First Look - Location-Based Attraction Delivers a New Business Model
By: David Busker, president & CEO, Koch Development
Koch Development had investment oversight and financial duties for the entertainment project while Pacific Development handled operations.
After the recent financial crisis severely impacted commercial real estate, many investors have been understandably cautious about how to approach the investment market — none more so than Koch Development, a conservative St. Louis-based investor/developer. While many funds were being created to invest in distressed assets, Koch was having difficulty locating stabilized assets that offered acceptable returns.
Then in early 2010 an alternative investment idea was brought to Koch by a joint venture partner. Pacific Development had discovered a recent attraction that opened in Niagara Falls, Canada in 2006. The Niagara project was a 200-foot tall modern observation wheel. An observation wheel is a technologically sophisticated wheel with fully enclosed, climate-controlled gondolas providing a year-round viewing experience for all ages. After extensive due diligence, Pacific determined that the attraction itself was a great business, so they took the idea to Koch to see if they would sponsor a project. After extensive feasibility and additional due diligence, Koch agreed to sponsor the project.
Location, Location, Location
Recently voted by TripAdvisor® travelers as the best beach in America, the Myrtle Beach community has made a concerted effort to increase the number of families visiting the area — which folded perfectly into the business model for the new project, dubbed the SkyWheel®. Although there were many possible locations for this project, the partners chose Myrtle Beach due to the perfect mix of demographics, number of visitors, local community support and a walkable entertainment district. Also, the new Myrtle Beach Oceanfront Boardwalk and Promenade opened to great success in May 2010 and led to new records for visitor traffic to the revitalizing downtown area.
Barriers to Entry
For success, the SkyWheel® had to have the perfect piece of real estate. In this instance, a half-acre of prime beachfront real estate in the heart of Myrtle Beach’s new Boardwalk. This is where the real estate development expertise of the partners was fully realized to secure the ideal location, next to a public park on the beach that has nightly events in season from Memorial Day to Labor Day each year.
Another barrier to entry was financing. Due to market conditions, the only way to finance this project was with equity, including Koch’s principals and advisors as well as the SkyWheel’s local management team.
A final barrier to entry was understanding the attraction and why people would seek the experience. The SkyWheel® is a European-designed, modern observation wheel, towering about 20 stories in the air. It has 42 Swiss-manufactured, climate-controlled gondolas offering 360-degree views.
A Whole New Business
Besides the challenge of development, the partners had to create an entirely new business plan. It required different skills—operational, marketing, safety, technical and cash management. Management duties are shared among the team, with Koch having investment oversight, financial and back office duties while Pacific handles operations.
The small footprint includes a restaurant and retail shop totaling approximately 6,000 square feet.
In developing the tight site, it was amazing to realize that not only would the SkyWheel® fit on the half-acre site, but there was also room for a restaurant and retail shop at the bottom, totaling approximately 6,000 square feet. The team partnered with the hospitality arm of Margaritaville
Enterprises, the lifestyle brand and restaurant company founded by Jimmy Buffett on two new concepts called LandShark™ Bar & Grill and LandShark™ SurfShack retail store, both based on Margaritaville’s Land-Shark™ beer brand. It was the perfect solution, finding an established national operator to partner and run the restaurant and retail shop while maximizing visitor traffic.
Ready for Prime Time
One of the biggest challenges was getting the SkyWheel® open in time for the 2011 season. A decision to go forward with the contract for the manufacture of the SkyWheel® had to be made in the summer of 2010, before the business plans for the restaurant and retail portions of the project were complete. Then managing to the grand opening date produced a number of challenges, including critical predevelopment items, unexpected construction delays and weather-related difficulties. However, the collaboration of the development team and weekly progress meetings kept the project on track.
Koch and Pacific felt this project, although with uncertainty, had less risk in it than traditional real estate development in the current economy. The challenges of adapting to a new business model were certainly not lost on the team members. However, a steep learning curve has led to proprietary knowledge and expertise, creating a team who is better positioned to develop more location-based attractions in the future.