Investing in Marinas, Part 2

This three-part series provides an introduction to the marina sector. Part one offered an overview of these assets, while part two, presented below, focuses on the relative attributes of owning and operating a marina. Part three covers the sector’s critical challenges, as well as potential opportunities for smaller independent investors.

Austin Cameron, owner and founder of VIP Marinas, didn’t begin his real estate career investing in marinas. Alongside a lifelong passion for boating and water sports, Cameron built a thriving business purchasing, renovating and flipping mobile homes. Then the Great Recession happened.

“All of a sudden we went from selling 30 homes a month, to selling one home every other month,” Cameron told LoopNet.

On top of his financial woes, Cameron was navigating the loss of both of his parents. These dual calamities inspired Cameron to reevaluate both his life and his career. “I was thinking maybe I’ll move to a beach in Puerto Rico, buy a couple of jet skis and rent them out— that was literally one of my plans,” Cameron said with a laugh.

But then he recalled some advice his mother gave him before she died. “My mom always said, ‘do something you love.’”

With that counsel in mind, Cameron purchased his first marina, the facility that would later inspire his company’s name, VIP Marinas, on Lake Travis in Texas. Today, Cameron is the sole or part owner of 13 marinas in Texas, Oklahoma and Florida.

Like Cameron, Raymond Graziotto — president and CEO of Seven Kings Holdings and former CEO of Loggerhead Marina — came to the marina space almost by accident. When LoopNet asked Graziotto what initially interested him about the marina space, he replied pithily, “We weren’t interested in it.”

After a career spent acquiring and developing multifamily properties, Graziotto bought his first marina as part of a larger land acquisition for a planned multifamily development. When he tried to hire a management company to operate the facility, he found himself underwhelmed by the available options.

“So, we hired a salty-dog kind of guy that was in the business, and we learned from him the way the business worked, and he learned from us what was missing from it at the time, from my view, which was quality management, customer service, rules and procedures and best practices. And we spent the next couple of years just trying to figure it out in a more professional, institutional way,” Graziotto said.

In the 25 years or so since Graziotto bought his first marina, or even in the dozen years since Cameron acquired his initial aquatic asset, marina ownership has indeed become more institutionalized.

Institutional investors have come to understand some of the unique attributes marinas possess, as well as how to avoid or ameliorate the challenges that can make these assets more intimidating for investors than many of their landlocked brethren. But while the institutional players may have taken more of an interest in the space, that doesn’t mean opportunities don’t still exist for smaller, independent investors.

As Michael Nissley, executive managing director at Colliers International, told LoopNet, “For the foreseeable future there will be opportunities [for smaller investors] to own marinas that are either in tertiary markets or smaller marinas that the institutional buyers aren’t going to be focused on at the moment. I think there’s still that gap for quite a while.”

Based on conversations with several industry experts, LoopNet identified four primary benefits of investing in marinas:

• Returns.
• Limited competition.
• Waterfront locations.
• Ambiance and enjoyment.

Returns

“There’s a lot of ways to make money in the business.”

Michael Nissley, executive managing director, Colliers International When asked about the advantages of investing in marinas, Graziotto’s first response was rather succinct. “Certainly returns,” he said. “We learned that you could pretty consistently raise rent.”

Nissley echoed this view. “When the occupancy’s at 90%, it’s an automatic bump in your rate … when it’s 95%, it’s time to raise it again.”

In Graziotto’s experience, those returns were fairly consistent and durable, even compared to multifamily assets. He characterized the returns as “steady and predictable and without very much retreat, even if the economy got bad.”

Nissley also emphasized the diversity of revenue opportunities that exist in the space, from fuel services to boat sales. “There’s a lot of ways to make money in the business,” he said.

What do “good returns” look like in the marina business? When asked about current cap rates for the sector, LoopNet could practically hear Cameron shaking his head through the phone. “I don’t even really know how to answer that,” he said, noting that cap rates have, in his view, compressed wildly in the past year.

Graziotto noted that cap rates are certainly being compressed, but it could be difficult to ascertain where the market stands today because “you know, everybody lies.”

Nonetheless, Graziotto said the range in cap rates seems to be quite wide at the moment, with premium locations — urban area, deep water inlet — trading below 5%, or a “five cap,” while “a dot on a map somewhere” along a lake could still be trading at a 12% rate.

Nissley noted that while the going-in cap rate on many purchases may hover between 6% and 8%, there’s often a value-add opportunity for the purchaser to double that return in the near-term, provided they have the capital available to make improvements to the property, such as redoing the site plan, expanding the number of slips, adding a dry dock component or even merely implementing computerized record keeping and payment systems.

Limited Competition
Graziotto observed that one of the reasons for cap rate compression in the marina space is the exceptional difficulty posed by developing new marinas. Graziotto felt that this barrier to entry for competitors was one of the most important advantages the space offered.

“In the apartment business, by contrast, seemingly we would build a deal in a market and then three other deals would be built and just cream us in terms of occupancy and rate. And that’s really hard to do in the marina business,” he said. “They just don’t pop up easily.”

Because of the dearth of undeveloped waterfront land, as well as the extensive environmental considerations and lengthy municipal approval process, it’s distinctly challenging to develop new marinas. Accordingly, Graziotto suggested that development was probably not an endeavor suited to novice marina investors.

This lack of competition makes marinas an uncommonly enduring investment opportunity. As Graziotto put it, “If you have a location that’s working today, it’s likely going to be working 50 years from now.”

Waterfront Locations

“The underlying value [of your investment] is not just that operating business, but the real estate.”

Raymond Graziotto, president and CEO, Seven Kings Holdings While a ground-up marina project may be a dicey proposition for most investors, the facilities’ generally picturesque waterfront locations do foster other development opportunities, which is another unique attribute of the sector.

“Oftentimes there are opportunities for adding a residential component to the marina that would enhance the usage of the marina and also enhance the value of the overall project,” Nissley said.

As LoopNet covered in part one of this series, part of the inherent complexity of investing in marinas is that you’re not just purchasing a real estate asset, but also acquiring an operating business. While that aspect of investing in marinas certainly presents numerous challenges, it also enhances the overall potential of your investment. As Graziotto noted, “the underlying value [of your investment] is not just that operating business, but the real estate.”

In other words, even if the marina business ultimately fails, you’re still in possession of a potentially valuable piece of waterfront real estate, which could eventually be partially or entirely rezoned and converted to other uses, such a residential or retail.

Nissley said that new investors can often take advantage of the inherent desirability of a marina’s waterfront location and add value to their acquisition by working closely with local municipalities to affect zoning or entitlement changes. Those modifications could enable a new owner to expand the marina or add ancillary elements to the asset, such as a residential or retail component. These are the kinds of alterations that the previous mom and pop operator may have lacked the capital, political connections or general wherewithal to facilitate. “Generally, when there’s a sophisticated buyer with adequate capital looking at a mom and pop acquisition, they see a lot of possibilities,” he said.

Ambiance and Enjoyment
For Cameron, the advantages of investing in marinas are more qualitative than quantitative. “I think you can make a lot more money in other segments of the market with less effort. But the advantage of the marina space, all day long, is the enjoyment and fun of being in the business, if it’s a passion for you.”

Graziotto also remarked upon the unique satisfaction that marina owners can derive from these assets. “This may sound almost childish,” he said, somewhat hesitantly. “But my customers in the marina space generally have a smile on their face every day. They’re there to have fun.”

He added that the customers’ positive attitude is an important advantage when it comes to retaining and attracting employees, which is particularly beneficial in today’s job market. “Customers are customers, but when they’re in a good mood it just makes everybody’s life better,” he said.

This feature stands in stark contrast to employee and customer interactions in the multifamily sector. “Nine times out of 10, the interaction with the management of an apartment complex is only when things are not good,” Graziotto said.

Cameron also appreciates the significant role that marinas can play in the lives of his customers. “At our marinas we’ve had people get married, we’ve had people propose, we’ve had people spread their loved one’s ashes.”

He added that it was this facet of the marina business that inspired his company’s vision statement. “Our vision as a company is to make destination marinas where people create positive memories that last a lifetime,” he said.

In the third and final part of LoopNet’s Investing in Marinas series, we’ll cover the challenges posed by this asset class, as well as the opportunities that exist for smaller independent investors.