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Financing Ecotourism & Conservation Projects Ed Sanders TIES North American Ecotourism Conference September, 2007

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Overview ƒ The challenges in financing ecotourism projects ƒ The related challenges in financing conservation land purchases ƒ Example of a large ecotourism and conservation project in Belize

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The Ecolodge Finance Challenge ƒ Ecolodges are typically the wrong size for financing ƒ Ecolodges aren’t attractive to traditional equityl investors ƒ Ecolodges aren’t attractive to traditional lenders ƒ Therefore need own money or “strategic” partners

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Ecolodges Don’t Fit the “Goldilocks” Test ƒ The typical ecolodge project (if there is such a thing) falls in the range of $1-3 million ƒ Over $1 million is usually too large to fund through “friends and family” ƒ Less than $5-10 million is usually too small for institutional investors. ƒ Ecolodge projects are therefore seldom “just right” for financing

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Ecolodges Are Not Attractive to Institutional Equity Investors ƒ Equity investors (e.g., Venture Capitalists, Private Equity Funds) look for potentially high returns, rapid growth, and quick and easy “exit” strategies. ƒ Very few ecotourism projects meet the desired return on investment of 20-30+ percent. ƒ Few have the potential for rapid growth. ƒ Exit options are limited and take too long.

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Example of Ecolodge Profitability by Age Profitability

<3 Years

4-10 Years

11â&#x20AC;&#x201C;20 Years

> 20 Years

Loss

33%

33%

35%

12%

Profits: 0-20%

62%

52%

41%

47%

Profits: over 20%

5%

15%

24%

20%

From TIES 2001 Study -- The Business of Ecolodges

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Ecolodges are Not Attractive to Traditional Lenders ƒ Lenders are primarily concerned about getting their money back if the venture fails (i.e., they want ready collateral). ƒ Very few buyers for an ecolodge if owner needs to sell. ƒ Ecotourism facilities typically have limited value for other uses if the venture fails. ƒ Land will only be valued at a fraction of its market value (e.g., 50%).

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Sources of Ecolodge Financing Developed Country

Developing Country

Ownerâ&#x20AC;&#x2122;s Own Funds

57%

58%

Friends and Family

1%

8%

Other Equity Investors

10%

19%

Commercial Bank Loans

21%

11%

Govt. & Private Loans

8%

6%

Other Sources

4%

9%

Financing Source

From TIES 2001 Study -- The Business of Ecolodges

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If You Don’t Have Your Own Money, Find “Strategic” Partners ƒ Strategic Partners are those who have a vested interest in the project’s success: ƒ Maybe the project helps their own business generate additional income. ƒ Maybe it advances the goals of a conservation organization or other NGO. ƒ Maybe an individual has a particular interest in the local ecosystem or culture.

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Example of Belize Lodge and Excursions ƒ BLE is a 13,000 acre ecotourism and conservation project that has taken 7-8 years to develop. ƒ Initial investors had a strategic interest in the project: ƒ ƒ ƒ

Landowner willing to take partial payment in equity Pennsylvania eco-farm owner wanted a tropical counterpart Local airline owner wanted to generate additional traffic for his flights ƒ Small loans from TNC, CI and EcoLogic

ƒ Subsequent major investors are two conservationoriented Dutch businessmen

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The Conservation Finance Challenge ƒ Ecotourism is a powerful force for conservation, especially if it finances large protected areas. ƒ Ecotourism revenues alone are seldom sufficient to cover the cost of large land purchases. ƒ Possible solutions: ƒ Strategic conservation partnerships, ƒ Finding buyers for “ecosystem services” from natural areas.

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Potential Conservation Partners ƒ Location, location, location. ƒ Government protected areas (national parks, state forests, BLM, Corps of Engineers). ƒ Non-Governmental Organizations (TNC, Trout/Ducks Unlimited). ƒ Private land owners.

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Belize

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Belize Lodge and Excursions

BLE CLCC Flick Crown 127

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BLE’s Conservation Initiatives and Partners ƒ Original hope had been to acquire the entire conservation corridor (45 sq. miles). ƒ Instead, purchased the core 7,600 acre property and a long-term lease on the island. ƒ BLE investor paid for an option on the CLCC parcel, and found a British donor through FFI to purchase the land. ƒ TNC worked with the USG and Government of Belize on a debt-for-nature-swap for Crown Block 127. ƒ BLE later acquired another 5,000 acres and TIDE acquired most of the 7 Hills tract

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Lessons from the BLE Experience ƒ Need to be patient and creative in looking at all potential options. ƒ Situation will be different in every country and region. ƒ One option for funding protected areas is the emerging market for the “ecosystem services.”

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The Emerging Market for “Ecosystem Services” ƒ Exploding interest in promoting the environmental services from natural areas (the NYC water treatment example). ƒ ƒ ƒ ƒ ƒ ƒ ƒ

Carbon sequestration, Wetlands mitigation, Flood control, water quality, aquifer recharge, Habitat protection, Pollination, Open space, vistas, recreational opportunities, Etc.

ƒ Last year, Forest Trends projected that the market for ecosystems services would grow from $3 billion to over $20 billion by 2010.

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Need to Take Advantage of All Potential Income Sources ƒ Multiple potential income streams from natural area protection: ƒ Government payments for ecosystem services (USDA’s CRP program) ƒ Voluntary carbon markets ƒ Wetlands mitigation banks ƒ Biodiversity credits ƒ Local wildlife protection markets (e.g., Bobolink project) ƒ Transfer of development rights and open space ƒ Conservation easements ƒ Etc.

ƒ The challenge is to aggregate all potential ecosystem services to maximize revenues.

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Measuring and Valuing Ecosystem Services is Not Easy ƒ Practical measurement problems: ƒ ƒ ƒ ƒ

Proximate and Ultimate Effects Additionality Leakage Permanence

ƒ Results in high transaction costs (e.g., CDM) ƒ Efforts underway to create better decision support tools (e.g., Ecosystems Marketplace, EcoAsset Markets)

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The Bottom Line on Financing Â&#x192; Ecolodges are difficult to finance, usually require substantial owner funding and are often built sequentially as resources become available. Â&#x192; Acquiring large tracts of land is expensive, but the best way to ensure that ecotourism directly supports conservation. Â&#x192; There often are options for attracting strategic partners and supplementing income from other sources, such as revenues from ecosystem services.

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http://www.box.net/shared/static/8tr3i6x1ui  

http://www.box.net/shared/static/8tr3i6x1ui.pdf

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