I’ve got a secret. Actually, I’ve been saying it for years and testifying to it in court, yet it seems it was the secret that did not want to be heard. It’s the marina capitalization rate secret.

First, some background. A capitalization rate (cap rate) is a number that turns net income into value. If you have a marina with $100,000 in net operating income and a 10 percent cap rate, that’s a market value of $1,000,000 ($100,000 divided by 0.10). Another way to look at it is that net operating income is 10 percent of the value of a marina. Another way is to look at its inverse – the net income multiplier. In this case, the market is paying 10 times net income to buy a marina; the cap rate is the inverse of the net income multiplier (1 divided by a 10 times multiple).

Back to my secret, keep it hush-hush. It’s simply this: cap rates derived by mathematical formulas are theoretical at best. They are accepted by courts but they do not always represent the market. Capitalization rates fluctuate with market supply and demand and with interest rate. Using mathematical techniques such as band of investment (BoI) or mortgage equity (ME) very often does **not** produce a reliable cap rate. Both of these techniques attempt to “model the market”, yet let’s look at the marina market today.

How much has the interest rate changed in the past two years? They have changed, but the change does not model the change in capitalization rates. Capitalization rates have changed materially in most markets.

- BoI and ME don’t consider that the inventory of marinas listed for sale is many times more than they were from two years ago.
- These techniques use financing terms as the majority of the capitalization rate calculation, yet what are those rates based on? Give me a dollar for every time someone used the Korpacz Investment Survey, the ACLI mortgage rate survey, a discussion of the prime rate or different ratings of bonds and I’ll be recession proof! Financing terms typically quoted as the majority of the BoI and ME calculations are not based on marinas. They’re for apartments, shopping centers, Class A offices, etc. The simple reality is that the large lenders are not lending on marinas, so it’s up to small local banks, specialized financial companies like Textron Financial and hard money lenders to make the loans. Of course, we all know what’s happened to the supply of available loans out there.
- Do the interest rates quoted include points? How about the fact that lending on an established regional mall seldom requires personal guarantees by all the principals? How do we account for the increase in the spread of debt coverage ratios between investment grade real estate and a marina financed by a local bank?

Everyone likes easy numbers… myself included. But the simple reality is that using mathematics to calculate marina cap rates is little more than throwing a dart at numbers pinned to a dart board. You have to go to the market. You need to ask those questions. That’s the only way to derive a credible, reliable marina capitalization rate. Anything else is… well… mathematically uncivilized and merely a check on value.