Waterparks have been popular family destinations for years, but now a growing number are popping up as flagship amenities at both new and existing resort hotels across the country. The number of hotels with indoor parks is expected to grow by 144 this year, up 33% from the 108 new parks that were introduced in 2005. The trend is common in northern states like Minnesota and Wisconsin, but Sunbelt hoteliers in Texas and Florida are also jumping on the bandwagon, reports Hotel Waterpark Research & Consulting.

“Indoor waterparks are ideal seasonality plays for hotel owners,” says Anwar Elgonemy, vice president at Jones Lang LaSalle Hotels. “These facilities can attract business in the summer and the winter, especially in places like the Midwest that have extreme climates.”

Elgonemy says that the typical 300-plus room hotel with a waterpark facility can boost its average daily rate (ADR) by $100. He sees two trends at work: Many families are willing to drive as far as 200 miles to stay at a hotel with park facilities, and most hotels with parks lump room rates and park admissions into one package price, boosting their ADR. For example, says Elgonemy, a larger hotel with a waterpark hosting a six-person family can add about $25 per person to that rate, adding as much as $150 to its ADR.

But fixed costs such as higher insurance premiums and utilities can offset some of that gain, since most resorts own and operate their waterpark facilities. According to Hospitality Consulting LLC, a resort hotel should expect to spend roughly $15 million in total project costs to add a 50,000 sq. ft. indoor waterpark.

Despite the added overhead, Elgonemy believes that mid-scale hoteliers see parks as a great way to smooth out lumpy seasonal earnings. He says that the initial investment can typically be earned back within two years of adding the waterpark.

An October analysis of hotel resorts with waterparks by Hospitality Consulting LLC found that the waterpark resorts generated cash-on-cash returns ranging from 14% to 24% on average. Similar resort properties without waterparks generated cash-on-cash returns of roughly 10% to 12%.

These enticing returns have yet to lure hotel REITs into the market, however. One possible reason may be that few hotels with park facilities have sold in recent years. “I think until there's a big sale that they can gain confidence from, it's doubtful that [REITs] will start buying and building hotels with parks,” says Elgonemy.

Even so, the public markets have embraced the hotel waterpark model. The nation's largest indoor waterpark resort company raised $250 million during its IPO in 2004. That company, Great Wolf Resorts (NASDAQ: WOLF), also opened a 406-room resort recently with an adjoining 103,000 sq. ft. park in Niagara Falls, Ontario.

Keith Simmonds, general manager at the Niagara Falls resort, says that the property is the largest Great Wolf Lodge (by total rooms) in the entire chain. Simmonds adds that the heavily marketed resort, which is already luring hundreds of guests from the U.S. and Canada, has a very simple formula that may explain why more hotel waterparks are being developed.

“This resort is all about families,” says Simmonds. “Many of the hotel rooms have bunk beds in them, and the waterpark admission is built into the room fee.”