Municipal Recreational Facilities: Funding the Fun

Recent economic downturns have resulted in significant cash shortfalls for some small to medium-sized municipal areas. Moody's recently released a report indicating that these financial difficulties may result in bankruptcy for the hardest-hit municipalities; three cities in California have already taken this step to obtain legal protection against their creditors. The report indicated that most municipalities are expected to "muddle through and pay their debts," but a few more cities are likely to go under in the coming years.

Putting the fun into funding

Some cities, however, have found an innovative way to improve their financial situation while offering an added service for their residents. Building a community recreational park or entertainment center can generate revenues while providing area residents with a new local option for family fun. A water park, fun fair or arcade and miniature golf combination can even attract tourism dollars from outside the city to ensure the financial health of the municipality and increase the quality of life in the surrounding area.

Planning the project

The first step is to determine the right type of recreational facility for the area. Factors to consider include cost of construction, community support for the project, proposed price points and ongoing costs of operation. Business financial projections should be included in the planning stage as well and should incorporate cash flow for business plan analysis. For example, if the city is planning to build a water park to generate revenue and boost tourism, it should consider these factors:

• The initial cost of construction, including property acquisition
• Ongoing staffing costs for lifeguards, concession stand staff and security personnel
• Costs of facility upkeep and maintenance, including insurance, utilities and repairs
• Advertising investments
• The cost of servicing any loans required to build the facility
• Similar facilities in the region
• Park capacity and projected daily attendance
• Profit-generating potential at different ticket price points

By taking all relevant issues into consideration before beginning construction, municipal areas can protect themselves against financial losses when building recreational facilities for their communities.

Coming up with the collateral

In most cases, city officials will require outside financing in order to construct these recreational facilities. These construction development loans can be collateralized in a number of ways. Banks and lending institutions consider a number of factors when determining the municipality's loan application; among these are the following basic criteria:

• The city's population – Generally, cities with fewer than 10,000 residents are considered a higher risk by lending institutions.
• The city's growth prospects – Cities that are expanding and that maintain a healthy downtown area are more likely to be approved for funding.
• The overall credit rating of the municipality – Typically, banks look for municipal credit ratings of Investment Grade or higher.

Cities that meet these standards can usually find lending arrangements at reasonable rates to finance new recreational facilities. In most cases, the lending institution will require extensive business financial projections in order to determine the financial viability of the project over the long term.

Recreational facilities can be a solid investment for small to medium-sized cities and can produce added income directly and through associated tourism. CNF Exchange specializes in helping borrowers and lenders connect through its exclusive interface and can provide the help and guidance municipal borrowers need to finance their new projects and gain approval for the funding they need.

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