Niche properties

Smooth Sailing

Investors Must Chart the Right Course in Marina Redevelopment.

L ong ago considered the domain of sunburned sailors with red-and-white-striped shirts, eye patches, and spyglasses, boating has blossomed into a trendy recreational activity, especially among families. In the past decade, the number of recreational boats owned has grown by more than 1 million, and the amount spent on boats and accessories has jumped to nearly $25.6 million, according to the National Marine Manufacturers Association.

To capitalize on this growing recreational activity, cities on or near bodies of water are racing each other to attract boat owners and enthusiasts by developing or redeveloping marinas with amenities rivaling exclusive country clubs, such as fine-dining restaurants, members-only areas, and luxury shopping. While the development process is long and arduous in most states, acquisitions and redevelopment offer commercial real estate professionals viable entries into the marina industry.

Dropping Anchor
Due to increased interest in recreational boating during the past decade, marinas have become a popular niche investment. Hot areas have sustained traffic patterns and year-round climates conducive to boating, says Bruce H. Blomgren, chief executive officer and president of Brandy Marine in Sarasota, Fla. Yet the largest number of boats docked at marinas is found on the inland lakes, according to Dennis P. Kissman, president of Marina Management Services in Boca Raton, Fla. In 2000, Michigan topped both California and Florida in boat registrations, according to the U.S. Coast Guard. “There are opportunities in every state, and they should be explored,” Kissman says.

Development is high around large lakes, particularly in the West, says Edward J. Doherty, CRE, president of Marina/Consult Corp. in Marstons Mills, Mass. A large development market also exists in Sunbelt states, especially in areas with a high density of commercial and residential properties, good transportation, and services. On the East Coast, Hilton Head and Charleston, S.C., and Savannah, Ga., are growing in popularity because they are stopover points between New York and the South, Blomgren says.

Outside the United States, St. Thomas, Virgin Islands, the boating marina capital of the Caribbean, and Trinidad, a good escape from tropical storms, are popular locations, Blomgren says. Also, “When Cuba opens, it will knock the socks off other Caribbean locations because of the curiosity factor,” he predicts.

Jumping Ship
Despite the market's current health, rigorous development and permitting regulations discourage many potential developers. In most states, local planning and zoning approval is required, as well as a state license and a permit from the U.S. Army Corps of Engineers, the National Park Service, or other federal or state government agency responsible for overseeing the body of water, Doherty says.

“In the Northeast it is very hard to build because of the number of government bodies,” that must sign off on a new development, says John A. Simpson, CCIM, MAI, chief executive officer of Commercialappraisal.com in Arnold, Md., and author of Valuation of Marinas, published by the Appraisal Institute.

Obtaining marina permitting is a lengthy and costly procedure. Florida's permitting process requires a minimum of 18 months, depending on the number of agencies involved, Blomgren says. In some cases, “You may get approval from one agency, but it may expire or the rules may change by the end of the process,” Kissman says. Many developers ultimately decide that there are better ways to make a return on investment, he says.

Environmental regulations also pose development obstacles, due to the notion that marinas harm marine habitats. However, “In reality, boaters aren't going to pollute their environment,” Kissman says. The marina industry currently is taking proactive measures to prove that marinas don't pollute, he says.

Also, many areas are saturated, especially in the Midwest, says Brian G. Brossard, a sales associate with DK Realty Partners in Rolling Meadows, Ill.

“It's a case of supply and demand,” Kissman says. “Boating is a growing pastime, but there is limited access to water.”

Buying Into BoatingDue to the development barriers, purchasing and redeveloping existing marina facilities provide the best entries into the industry and the quickest return on investment. In fact, in saturated areas, the only way for owners to expand their operations is to buy more marinas, Brossard says.

However, typically there are “relatively few sales because they are such good investments during good times,” Simpson says. Therefore, “there is a gap between what the seller wants and what the investor can spend and still make a return.”

A marina is “close to a hotel in its business plan; the space of the water is like a hotel room,” Blomgren says. Yet unlike a hotel, finding comparable sales for marinas on which to base pricing is difficult. “The land and water value are so different from properties nearby,” he says.

Although typical asking prices vary, marina prices usually are based on price per slip or price per linear slip of capacity, Doherty says. “Marinas have different profiles. You have to look at each particular property as an individual problem and then determine the price based on similar properties sold in the area in the past two years,” he says.

To make a profit, a 10 percent to 11 percent capitalization rate is the proper price point to buy, Blomgren says. Buyers also should look at a marina's upside -- its room to expand and amount of improved property, says Paul Demik, principal of DK Realty Partners.

Fishing for Financing
Unfortunately, obtaining financing hinders many marina acquisitions. “Lenders realize that marinas are an operating business, which is a negative,” Kissman says. Lenders' comfort levels also are shaken by the lack of available comps, he adds.

Although several institutions such as Bank of America previously had departments dedicated solely to marina financing, currently not one institutional lender is pursuing marina loans, says Harry Nieman, former vice president and manager of marina financing at Bank of America in Pittsburgh. Lenders consider marinas to be leisure properties without a guaranteed return, and many aren't willing to devote entire departments to them, he says.

Many lenders want buyers to have extensive marina expertise, but “unfortunately 80 percent of those who want a loan don't have the experience,” Nieman says. Lenders also require marinas to have good track records, cash flows, and stability.

The average purchase loan for a marina is five years, with 70 percent loan-to-value and 1.30 debt service coverage. Many lenders also require collateral or a personal guarantee. Borrowers should try to mitigate guarantees -- 50 percent or lower of the purchase price -- to limit their exposure, Nieman advises.

Reeling in CustomersWhen redeveloping a marina, owners should take its location and customer base into consideration. For example, in coastal areas, mega-yachts are the fastest-growing boating segment, causing increased demand for marinas with larger slips, Kissman says.

Although slip rentals are the No. 1 income stream to the bottom line, their income is limited by the number of slips and lease length. Therefore, marinas should have at least three additional profit centers to remain lucrative, Blomgren recommends. Adding amenities that attract non-boaters helps increase profits as well. “Marinas are not just a storage place for boats anymore,” Kissman says. “Now people want the experience and the lifestyle.”

Not surprisingly, restaurants are the most profitable amenities because customers, even those who don't like boating, “like to sit by the window and watch the water,” Blomgren says. Since marinas have become much more family oriented in the last five to seven years, amenities that appeal to a range of age groups, such as playgrounds, pools, and fitness centers, also are popular.

Retail properties also are big draws, Simpson says. However, shops should be leased to independent retailers, Demik cautions. Many marina investors don't have retail experience and thus are hesitant to purchase a marina containing a sales component, he says. Enlisting the services of a professional marina management company can help overcome this problem.

Boat service centers also attract customers because many of today's boaters don't have the time or knowledge to do repairs by themselves. And while fuel is always a necessity, increasing regulations make fuel pumps a costly endeavor, Kissman says. Boat dealerships can be profitable enterprises, but “you can lose your shirt if you don't know what you are doing,” Blomgren warns.

The Tide Is Turning
Marina development and acquisition follows a cyclical pattern: Interest founders when the stock market is performing well, but grows when high stock returns fade, Blomgren says.

As during the 1980s savings and loan crisis, many of today's private investors are looking for marina opportunities. Marinas used to be a cottage industry, with many “mom-and-pop-operated” facilities, but this is changing as more large players enter the industry, Blomgren says. Although institutional investors shy away from marinas because immediate returns cannot be expected, private investors can rely on properly managed facilities to provide a steady, long-term income. “The return on investment is coming in line to where it should be compared to other property types,” Kissman says.

More people are beginning to understand the industry and its stability. “Properly managed facilities in good locations are profitable operations,” Doherty says. Although this specialty niche is limited to waterside areas, it can be a profitable enterprise for brokers and investors willing to take the plunge.

Gretchen Pienta

William T. Adams, CCIM, CRB, is owner of Adams Realtors in Atlanta. Contact him at 404.688.1222 or wtadams@ccim.net.Gretchen Pienta is associate editor of Commercial Investment Real Estate.

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