car manufacturers
• No loss of ownership by the attraction
• Sponsor puts money in exchange for
• Exclusivity
• Control over how their product is displayed
• Advertising support for their brand/products
• Control over how their products are sold.

6
Sources of Capital

• Initial Public Offers (IPOs)
• Lengthy process
• Subject to market fluctuations
• Costs can be significant
• Annual rev. should be between 25-50 million.
• Stringent financial reporting
• Companys financial data is publicly available
• Variation in shareholder motivation

7
Sources of Capital

• Conventional Bank Financing
• Credit rating
• Ability to repay the loan.
• Loan options
• Construction loan
• Draw downs based on an agreed schedule.
• On completion
• Converts to a conventional loan with payment
  schedule

8
Sources of Capital

• Conventional Bank Financing (Continued)
• Costs prime rate plus points (2 or more)
• Period of the loan varies
• Equipment loan (5-7 years)
• Real Estate loan (20 years)

9
Sources of Capital

• SBA 7A Guaranteed Loans
• A bank actually extends the loan to small
  businesses with the SBA providing a guarantee of
  repayment of certain percentage of the loan
  amount (usually 75-80).
• Terms may be longer.
• 90 of all businesses in the U.S. qualify for SBA
  financing

10
Sources of Capital

• SBA 7A Guaranteed Loans (continued)
• Relatively high cost of financing compared to
  conventional banks.
• SBA charges a guarantee fee starting at 2 on
  loans of 150,000 or less
• Rate is usually prime plus 2.25 to 2.75 points,
  depending on the length of the loan.

11
Sources of Capital

• SBA 504 Loans
• Longer term financing for major capital
  expansions.
• Loan is provided by a Certified Development
  Company (CDC)
• a non-profit corporation set up to contribute to
  the economic development of its community.
• There are about 270 CDCs nationwide.

12
Sources of Capital

• SBA 504 Loans (Continued)
• Loan is provided for
• Purchasing land
• Improvements
• Purchasing long-term machinery and equipment
• A typical transaction involved 10 down payment,
  a 50 loan from a conventional bank, and a 40
  SBA guaranteed debenture arranged by the CDC

13
Sources of Capital

• SBA 504 Loans (Continued)
• For every 50,000 loaned by the CDC, at least one
  job must be created.
• Internet address
• www.sbaonline.sba.gov

14
Other Sources of Capital

• Public Sector Financing
• Federal, local and state authorities joint
  ventures and partnerships
• Options include
• Interest-free loans
• Lower than market interest rates
• Contribution of locations
• Public financing considered as equity, so
  additional financing may be obtained.
• Can be a very time-consuming process
• Public sector motivation (employment, revenue
  generation, economic resuscitation, EEOC)

15
Other Sources of Capital

• Leasing
• Significant fixed asset purchases like rides or
  computers
• Monthly payment based on a present value, lease
  rate, and residual value
• Ability to access current technology

16
Concluding thought

• Arranging financing/access to capital can be a
  major challenge for any amusement park/
  attraction owner (Broom, 1998, 11)
• Key considerations
• Time
• Ability to service the debt

17
Next Class

• Happy Thanksgiving
• Nov 28, 2006
• The Future of Theme Parks
• Readings
• Milman, Ady (2001). The Future of the Theme Park
  and Attraction Industry A Management
  Perspective. Journal of Travel Research. 40
  (2) 139-147.
• Walker, Ezell Stanley (2000). The Attractions
  World of Tomorrow. Funworld..16(7) 42-49.
• Submission of Research Reports