The Biggest Marina Valuation Fallacy

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Eileen and I have been extracting cap rates and operating expense ratios from sales for almost a decade and a half together.  During that time, I’ve reviewed an untold number of marina appraisals and have spoken with dozens and dozens of lenders and appraisers about the same thing – the operating expense ratio.  It’s time I set the record straight.

Let’s take yesterday.  An appraiser called and said something like “the operating expense ratio of 61 percent seems high.”  Or even worse, the report will go out to a decision maker with an operating expense ratio that’s similar to industrial buildings, apartments, or other common property types and the decision maker will rely on it.  What they don’t know is that marinas always have a materially higher operating expense ratio than common property types.

Here’s why.

  1. Payroll – do industrial buildings and triple-net lease real estate have it?  Apartments sometimes do and sometimes don’t depending on the size.  Marinas need personnel in the office to lease slips, rent transient (daily) slips, etc.  They need at least one or two dock hands to help customers with one request or another at the docks.  A dockmaster and maintenance person (if they are not the same) is necessary to keep the facility in shape.  If you’ve got boat repairs, boat sales, motels, hotels, golf courses, bed and breakfasts, or any other type of real estate business, add more people to the payroll line item.
  2. Insurance – do industrial buildings and office buildings have the potential to be damaged or destroyed with each major storm that comes around?  Bulkheads and docks are very expensive to fix.
  3. Repairs and maintenance – marina docks are subject to wave damage from storms.  The buildings are located in flood zones.  The salt air corrodes and wood borers can chew up piles.  Dock planking needs to be kept in good shape lest a boater trip and sue.  The list goes on.  Comparing a marina’s repairs and maintenance expense to an industrial building or apartment project does not consider any of this.
  4. Utilities – this expense is frequently not passed on to the boater at most marinas like it is with a tenant (i.e. separate metering is not yet prevalent).  And we all know what’s happened to fuel prices, but don’t forget that water and electrical bills are increasing at a greater pace than ever before.
  5. Reserves – marina owners rarely allocate anything to this (see my prior post, Owner’s Don’t Reserve – They Refinance).  Considering that every item on or under the docks is subject to weathering and most types of bulkheading will deteriorate too, a line item for reserve should be present.  A 2 percent of effective gross income reserve just does not cut it for a marina.  Some banks I know are requiring 4 percent of effective gross income to be set aside in their bank account for a reserve, but depending on how well depreciated the marina is, even that may not be enough.

That’s why we call marinas a special purpose property.  They are a labor of love and a lifestyle.  They do make money, but expenses are higher and your return on equity is lower than other real estate investments.

Want the lifestyle?  Want to invest?  Do it wisely and with the advice of experts.

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