Is the real estate party over? For a growing number of ski resorts and developers, the fat lady is singing, and her song is “The Construction Loan Blues.”

The sub-prime mortgage mess that has tightened credit and ensnared much of the world is creating a meltdown in several U.S. mountain communities, proving that while the ski business may feel insulated against gas shortages, global warming and fears of flying, it is not immune to financial storms spawned on Wall Street.

“Real estate is a disaster right now,” says Gardiner de Back, senior VP in the commercial division of Wells Fargo Bank, which funds ski area improvements throughout the U.S. “The concept of ‘build it and they will come’ is absolutely not going to work anymore. Second home projects are in the tank, and will probably stay there for a while.”

Bob Roberts, executive director of the California Ski Industry Association, agrees. “It’s going to be a very different real estate finance world for at least the next couple of years,” he says. “Obviously this situation is going to impact development moving forward. It’s going to wreck havoc with those on margin, or bootstrapping, or running on less than a triple-A approach to life. If you don’t have a strong track record, you’re likely to find yourself in trouble.”

• Tamarack Mountain Resort in Idaho began 2008 with a Chapter 11 filing aimed at avoiding foreclosure on a nearly completed mountain village. Even though most units were pre-sold and buyers were poised to move in, no financial institution was willing to underwrite a second loan to complete the project. While management was searching for investors or a buyer for the resort, one bank threatened to uproot newly-installed chairlifts. Worse, the downward spiral prompted a Florida developer to withdraw plans for a luxury hotel that had the backing of tennis celebrities Andre Agassi and Steffi Graf.

• The Chateau at Heavenly, which would have combined a 477-suite luxury condo hotel, a convention/entertainment center and a shopping/dining complex at South Lake Tahoe, is on ice after the developers spent millions on foundation work but couldn’t get a construction loan. Subsequently, Rock Resorts, the Vail-owned company that would have managed the hotel, opted out of the development. Another partner, the City of South Lake Tahoe, which had long dreamed of a large conference facility, is waiting anxiously on the sidelines.

• Despite a positive cash flow from its ski operations, Mammoth Mountain has stopped the clock on close to a billion dollars worth of projects, including five hotels (one of them a Ritz-Carlton) and a large spa. These were going to be built on land that new owners Starwood and CEO Rusty Gregory had acquired from Intrawest, which financed and built the initial phase of a base village. As evidence of a retreat by second-home buyers, the Westin Monache condo-hotel, which opened last season after quick sellouts of its two phases, has seen some 70 units fall out of escrow, according to Gregory.

• At Kirkwood, the developer of a new 28-unit townhouse project and a spec builder of luxury single-family homes both tried to sell their inventory through a highly-advertised mid-September auction. The auction was cancelled, and asking prices for the units were dropping, according to resort senior vice president of marketing Tim Cohee. Two resort-funded projects—Expedition Lodge and Thunder Mountain Lodge—were halted, even though their foundations have been completed.

• Even resorts with ample resources have seen a slowdown in buyers. At Northstar-at-Tahoe, where a Ritz Carlton complex with hotel, full-ownership residences and fractionals is under construction, developer East West lowered prices to pre-sell 11 of the 23 residences, then took the remainder off the market, according to spokesperson Sue Hyde. “Buyers are looking for deals, and we’ve lowered prices to provide incentives,” she says.


Cap Ex Financing Solid
While resort real estate development stalls, pure-play lift expansions and other ski-related mountain improvements continue to get financing from lending institutions. “Our approach is to bifurcate real estate and ski ops,” says de Back of Wells Fargo. “We’re just as enthusiastic as ever about doing deals, but we’re not looking at much of anything that is more than four times EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization].” Expansion of ski lift systems, ski terrain and retail services are still seen as creditworthy for loans, he adds.

De Back says the real estate bust is likely to have a chilling effect on recent ski area acquisitions, some of which sold for multiples of 10 to 12 times EBITDA: “Lofty prices have been paid for resorts, and there is risk of them being overleveraged.” Those companies, he says, are likely to have difficulty getting loans for any expansion. “Right now, I look at cash flow coming out of ski ops, and I’m looking for around seven times EBITDA.”

While the bursting of the real estate bubble is likely to prompt many resort companies to reexamine their business models, some companies never went down that road and are now counting their blessings. One of those is CNL, the real estate investment trust (REIT) that owns 10 ski areas from coast to coast, with assets acquired from Booth Creek, Boyne Resorts and American Skiing Company. CNL’s family of resorts consists of Loon Mountain, Sunday River, Sugarloaf, Bretton Woods and Mt. Washington Hotel in the East, and Mountain High, Brighton, Snoqualmie, Northstar-at-Tahoe and Sierra-at-Tahoe in the West.

“We are continuing to raise money through the sale of shares in our real estate investment trust, and we’ve been quite pleased at the steady flow of funding that is coming in on a daily basis,” says Steve Price, managing director of CNL’s ski portfolio. “We’ve funded a number of capital projects around our resorts, and we’re not seeing an impact at this point. While we encourage high-quality real estate development, we generally do not participate in that. We’re all about the annual operating functions of a ski resort that produce relatively predictable earnings.”

Indeed, even at Mammoth Mountain, despite the slowdown of construction in the village, the ski area is moving ahead this season with three replacement lifts, two children’s ski school facilities, a new bar and restaurant at McCoy Station, and a new 10,000-square-foot restaurant at the top of Gold Rush Express. Observes Gregory: “I don’t think the ski industry will go into catastrophic times, but the days of excess money for new projects are over for a while. Prices on real estate will have to be cut dramatically to clear the market of inventory. Capital will come back, but it will take some time.”