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Monday
Jan302012

Realistic Marina Valuation Strategies

This article, by Dennis Kissman, was published in Marina Dock Age – March 1997

I recently had the opportunity to be one of three faculty members for an International Marina Institute course held in Tampa, Fla., on marina financing and appraising.  The topic was presented from three points of view.  First, the real estate appraiser’s perspective, which was presented by Mark Stroud of The Stroud Corp.  Then there was the lender’s perspective, presented by Harry Neiman of Nations Credit Commercial Corp.  And third was my mission to present a buyer’s and seller’s perspective. 

The course was well attended and represented a good cross section of interested people.  We had appraisers, lenders, prospective marina buyers and marina owners in attendance.  I must admit it was an education for me as well.  Even though we faculty members worked with each other on a one-on-one basis on specific projects, it was very enlightening to learn the amount of reliance that each of us places on the other’s work.

The faculty’s consensus was that, although each of us approached evaluating a particular marina a little differently, the income approach is the common thread that makes or breaks a deal.  This holds true whether you are a buyer, seller or an owner planning to refinance your marina.

The course format provided for some very lively discussions when we were going through the marina case study.  It was interesting to see the different directions that each participant came from, depending upon his or her background. 

Since the focus was on establishing a cap rate to be applied to the net operating income of the marina, the major question centered on what cap rate to apply.  In one example, I used a cap rate of 18 percent—and that got everybody’s attention.  The buyers and lenders were all smiles, while the marina owners and appraisers wondered what I was smoking.  Before, I had always talked in the 10 percent to 12 percent range, which in today’s market is probably where the rate should be to remain competitive with other types of investments.  Just as the 18 percent rate may sound ridiculous to a marina owner, similarly, the marina owner who believes his marina is worth selling at a 7 percent rate is just as ridiculous.

Here is an example using these extremes: For discussion purposes, say that a marina has a net operating income, or NOI, before depreciation, debt service and income taxes, of $500,000.  Apply a cap rate of 18 percent, and that marina should sell for a rounded $2,800,000.  This amount is obtained by dividing the rate into the NOI.  Using this same example, apply a cap rate of 7 percent and the marina should sell for $7,100,000.

Settle on the rate that seems to be a compromise—where marinas will actually transact at— and that is the 10 percent to 12 percent range.  So, using the 11 percent cap rate, the marina should sell for $4,500,000 in a competitive market.

The next obvious question: How many marinas sold at the 18 percent cap rate and how many at the 7 percent cap rate?  The answer: A few distressed properties held by lenders sold at the 18 percent cap rate.  No one, including myself, could think of one sale that took place at the 7 percent cap rate.  And that is my point.

Take the same example and assume that the marina is worth the $7,100,000 and buyers are willing to buy at an 11 percent cap rate.  The NOI would have to reflect $781,000, not the $500,000 now showing.

When will this industry wake up to the fact that you—marina owners—sit on a valuable asset, and the only reason you cannot get the true value out of the property is because you are afraid to charge customers what it is really worth.  Instead of just wishing you could get more than $7 million for your marina, why don’t you do something about it?

Dennis P. Kissman, president of Marina Management Services Inc. in Boca Raton, FL can be reached by phone at 561-338-5800 or via e-mail: dennis@marinamanagement.com.

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