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Thursday
Dec152011

Where to Turn for Marina Loans - 2001

This article, by Harry Nieman, was published in Marina Dock Age –  July 2001.  

In the last several months, Federal Reserve Chairman Alan Greenspan has lowered the Fed rate six times, by a half percent each time.  One would think that with the bank prime lending rate at around 7 percent, loan funds would be plentiful for any reasonable purpose, such as financing a marina.  You already may have learned that is not the case.

Banks are reluctant to finance marinas in a go-go market, and are now really in a rather cautious lending mode.  The uncertain economy has caused cash flows to be adversely affected in regular business enterprises well known to the banking community.  One can only imagine how banks react to marina loan applications.

STORAGE = STEADY INCOME

Very few lenders in the market place understand the marina business and its strengths and weaknesses.  Most believe it to be highly volatile because of the recreational aspect of boating and are unaware that the steady income generated from storage (wet or dry) is the heart and backbone of any marina’s success.

Most of this revenue flows to the bottom line, also known as NOI (net operating income) or EBITDA (earnings before interest, taxes [income taxes], depreciation, and amortization).  Much of this income will not be impaired in an economic downturn because the boats have to be housed somewhere.

Today, zoning and other ordinances generally prohibit storage in a non-commercial industrial location.  If the boat owner is unable to make his payment to the bank for his boat and the bank repossesses the boat, it is now the bank’s obligation to make storage payments to the marina owner.

Surely, before this happens though, the boat owner can find cheaper storage.  If the boat is small enough, the owner might take the boat out of the water or the dry stack building and store it on dry land himself.  This causes income to go down for the marina owner, and in a downturn or slow economy, fuel sales are reduced, as well as repair, service, and new boat sales.   

If disposable income is reduced, it has an effect on recreational expenditures (i.e.  Golf, vacation, etc.)  But most fishermen continue to use their boats because they enjoy the sport, own a boat anyway, and are limited to spending money on other diversions so they continue to support boating.

WHERE HAS All THE LENDING GONE?

Unfortunately, there currently is no one source of exclusive marina financing.  This was the niche that I operated within for seven years.  I pursued nothing other than marinas until my funding source decided to collapse the specialized recreational division and direct the general bank to merge this activity within the full banking network.  I was no longer able to provide expertise or support for this lending niche.  One other lending source attempted to create a successful marina lending operation, but it failed to establish any material significance in the marketplace and ultimately terminated its marina lending effort.

New marina owners, buyers, or sellers are relegated to dealing locally with the community lender, then educating each new loan officer of the merits of their requests.  It is important that the local lender support such businesses in the community, since it requires reciprocity for each to survive.

One major drawback may be that the local lender is not sufficiently capitalized to handle a large loan request of a multimillion-dollar marina.  Then the request must be searched regionally.  A borrower must convince the lender of the merits of the loan request, the safety, the return, or the advantages of other business generated by the marina which might benefit the lender (e.g. compensating balances, investment banking, vehicle loans and equipment financing, personal and consumer business, and so on).

To commence with the loan request, a prospective borrower must prepare the last three years’ financial statements reflecting items of income and expense on the marina.  The borrower must also provide an expense item to cover reserves for replacements (normally 2 percent of gross income) excluding any extraordinary income (boats, motors, trailers, etc.) and a charge for management of the marina which is normally 4 percent of gross income.  Also, including a current income and expense statement covering the previous 12 months is very important to reflect current activity and trends affecting the marina.

In the event additional income or expense is to be incurred during the ensuing 12-month period, a pro forma or projected statement should also be prepared.  A description of the property and all its components which is being offered as security to the lender is necessary so the lender understands what collateral is provided for the loan.  The borrower should provide a bio or resume authenticating his expertise in the marina industry or some support of business acumen along with a current personal financial statement.

THE NUMBERS

A loan request should be reasonable, based on the dollar amount of the loan and the cash flow of the marina to service the debt payment.  A loan to value ratio of 70 percent is adequate to produce a debt service ratio (DSRI of 1:30, which is a standard ratio for the average marina loan.  Certainly, some marinas will qualify for more or less based on certain circumstances.  A marina with a good record of accomplishment should qualify for a loan based on a 1:30 debt service ratio.  It must also provide the lender with the comfort of repayment of the debt.

To overburden a marina with more debt than described unduly burdens the owner/operator to provide efficient and consistent revenue not subject to any disruption reduction or variation.  A high level of debt puts the marina owner at risk and the lender in a defensive and sometimes litigious posture.

Many local lenders, particularly those in your community, may require personal guarantees and/or additional collateral to induce them to extend a marina loan.  However, once lenders have experience with marina loans they will then be willing to extend credit to marina owners/ operators for acquisitions, expansions, and renovations.

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