One of the “hidden” costs or difficulties in appraising marinas is the lack of application of uniform accounting standards.  It’s not that it’s not been proposed – the International Marina Institute did a great job in publishing “Uniform System of Accounts for Marinas & Boatyards“.  Yet I am hard pressed to recall even one instance where two marinas had the same accounting categories, account numbering, or reporting.  At least most of them use QuickBooks!

Marina participants refer to this as “forensic” accounting, which although the term is applied to the legal system and sciences, it’s pretty well understood that means a deep crawl through accounting records.  The goal is to reconstruct the marina’s true operating statement(s).  This is important and necessary for the following reasons:

• Appraisers base the income approach on a projection of at least one year’s income, so reconstructing the last year is important.
• We isolate patterns in income and expense analysis and discount aberrations.  That may mean reconstructing several years’ operating statements.
• The income approach is the primary valuation method for marinas so it’s wise to invest extra time and effort in getting it correct.  USPAP uses the term “credible” in dozens of places, so we must produce credible reports and analyses.

Among the most difficult appraisal assignments are those that require us to reconstruct the financials and there are no analogs present in the market.  Let’s analyze the three most common examples.

There are some marinas that have such a high land-to-building ratio that the majority of income is generated by the businesses in the improvements on the uplands itself.  That’s easy to figure out by comparing the percentage of income from the slips compared to the income generated by the uplands buildings.  The need for reconstructing the operating statement occurs when the majority of the improvements have owner-run businesses and the parent corporate entity has optimized the financial statements to minimize income taxes.  When the gross is $5 million but the net is $50,000, it falls on our shoulders to reconstruct the true net operating income attributable to the real estate.  As the Bard would say, “here’s the rub”:  without the extensive cooperation of the marina owner and/or the accountant, it cannot be done credibly.  Sadly, some owners need to realize that we are not magicians and we need their help to analyze someone else’s numbers.  Yes, we need the QuickBooks files too.

The second case where financial statements need to be reconstructed is when income is being received yet not being reported.  Most marina owners and managers are honest, but like any industry, there are those that bend the rules a little.  Collecting all cash for many slips is great for hip-pocket national bank, but it shows many more vacancies, which penalizes market value.  In cases like that, we are forced to use market occupancy and rates, yet if the marina is doing better than market, there’s just no way to show that.

The third situation where we are called on to reconstruct operating statements is the failed or “dark” marina.  Sometimes we are lucky and get the prior financial statements, but even then they are suspect because they may not reflect stabilized occupancy and/or competent management (the latter is assumed and typically included in the assumptions and limiting conditions section of an appraisal… it’s standard operating procedure in the appraisal business).  Reconstructing the operating statement(s) is often a very difficult task to do because marinas vary so much in their components and many expenses are dependent upon what is there and what condition it is in, which can be contrary to other marinas in its competitive market.  Regrettably, the latest operating statement survey that was performed was in 2000 based on 1999 numbers.

So how do we “reconstruct” operating statements?  I’ll save that for Part 2.