Identifying Viable Marina Financing Options During A Recession
Monday, February 6, 2012 at 2:42PM
Dennis Kissman in 2010, Financial Planning, Industry Articles, Management, Profit Centers, Valuation

This article, by Dennis Kissman, was published in Marina Dock Age –  December 2010. 

In the next couple of years, many marina owners around the country are going to face some serious challenges when balloon payments on their mortgages are coming due, and there are very few, if any, lenders that will refinance those loans.  The more one knows about these finances, the better one will be able to cope with the problems. 

To help marinas navigate through these troubled waters, the following paragraphs present one interpretation of how to deal with these financial problems based on the real-life experiences of marinas working with those in the lending business.

The situation

The first question marina owners ask about refinancing is: “Who’s lending?”  This is not an easy question to answer.  It appears that the days of the big financial institutions with large marina portfolios are gone.  The best bet for marinas and boatyards is to deal with local or regional banks where decisions are made locally, and these finance institutions are familiar with the local economy and population demographics. 

In dealing with local bankers whom you have known for years or even have your loan currently with, there is no guarantee that the institution will renew or lend the money.  The days of “your friendly banker” where decisions were made based on relationships and a history of doing business with the bank have disappeared.  Today’s local banks are going to base their lending decisions on verifiable historical financial information.  In other words, the banks want to see a good cash flow history from the marina’s core profit centers.  If there’s one asset that banks deem as positive in these transactions, its excess land.  Even though the land has probably decreased in value in recent years, this property can help collateralize a loan.

Speaking of collateralizing the loan, the borrower should be prepared to give a personal guarantee.  Local lenders, including banks, are going to seek everything from one’s first-born child to one’s mother-in-law and everything in between as collateral for the loan.  In marina lending negotiations, it may be very difficult to get out of a personal guarantee unless one has something of much greater value and more secure than the marina to pledge as collateral.

In today’s financial environment, lenders are not going to take any risks.  When that is the case, marinas would usually expect a very low interest rate, following the dictum: “No risk, no reward.”  Unfortunately, this is not the case in today’s lending environment.  Marinas and boatyards should expect to pay around six to seven percent, maybe even higher if the lender is concerned about the collateral to secure the loan.

The viable factors

As if the interest rate is not bad enough, the days of 80 percent loan to value are gone.  They are now down to 60 to 70 percent.  This may not sound like much but it really is as the following example illustrates. 

For this example, assume that an appraiser valued the marina at $5 million five years ago, and the owner secured an 80 percent loan or $4 million at seven percent interest.  The loan was amortized over 20 years with a five-year balloon payment.  In this scenario, monthly payments would have been $31,012.  Over the five years, the marina would have paid down the principal by $549,738.  This means the existing loan balance is $3,450,262 that needs to be paid off or refinanced.  What happens when the marina seeks to refinance the existing loan balance with a new lender?

Because of a decline in the economy and the fact that marina businesses are suffering, the same appraiser now values the marina at $4.5 million based on the marina’s verifiable reported income.  This is a 10 percent decline, but not an unrealistic scenario.  Applying the aggressive 70 percent loan to value requirement, the maximum loan amount the marina could obtain would be $3,150,000.  Because the current loan balance is $3,450,262, there is a shortfall of $300,262 that will have to be made up somehow.

Assuming all refinance conditions are met, the marina will need to write a check for $300,262 or current lender could foreclose on the marina.  This is neither a good scenario nor an uncommon phenomenon.  Many marina owners are facing this situation in the near future and to ignore it thinking the economy and the marina business will rebound in the next year or two is unrealistic.  Why?  Because marinas rely on someone’s leisure time and discretionary dollars and neither are in plentiful supply in this economy.  Moreover, when the economy does turn around these components of the economy will be the last to rebound.  One must also consider the seasonally of the marina business, which could even prolong a recovery longer than the rebound in the general economy.

Take action

Although this is a distressed lending environment, it is better to plan for the worse and be prepared to take advantage of opportunities if it is not as bad as predicted.

Right now, there are not a lot of finance options in the marketplace, and the marina’s best bet is to work with its current lender.  The sooner one starts the process, knows the lender’s expectation and reviews its available options, the better that marina will be able to navigate through these troubling times.

The first thing one should do is avoid blaming one’s self for this situation.  There are many good marina operators that are having financial problems.  Lenders realize this, and the last thing they want is a marina property and especially a business they know nothing about.  Although a lender’s first reaction may be an emphatic “NO” to one’s lending request, marinas that are persistent and professional in their approaches will eventually find that most lenders will work with them.  This is especially true if the borrower has always met obligations in the past. 

In working with marinas on loans and refinancing, lenders may engage consulting firms such as ours to come in and analyze business practices.  Marinas shouldn’t view this as an attack on their business skills.  It’s an opportunity for the lender to receive an unbiased evaluation of the marina business and in the end; this information could help secure a loan modification.

The second step marina should take is write-up a detailed plan of one’s current financial situation and how to get through this crisis.  Marinas should sit down with their lender before they start falling behind on their mortgages or any other financial obligation.  Marinas should come up with a realistic monthly mortgage payment that they can afford.  The greater the lender’s comfort level, the more receptive he will be to accepting the financial plan and reducing the monthly loan payment.

One word of caution: Be leery if someone wants you to pay fees up front to get you a new loan.  These arrangements usually do not work out and could put you in a crisis situation as deadlines to refinance approach.

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.

Article originally appeared on marinamanagement (http://marinamanagement.com/).
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