Investing in Marinas, Part 1

This three-part series provides an introduction to the marina sector, an increasingly popular type of real estate that offers many opportunities, but also features unique challenges that are unfamiliar to even highly experienced CRE investors. Part one, presented below, offers an overview of the sector; while part two centers around the space’s relative attributes; and part three considers its challenges, as well as opportunities for smaller independent investors.

When discussing the potential challenges of investing in marinas, Raymond Graziotto — president and CEO of Seven Kings Holdings and former CEO of Loggerhead Marina, which at one point was one of the largest owners of marina facilities in the state of Florida — shared a cautionary tale.

“There was actually a facility in Florida that was built on the wrong side of a low bridge,” he told LoopNet with a rueful chuckle. “It got built and financed and exists, but half the facility is basically empty because it was built for 45-foot boats that can’t get under the fixed bridge that nobody thought about.”

The message not so subtly implied by Graziotto’s anecdote is that, despite tremendous investment interest over the past several years, the marina business is not for everyone.

Nonetheless, REITs and other institutional entities aren’t the only investors curious about this somewhat esoteric asset class, and there may be a good reason for that. “I think the marina space is one of the few spaces that remains that still has a lot of potential for growth and maturity, where if you invest in this you can really do well over the next 10 years,” Michael Nissley, executive managing director at Colliers International, told LoopNet.

“Everybody’s chasing yield, and when you get some of these industries that are so mature that everything’s already figured out, it’s time to pioneer a new industry.”

Michael Nissley, executive managing director, Colliers International

Nissley, who is the national director of Collier’s Manufactured Housing & RV Group, has made marinas a significant part of his practice over the past decade. Like many in the space, though, Nissley became involved in marinas somewhat by accident, when he represented Parkbridge Lifestyle Communities, a public REIT that was the largest owner of mobile home parks in Canada, in the sale of its portfolio to a Canadian pension fund. Parkbridge held a handful of marinas in its portfolio, and Nissley became intrigued.

“Everybody’s chasing yield,” Nissley noted. “And when you get some of these industries that are so mature that everything’s already figured out, it’s time to pioneer a new industry.”

But some existing owners are dubious about marinas’ growing notoriety as the next untapped asset class. “A lot of guys are going to lose their shirt in the marina business,” Austin Cameron, owner and founder of VIP Marinas, told LoopNet. A lifelong boater and former competitive water skier, Cameron has been obsessed with the water since he was a child.

“All of my favorite memories revolve around water,” Cameron said. “I don’t remember preschool, I don’t remember kindergarten, but I sure as heck remember being on the boat.”

His ardor for the water has manifested in a thriving marina business. Cameron is the sole or part owner of 13 marinas in Texas, Oklahoma and Florida. And passion, Cameron insists, is crucial for success in the marina business.

“I have done well and made money in the marina space, but that’s because my wife and I, on Memorial Day weekend, are power washing boats and cleaning duck sh-- off of docks,” Cameron said. “This is not an office building; this is not an apartment complex — you’ve got to have a passion for it.”

Whether or not Cameron’s perspective is universally accurate, it’s certainly clear that there are a number of unique aspects to the marina business that novice investors should be aware of prior to entering the space. Over the course of this article and its companion piece, LoopNet will cover some of the most important things you need to know before investing in marinas.

While the marina industry’s status as the hot new asset type may seem surprising, it could be argued that its newfound distinction is long overdue. As Graziotto observed, “If you think about marinas, they’ve been around for hundreds of years — before rail, before cars — for them just now to become kind of institutionalized is really fascinating.”

“One thing that I think is a misunderstanding is that it’s not a passive investment. You are buying an operating business.”

Raymond Graziotto, CEO, Seven Kings Holdings

A marina is unlike any other real estate asset. As Cameron pithily observed, “Office buildings don’t float.”

The aquatic characteristic of marinas, and the capital expenditures that come with it, is something we’ll get to in part two of this series. But first, let’s define what we’re talking about when we talk about marinas.

Types of Marinas
Marinas can be roughly categorized into two primary types: wet slips and dry docks. Wet slips are marinas where the boats are partially submerged in the water, while dry docks serve as storage facilities for boats out of the water. Dry docks are most commonly utilized in areas of the country where inclement weather during the winter season necessitates removing boats from wet slips. Many marinas, particularly in the northern portion of the United States, have both wet slip and dry dock facilities to ensure a steady income stream throughout the year.

For the purposes of this article, we will primarily consider wet slip marinas, either with or without a dry dock component.

Wet slip marinas can be further delineated into two categories: saltwater and freshwater. Saltwater marinas are located in coastal areas along oceans, gulfs or bays, while freshwater marinas can be found along lakes, rivers and canals throughout the country.

For nearly all marinas, the principal source of revenue is derived from rental income paid by customers to store their boats in either a wet slip or dry dock. But that’s typically not the only revenue generator at play. As Graziotto said, “One thing that I think is a misunderstanding is that it’s not a passive investment. You are buying an operating business.”

Marinas As an Operating Businesses
This notion begs the question, what exactly are you buying when you purchase a marina? As with most issues pertaining to marinas, the short answer is: it’s complicated — as well as highly variable, depending on the specific marina you’re purchasing.

Let’s suppose that you’re buying a wet slip marina. That marina may also have a dry dock component. But it also may not. Graziotto noted that nascent investors may want to be wary of dry dock facilities, which require the operation of lifts. Because dry docks involve moving multi-ton boats around, they represent “a much more robust operating business” than wet slip-only marinas, where boat operators park their own vessels. “And that means everything that comes with it: complexity, insurance risk, operational risk, liability; lots of potential moving parts,” he said.

As for the wet slip facility, you’re obviously buying the docks themselves, but not necessarily the submerged (or bottom) land they float above or are built upon. In many instances, according to Graziotto, marinas represent “fee simple” purchases, i.e., full ownership of a real estate asset that encompasses both the improved property and the land upon which it resides. That’s not always the case, though.

“Most often, in places like Florida, the bottom land is owned by the state, but you have a perpetual use right for the submerged land lease to use the bottom. And while those [contracts] have expiration dates, typically they’re perfunctorily renewed,” Graziotto said.

But even if such renewals are relatively routine, it’s important to understand who owns the submerged land, as that ownership usually comes with (often costly) maintenance responsibilities, such as dredging.

Ancillary Businesses
In addition to the rental income from boat storage, Graziotto said that many marinas will often have “ship stores,” which sell boating supplies; fueling stations; mechanical services/boat maintenance and boat sales. Cameron added that some of his marinas also offer boat rentals, as well as boat clubs, which essentially act as subscription-based boat rental services.

Cameron observed that if you attend a conference of marina owners, half of them will insist on providing maintenance and repair services and assert that it’s the most profitable part of their business, while the other half will contend that marina owners should steer clear of directly managing such resources.

Graziotto said that he mostly avoided getting involved in the maintenance/repair space at the marinas he owned. “We never thought it made sense to try to be an expert in turning wrenches. We were more interested in finding people that did that well and providing them the opportunity and then taking a piece of the action through rent or rent and a percentage of sales.”

As for providing fuel on-site, Graziotto felt that, due to environmental regulations, it is important for marina owners to manage that particular aspect of the business directly. “We don’t really feel comfortable farming that out because if they make a mistake and you aren’t watching closely it becomes your problem,” he said.

Both Cameron and Graziotto acknowledged that ship stores didn’t generate much in the way of profits, but were fairly essential amenities that needed to be provided either directly or indirectly via a third-party operator. Nissley noted that many institutional players take the approach of renting nearly all of the ancillary businesses to third-party operators, as REITs, which were only recently approved to enter the marina space, are prohibited from deriving more than 10% of their revenue from non-rental income.

Nissley also said that it’s “the noise” of all these separate revenue streams that can make marinas a challenging investment, and for a long time dissuaded institutional investors from entering the space. “The revenue streams are all different; you don’t just throw them together and put a cap rate on it,” he said.

Cameron noted that he takes a marina-specific approach to supplementary revenue streams such as boat sales, rentals and clubs. In some locations, he manages those businesses himself, while at other marinas he leases space to outside operators. The key, he said, is that if you are going to control the business directly, you need to be prepared to engage with it on a regular and routine basis.

In general, Cameron emphasized the importance of personal attention, as well as understanding your market and your customer base. After years of being solely focused on lake marinas, he recently purchased his first saltwater marina in Florida, but only after procuring a 60-foot yacht, charmingly named “Corporate Office,” and exploring the coast of Florida personally.

With that same philosophy in mind, Cameron also emphasized the importance of prospective investors possessing or acquiring direct knowledge of the specific kind of marina they’re purchasing — even if it’s not their first investment in the space.

Unlike office or retail properties, which are reasonably similar in terms of operational requirements from market to market, “a wet slip saltwater marina and a wet slip freshwater marina are as similar as an apple and an orange; and a dry stack saltwater marina is as equivalent to a wet slip freshwater marina as an apple and a barbecue pit,” Cameron said.

In part two of this series, LoopNet will consider the advantages of investing in marinas relative to other real estate assets, while part three will focus on the challenges of the sector and uncover opportunities for smaller independent investors.