Investing in Marinas, Part 3

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

At the outset of LoopNet’s conversation with Austin Cameron, owner and founder of VIP Marinas, he offered a word of warning.

“This article may go differently than how you expected.”

Cameron was referring to his somewhat pessimistic take on the influx of investment in the marina sector. As detailed in the previous installments of this series, Cameron fervently believes that a passion for the marina business is an essential component of success in the space.

“I’ve seen a lot of people that buy a marina, and then I buy it two years later because they’re fatigued,” he told LoopNet. “If you’re only doing it for money, you better get out of the business.”

However, Michael Nissley, executive managing director at Colliers International, didn’t entirely concur with Cameron’s perspective. In fact, Nissley felt that an outsider’s perspective could add value when it came to investing in marinas.

“There’s an opportunity for new capital, and for new ideas to come in there and seize the moment. That’s what I like most about the industry — and usually the locations are good,” Nissley said.

Of the three experts LoopNet spoke with, Raymond Graziotto — president and CEO of Seven Kings Holdings and former CEO of Loggerhead Marina — offered perhaps the most balanced view. He felt there were still opportunities for novice investors interested in marinas, but he still saw the value in experience, particularly given the complexities of this particular asset type. “If you’re an investor, my recommendation would be that you invest with someone else that’s done it before … because there’s a lot more to it than meets the eye,” Graziotto said.

Based on conversations with investors and brokerage professionals that are well-versed in the sector, LoopNet identified the following primary challenges to investing in marinas:

• Operating business concerns.
• Maintenance, capital expenditures and insurance.
• Poor record-keeping.
• Environmental regulations and insurance.
• Financing issues.

Operating Business Concerns
Graziotto felt that the very nature of a marina, that it’s both a real estate asset and an operating business, was the biggest challenge that investors face.

“The tough part of the business is the fact that it’s an operating business. You’ve got massive forklifts moving things around … you’ve got massive regulations that you have to follow and be smart about,” he said.

According to Graziotto, finding the right talent to help you manage that operating business will be an essential aspect of any marina investor’s success. He noted that as the business has become increasing institutionalized, there is a greater concentration of professional talent in the space than there was when he first began investing in marinas more than 30 years ago.

“When I first started out, we either had to find somebody and train them ourselves, or maybe we could find somebody that knew the business, but normally they had terrible habits,” he said.

Graziotto said that employee retention can still be difficult in the marina sector, particularly in locales where the marina closes during the winter. It’s one thing to be the custodian of an operating business, but it’s an additional concern when that operating business needs to close and reopen every six months.

Cameron said that investors also need to consider the symbiotic relationship they’ll now have with the boating industry, which has waxed and waned in popularity over the years.

“Right now, the boating industry’s growing big time, but it hasn’t always been this way. Three years ago, five years ago, the boating industry was shrinking,” he said.

Maintenance and Capital Expenditures

“There’s always something rusting or needing to be replaced. It’s a never ending, ongoing part of the business.”

Raymond Graziotto, president and CEO, Seven Kings Holdings “The care and custody of dealing with floating docks, or even fixed docks, is a full-time job,” Graziotto said. “It’s something that you have to be thoughtful about and you have to have capital reserves for.”

Graziotto continued. “There’s always something rusting or needing to be replaced. It’s a never ending, ongoing part of the business, which is very different than owning a hotel, or an apartment building or an office building. Stuff happens, there’s always maintenance in any of those spaces, but when you’re thinking about putting a dock in the water that’s going to sit there and ride up and down on the tide, and then it’s [sometimes] in salt water on top of that, subject to wind and waves and rain … no matter how well they’re built, you’re going to always be dealing with something.”

Regular maintenance involves issues like corrosion and rusting of the docks, as well as dredging, which could be an annual expense or may only be required every few years, Nissley noted. As discussed in part one of this series, it’s also important to understand who has responsibility for dredging, as this varies depending on whether the submerged land is held by the marina owner or another entity.

Nissley added that some capital expenditures may only present themselves if a new owner attempts to make significant improvements to the property. “When you’re inheriting an old marina, it could have septic tanks, or it could have underground gas tanks that were allowed a long time ago,” he said. “There are a lot of things you need to look at that weren’t a problem in the past, and if they’re grandfathered in, might be okay for the time being, but when you’re trying to get a new loan or you’re trying to redevelop or you start digging up the ground, you could end up getting in a lot of trouble and in a deep financial hole that you can’t get out of.”

Because of both the regular maintenance costs, as well as the possibility of more significant capital expenditures, Cameron felt that “marinas require more financial discipline than any other asset around.”

Cameron also observed that it can be difficult for novice investors to discern the difference between ongoing maintenance and true capital expenditures. He said that the records of some marina owners can even be intentionally misleading in this regard.

Poor Record-Keeping
Speaking of which, Cameron warned that some marina owners will obfuscate ongoing maintenance costs by classifying them as one-time capital expenditures. As an example, he said an owner might classify a $50,000 expense for new pilings as a capital improvement, but if the pilings require replacement every two to three years, in actuality that expenditure represents an ongoing maintenance cost.

For this reason, he suggested that an investor should not rely on the marina’s profit and loss statement to determine the cap rate and corresponding value of the asset. He encouraged prospective investors to look at several years of financial statements for the asset, in order to truly distinguish between capital costs and routine maintenance liabilities.

Of course, Nissley noted that it might be difficult for investors to get a clear understanding of a marina’s profit and loss statements because some mom and pop owners keep incomplete records. This can be particularly problematic with a marina asset, given the diversity of income streams that are often in play.

On the other hand, Nissley said that cleaning up that “noise” and establishing more efficient recordkeeping practices represents an opportunity for a new owner to add value to the asset. “Just doing that alone with a mom and pop creates value — you don’t need to grow the revenue or anything — just cleaning up [the books] creates more efficient underwriting.”

Environmental Regulations and Insurance

“The microscope is on the water, everywhere in the U.S.”

Michael Nissley, executive managing director, Colliers International One of the biggest issues marina owners contend with is, undoubtedly, environmental regulations.

“The microscope is on the water, everywhere in the U.S.,” Nissley said.

As environmental regulations around marinas have become more stringent, that’s created new costs for owners. New investors need to be mindful of the possibility that all of those regulations may not have been strictly adhered to by the prior owner.

According to Nissley, in some instances, “you had some new regulation that got put in place, and the mom and pop couldn’t afford to do it the way it’s supposed to be done, and so they cut corners and pollution was a result.”

Nissley warned prospective purchasers to be on the lookout for issues such as fuel spills, bilge pumps that haven’t been dumped correctly or fuel lines that haven’t been maintained properly. “Back in the day, people just let everything go in the water,” he said.

Graziotto also mentioned endangered sea grass, hydrology and proper flushing as other environmental concerns that investors should be aware of. Without proper flushing, the water around the marina could become “stagnant and inhospitable.”

With regard to flooding, hurricanes and other climate change-related environmental issues, Nissley was relatively sanguine. He said that while hurricanes are certainly a potential issue in some regions, the “number of events that have happened seem to be acceptable from a risk perspective for the owner-operators.” As for flooding and rising sea levels, he observed that marinas are actually in a better position to contend with those events than most mainland properties.

Nonetheless, all of these environmental challenges do come with another more definitive cost: high insurance premiums. In fact, Nissley estimated that insurance costs, on average, are higher for marinas than any other real estate asset.

Financing Issues
Another significant obstacle to investing in marinas is a dearth of available financing. All of the experts LoopNet spoke with concurred that there are more financing options available now for marina investors than there ever have been, but those opportunities are still limited compared to most other asset classes.

According to Graziotto, financing in the marina space is “relationship- and balance-sheet-driven.” He said that investors should be prepared to contribute 40% to 50% equity towards most transactions, as well as be comfortable with making personal guarantees for any loans that are procured.

As far as opportunities for marina investment are concerned, it has to be said: it’s a great time to be a marina owner.

“I get a call per month trying to buy my whole portfolio,” Cameron said. “Right now is a great time to sell if you’re a seller.”

Nissley echoed this view. He said that the lack of financing options and institutional interest in the space made it “difficult in the past to exit as an independent marina owner.” But as both of those facets of the sector have evolved, the (literal) fortunes of independent marina owners have improved.

Of course, this has made investing in the space more challenging for smaller independent investors, though certainly not impossible. “It’s a lot harder to find deals today than it was 10 years ago,” Cameron said. Nonetheless, Cameron said the institutional entities are still avoiding smaller sites and facilities in more tertiary markets. He suggested that properties under $4 million dollars are still not on institutional investors’ radar.

Similarly, Nissley proposed that smaller investors should focus on “identifying lake marinas, river marinas and some ocean and Gulf of Mexico marinas that have been operated inefficiently or under-capitalized.”

As for whether marinas are a sound investment, Cameron, true to form, was dubious. He said that he thought it was a solid investment for individuals who wanted to be owner-operators, but he warned against the casual investor entering the space. “The marina space is not a space for investors to get into unless they’re incredibly savvy and they’re planning on working it day-to-day,” Cameron said.

Graziotto was more encouraging, but he still recommended that prospective investors consider partnering with someone who had prior experience in the sector. He also emphasized the necessity of putting together a team of engineers and environmental consultants who “live in the space” to help conduct due diligence.

Nissley agreed. “The things that an engineer’s going to know that you may not know could be the difference between success and failure,” he said.

Such caveats notwithstanding, Nissley felt that marinas were at a particularly fruitful moment in their history, one that intrepid investors may be able to benefit from. He said that there’s currently an opportunity for independent investors to act as a middleman between the mom and pop operations and the big institutional players.

That said, he acknowledged a truism that the readers of this series are probably now well aware of: when it comes to marinas, “it’s never just real simple.”