For Sail

Navigate the Specialty Niche of Marina Appraisals and Resales.

As many boaters prepare for another season on the high seas—or the local river or lake—the facilities that often launch their journeys—marinas—are reemerging as a potential niche for commercial real estate professionals.

Although the specialty, particularly with regard to new development, is limited, brokers can find opportunities in marina appraisals and resales. Like many property types, marinas have ebbed and flowed of late, following the wave of the general economy. "From time to time, marinas are a very hot item, and other times they’re extremely slow," explains Bob Schweiger, CCIM, SIOR, a broker at Prudential Florida Realty in Clearwater, Florida, who spent 15 years selling marine products before turning to commercial real estate in 1973.

"As the economy increases, so do boat sales, and so do marina customers," he says. "If the economy is low, then they don’t sell so well." Through about 1995, the marine business was in "pretty bad shape," says Schweiger, who has sold about a dozen marinas. As the economy has improved, the marine business "took a huge jump forward—and that renewed interest from many marina buyers."

Today, marina sales and prices are on an upward trend, says Ed Doherty, president of Marina/Consult Corporation in Cataumet, Massachusetts, a marina consultant who managed marinas for 20 years. "The high point of this industry, as far as the sale of marinas, was probably 1988 and 1989." Prices fell with the recession, reaching lows in 1991 and 1992, with recalls and government sales affecting the market. "From 1989 to 1993, there wasn’t a trend in sale prices," he says. "You’d get a high, a low, random pricing. From ‘93 to ‘97, there’s a clear trend upward in prices. The types of buyers that we had in the market in 1988 are coming back in."

Opportunities
In many cases, marinas are not passive investments, as the majority are owner-operated. However, these properties still hold promise for specialization for some commercial real estate professionals, especially amid a trend toward consolidation of ownership and talk of specialized real estate investment trust (REIT) activity.

"We saw a void in professional brokerage in the sale of marina properties," says Kevin Barrett, an investment sales broker for KLNB, Inc., a Towson, Maryland, commercial real estate brokerage firm. Last spring, KLNB formed a joint venture with marina manager Coastal Properties Management, Inc., to provide brokerage and consulting services to marina owners, predominantly in the marina-rich Chesapeake Bay area. "We see a real niche, particularly in the Mid-Atlantic. There’s no one really specializing, no one focusing on professional packaging [of] financial projections for a buyer to be able to analyze and take to a lender."

Why should brokers and investors be interested in marina properties? Barrett, whose company recently had five marina listings and represented several buyers, cites a number of reasons. "Traditional real estate investors...[are] looking at other avenues to get a higher return on investment," he says. "That’s a result of the whole REIT phenomenon and capital markets being so strong." Another trend, Barrett says, is the potential securitization of properties. Moreover, "There is debt capital for marina properties again."

Industry Snapshot
There’s no typical marina property; they come in various sizes and with a variety of related income-producing businesses, which can include rental of wet slips for in-water boat storage, as well as dry storage rental; fuel sales; boat sales, service, and rental; restaurants; and retail stores.

According to a survey by the International Marina Institute in Nokomis, Florida, marinas had an average slip capacity of 374 with average occupancy of 83 percent in 1995. Average revenue per slip was $3,124 and average total sales exceeded $1.6 million. More than 69 percent of the facilities surveyed were owner-managed, IMI reported. More recent numbers reflecting changes since 1995 were not immediately available.

As noted, the economy has influenced the industry’s ups and downs, but other factors also offer challenges to marinas. "The marina business, over the years, has been so volatile due to the fact that these are located on water," Schweiger says. "Waterfront has appreciated so drastically, it became hard for marinas to make money."

It’s also difficult to get new developments approved, Doherty says. To develop a marina, he explains, requires an extended permitting process, including approvals from local conservation, planning, and zoning officials; state conservation officials; and the U.S. Army Corps of Engineers, a process that can take from one to five years, he says.

Then, "development costs are going to be high," he says. For instance, non-natural harbors may need breakwaters to protect them from wind and waves. And because of finite development opportunities near water—many of which already are built up—"You might end up with a high-cost development in a secondary market location," Doherty says. Moreover, in many instances, including coastal waters, "The land under the water belongs to the state—and the states are becoming increasingly aggressive about the fees they charge for the use of that water," he says. (For instance, Massachusetts charges $2.50 per square foot [psf] for development of waterways, he says.) And the permits aren’t indefinite. "There is no absolute guarantee that it’s going to be renewed," Doherty says. "You’re looking at a rather large investment for what could be compared to a short-term lease."

Marina Resales
Consequently, in many regions, "the bulk of [the] market is resale," Doherty says. "That’s because the natural harbors generally have long since been developed. In inland locations—some of the Great Lakes and the rivers—it’s possible to get development permits. There’s probably more development there than [on] the coastal waters."

But those areas can be limited, too. For instance, on the Arkansas River, some new marina development is planned, says Rollin Caristianos, CCIM, a broker with Rector Phillips Morse in Little Rock, Arkansas, including an approved, small 40-slip marina he’s marketing that may be part of a residential development. But few other possibilities exist. "There are so few sites along navigable areas like this...that would even work," Caristianos says. "Most of the ones here have already been developed."

Several factors are important to consider in marina resales, including pricing and returns; appraisal difficulties; and finding buyers.

Pricing and Returns. Because of their many business segments, marina properties don’t necessarily lend themselves to a standard pricing unit. "There do not seem to be any comparables that you would go by," Schweiger says. "If you were selling an industrial building, it would be price per square foot. For a marina, that would not apply. It’s very difficult to put any number [such as] price per wet slip. It’s more an accumulation of everything: boat sales, repair, wet storage, dry storage, restaurant operations," all of which are separate businesses.

Understandably, marina property pricing varies as widely as the marinas. "There’s not many really fine marinas below a million [dollars] and they can range upwards to 10 [million], 11 million [dollars]," Schweiger says. "You have to look at each situation individually." Prices in the Chesapeake Bay area typically run between $1 million and $4 million, Barrett says.

Marina cap rates vary as well. "It is so across the board," Barrett says. "Investors are wanting to look at higher returns than they would on a normal income-returning investment. We might see initial cap rates in the 11.5 to 12.5 percent range and internal rates of return based on a five-year hold that might reach 15 or 20 percent," which is "10 percent to 15 percent higher than an average quality commercial investment today."

Doherty places marina cap rates at between 8 percent and 14 percent, averaging between 9.5 percent and 10.5 percent. Yield rates vary by location, he says. In the Northeast, market participants seek yields of 15 percent to 20 percent; "As you move to the South and West, people look for yields as high as 25 percent," he says.

Appraisals. Because marinas can include so many different business types, the valuation process can be complex. "You have to take apart the sources of income more thoroughly than you would just in analyzing leases and quality of tenants. You have to focus on trends in the income," says Barrett, who adds that his company would not have attempted its marina consulting endeavor without a knowledgeable marina-oriented partner. "You really have to know the operations of a marina to be able to analyze it."

"It is difficult," Doherty agrees. "It’s much like valuing a hospital or a hotel," he says. "You’re getting into various new dimensions and each of these businesses...have different risk characteristics, different measurements in final value." Marina properties can vary dramatically, he notes. One might just rent slips, while another has several related businesses.

But Greg Peck, CCIM, GAA, owner of Gregory Peck & Associates, in Murfreesboro, Tennessee, which has appraised four of the five marinas on Nashville’s Percy Priest Lake, maintains that marina valuation "theoretically, [is] just like any other appraisal that you do." Peck, who recently appraised a renovated Nashville-area project that included a 340-slip marina for a first mortgage loan, lays out a typical marina appraisal process.

To get started, "You have to look at the physical structures. Within that framework, you have to allocate what portions of the marina produce income," he explains.

"Once you figure that out, it’s necessary to compare that information to market-derived information, so you can tell if the rental income is either low, high, or where it should be," Peck says. "You have to investigate other similar properties in order to find out what normal expenses are." For instance, he says, if a marina sells fuel, appraisers must research the cost of fuel, and so on, for other business types.

Next comes a tally of gross potential income, assuming all slips are rented, subsequently deducting vacancies and deducting or adding income from other sources, such as boat repair, product sales, or a restaurant, and then deducting normal expenses. It’s helpful to have a two- to three-year track record to examine to look for consistencies, Peck says. (Inconsistencies frequently evolve from specific capital expenditures, such as extending a dock or changing an anchorage system, he says.)

"Then," Peck says, "It’s a matter of capitalizing income into value. Ideally, use a good market-derived cap rate from the sale of other marinas, which is sometimes tough to find. If you can’t find that kind of information in your local area, then you have to expand to similar areas, or go to lenders [to] find out what parameters would be imposed by lenders for them to make a loan."

Finding Buyers. With marina properties, it’s not the quantity of potential buyers that counts, it’s the quality, Schweiger notes. "There are a lot of marina buyers out there," he explains. "There are not a lot of people who know how to run a marina. Many times, people bought a marina because they like to boat. That certainly does not qualify them to operate a marina."

Nonetheless, he says, "There’s an increasingly strong element of buyers who know and understand marinas and who know...what [price] they need to buy them for to make money. The buyers are far more knowledgeable than they have been in the past."

One possible reason for that is a trend toward aggregation in marina ownership. "This has been a single-operator business for years," Doherty says, but now, some companies are collecting several marinas. "I think the trend is clearly headed in the direction of REITs. That’s going to be the direction of the people who are looking for large-scale aggregation. They’re going to follow the golf course model." Barrett concurs: "There is a stir on Wall Street to start looking at the business as a vehicle for REITs." A marina REIT reportedly is under consideration, observers say.

In terms of marketing marina properties, brokers may start locally, but likely will branch out. "If it’s a sizable marina, I think you have to market on a national basis," says Schweiger, whose company marketed a large, older St. Petersburg, Florida, marina throughout the country in 1995. "We had prospects from all over the United States and some from the Caribbean." The property, which had about 200 wet slips as well as dry-storage facilities, ultimately sold for about $4 million after about a year on the market, he says.

Smooth Sailing Ahead?
In the future, the changing nature of the marina business will affect operators and owners, amid increased marina customer turnover, Doherty says. "The business is competing for recreational dollars and is getting a smaller percentage each year," he says. However, "What you’re looking at are long-term difficulties that do have solutions. I think we’re in an interim period now. If [boat manufacturers and marinas] market more cleverly to people [buying] smaller boats today, they have a good future."

Schweiger says that the outlook for marina properties is simple. "At certain times, the market does very well for marinas," he says. "At others, they’re difficult to give away. Right now, I think the market is very strong" and will remain so in conjunction with the economy.

Thus, the segment remains attractive as an interesting specialty niche. "We are and continue to be commercial investment real estate brokers," Barrett stresses. "We see this as an adjunct to our commercial investment business. We’re confident that this is a viable niche business."

Barbara Bronstien Stevenson

Barbara Bronstien Stevenson is associate editor of the Commercial Investment Real Estate Journal.Ethical PerceptionsHow do others perceive the ethics of real estate brokers?In a Gallup Organization poll released at the end of 1997 on the perceived honesty and ethical standards of various occupations, 56 percent of respondents rated "real estate agents" as average (though many respondents likely did not distinguish between residential and commercial agents); 3 percent rated them very high, 13 percent high, 20 percent low, and 4 percent very low.In comparison, pharmacists topped the list with 69 percent high or very high ratings, while car salespeople pulled up the rear with an 8 percent rating. Lawyers immediately followed real estate agents with marks of 15 percent high or very high.