Survey of Ecolodge Economics/Planeta.com

Survey of Ecolodge Economics and Finance
by Ed Sanders and Elizabeth Halpenny

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The following is a summary excerpted from the study that Elizabeth Halpenny and Ed Sanders prepared last year for The International Ecotourism Society (TIES). The study is titled The Business of Ecolodges: A Survey of Ecolodge Economics and Finance and can be purchased from TIES. The study was based on the results of a survey of 121 ecolodges completed the year before. Ed Sanders notes that "the sample is too small to be statistically reliable and it only covers the ecolodge segment of the ecotourism industry, but the report is important as it reflects the first-ever systematic survey of ecolodge financing." The following findings are probably the most relevant to the Financing Sustainable Tourism Conference.

1) The typical ecolodge is quite small, averaging less than 15 rooms. The cost for the ecolodges averaged $US 1 million for new construction and $3 million for replacement value (which reflects subsequent add-ons). This size range is too large for most individuals to finance, but too small for most institutional investors, thus creating an inherent financing problem.

Size Distribution by Number of Guest Rooms

# of Rooms	Developed Country	Developing Country	Total
1-15	70%	57%	60%
16-30	13%	32%	27%
>30	17%	11%	13%
Total of Group	100%	100%	100%
Lodges Reporting	30	89	119

2) Given this size range, it is not surprising that the bulk (almost two-thirds) of the financing has come from the owner's own equity or from friends and family. Commercial bank loans have been relatively unimportant (especially in the developing countries) and governments have been almost non-existent players in ecolodge financing.

Sources of Financing for Ecolodges

Financing Source	Developed Countries	Developing Countries	Combined
Owner's Own Funds	57%	58%	58%
Friends and Family	1%	8%	6%
Other Equity Investors	10%	19%	9%
Commercial Bank Loans	21%	11%	14%
Government Loans	3%	2%	2%
Private Loans	5%	4%	4%
Other Sources	4%	9%	7%
Total for Group	100%	100%	100%
Lodges Responding	25	74	99

3) One of the surprising findings to me initially was that less than 20 percent of the ecolodges were primarily built at one time, with almost 60 percent built incrementally over time. In retrospect, this is not surprising because of the heavy reliance on owner's own funds to build the resort, suggesting that most started small and were expanded as cash flow allowed.

Timing of Construction

Primarily Built	Developed Country	Developing Country	Total
at one time	23%	17%	18%
in two stages	17%	24%	22%
incrementally	60%	59%	59%
Total for Group	100%	100%	100%
Lodges Reporting	30	87	117

4) The general financing problem associated with small ventures has been compounded by the wide variability in the profitability of ecolodges. An astounding 45 percent of the ecolodges in the developing countries reported that they were operating at a loss (although the number of lodges is too small to be statistically reliable). Nonetheless, this suggests that many ecolodge operators may be in the business for "lifestyle" rather than profit maximization reasons, which is likely to scare off many potential investors. On the other hand, a significant number (17 percent) of the lodges were highly profitable, with revenues of over 20 percent on sales (which compares to the 6-7 percent profitability in the U.S. hospitality industry).

The study tried to identify the primary determinants of profitability, such as size and age of the establishment, occupancy rates, ownership arrangements, and room rates. Occupancy and room rates appeared to have some influence but not much. This suggests that each ecolodge has to be evaluated on its own merits and that industry averages are of limited applicability, thereby making it even more difficult and expensive for investors and lenders to decide whether to support any given venture.

Industry Profits as a Percentage of Total Revenues

Profits	Developed Countries	Developing Countries	Combined
Loss	45%	26%	31%
0 to 10 %	31%	26%	28%
11-20%	10%	30%	24%
Over 20%	14%	18%	17%
Total for Group	100%	100%	100%
Lodges Reporting	29	73	102

When asked what the single most important obstacle to increasing profitability was, by far the most common complaint (23 percent) was lack of financing to expand, which is probably a proxy for lack of investment capital.

The next most common complaint (15 percent) was lack of financing for marketing, which is probably a proxy for operating capital. These two concerns far outweighed the other eight categories, with difficulty of attracting tourists (10 percent) and extreme seasonality (10 percent) being the next most important.

These summary findings suggest that the subject matter of the conference is extremely important and timely. If the industry is to grow, ways must be found to: help aspiring ecolodge developers to realistically assess their potential for accessing various types of financing; help them to prepare well-documented requests for financing that meet the requirements of potential investors and lenders; and, encourage the growth of special financing programs by government agencies and non-profit organizations to meet the special needs of small scale ecotourism ventures.

I hope that these summary observations will be useful as background to the participants in the conference and I'd be glad to try to answer any questions about the findings of the Ecolodge Financing Study.

Use email to contact the authors Ed Sanders and Elizabeth Halpenny

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Survey of Ecolodge Economics and Finance by Ed Sanders and Elizabeth Halpenny