What is My Marina Worth?
By Tom Duncan

When it comes to establishing the market value of real estate, appraisers utilize three approaches to value, the cost approach, market approach and the income approach. The indicated value developed by these various approaches is correlated and weighed to arrive at the final value estimate of the market value of the property. But when it comes to marinas you might say that the three approaches to value are the seller's value, the buyer's value, and the lender's value. All the scientific methodology can be tossed out a window when you are playing in the marina arena.

But what really is the best way to value a marina? Marinas are unique animals within the real estate industry. There are so many facets to marinas it is honestly very difficult to put a value on the whole thing. Think about it, there is waterfront land (in 99.9 percent of the cases), there are many different businesses operating within a marina: new and/or used boat sales, trailer sales, motors (outboards to V-8's both gas and diesel), fuel sales, engine repair (which includes out drives and other transmissions), electronics sales and service, hull maintenance with both wood working and fiber glass, bait and tackle, retail sales of items rivaling a department store, food store, hardware store and sporting goods store, heavy equipment operations and maintenance, building maintenance, landscaping maintenance, just to mention a few. If that isn't enough to confuse you, why not throw in the submerged land or bottomland that may not be owned by the upland owner, but leased from some government agency. 
The sum total of all of the cash flows from the different "businesses" result in a bottom line number, usually referred to as the "NOI", net operating income. This is the revenue before income taxes and debt service (mortgage payments) sometimes called EBIT or earnings before interest and taxes. Depreciation is not a part of either number. 

The predictability or security of the cash flows from the various profit centers (we always hope they are profit centers) must be weighted or given values. The resultant total value is what the entire marina operation can be valued at. The predictability or risk associated with the type of mini-business going on is given a value based on its ability to be recurring, month after month, year after year. Those operations that are more at risk depending on the economy or other possible natural causes are given a value quite different from slip rents or dry storage rents. 

In valuing a marine property appraisers may use the capitalization approach. Among the different definitions of capitalization, simply put it is an interest rate percentage applied to a cash flow. In essence it is the answer to the question, "How much money would I have to invest at the particular capitalization rate (cap rate) to give me that cash flow?" For example, you have a cash flow of $10,000. Using a 10 percent capitalization rate what amount of money would you need to invest to give you $10,000 at the end of a year? Divide the $10,000 by .10, the decimal equivalent of 10 percent, and you get $100,000. The $10,000 capitalized at 10 percent is worth $100,000.The higher the capitalization rate, the lower the value. The same $10,000 capitalized at 14 percent equals $71,428.57. If you invested $71,428.57 for one year at 14 percent you would receive $10,000.

One argument to this method is that it assumes all cash transactions. With leverage, or a mortgage, you can calculate the cash-on-cash return of the hard cash you have in the property. The leveraged rate of return is different from the capitalization rate. This is a whole other finance lesson. Just be sure that the cap rate is at a comfortable spread over the cost of borrowed money. If your mortgage interest rate is 9 percent you may not be happy, as a buyer, buying that cash flow with a 10 percent cap rate. 
Where do you get the information to come up with the department cash flows? From the year-end income and expense statement. Buyers like to see this document and the ones for the two years before that. This three-year display shows any trend or major deviation from the norm. If there is a big difference from one year to the next, a good explanation should be forth coming. 

One of the places where most marina owners/sellers get into trouble is when they start talking about the "upside" the property has. The only value upside has is to the prospective buyer. What is upside? It is that magical value something has that hasn't been realized yet. If there is truly some upside to a property, it is a sales incentive that may add to the attractiveness of the property being offered for sale. I've seen many properties that were operated very efficiently but nothing could be done other than what was already there. No more slips or dry stack spaces could be added. Everything appeared to be maxed out. The only upside the property had was through rental rate increases. If you buy into that scenario you will soon be in serious trouble. If you lose occupancy due to economic reasons or other outside influences, or have to lower your rate structure because of new competition, you might not be able to meet your mortgage payments, and there is not much, if anything, you can do about it in the short term. 

Also, as a prospective seller, don't waste your time or the buyer's time, putting together a proforma of future operations using some far-out assumptions. Let a buyer make his own forecast based on the solid information you provide to him. 
Be prepared to show legitimate personal expenses or other items that truly do not belong in the income and expense statement as a new owner will experience once he begins to operate the business. Did you remember to put in the "reserves for future repairs or replacements?" If not, the buyer will and most certainly the lender will. Want to back-out the owner's pay, or family members' pay? Somebody has to get paid for working there. Deferred maintenance and other repairs a new owner will be faced with will subtract from the value of the marina. Get the property ready to be put on the market. Ask someone who is not at the marina every day to do a walk around and point out things to you. 

Let's look at one of the real problem areas, customer cash transactions. One of the joys of owning a business, and the cash register, is that you are in control. If you are overly aggressive in that area, be very careful. I hear owners bragging about all that tax-free money they have been getting. Well, when it doesn't get to the bottom line, it affects the value of the business, and that may be more than the amount of tax you would have paid on the money in the first place. Enough said. 

Perhaps the best advice for a marina owner who is thinking about selling is to be realistic about what they have. Too many good marinas are and have been on the market for too long. They are shop worn and start to reek with problems the longer they stay on the market. If your only motivation to sell is to get a high price, you may be doing yourself a great injustice. 

Your local real estate broker may know the area well and be outstanding at marketing residential property or other commercial properties, but just because he keeps his boat at the marina does not qualify him to sell your property. Your accountant may not have a handle on what it is worth either. Your marina is a very specialized property, which means you need a specialized marketing consultant or broker to get you started on the right foot to get the highest amount of money for your property in the shortest amount of time.

Tom Duncan is a broker\consultant with Maritime Real Estate Services, LLC in Palm Harbor, FL. He can be reached at tom@maritimere.com, and Ph: 727.424.5666.