The basic premise of a commercial real estate investment is this: a property is purchased, the space within it is leased to rent paying tenants, rental income is used to pay operating expenses and debt service, and any money left over is distributed to the property owner.
This business plan applies to many common CRE asset classes like office, retail, multifamily, industrial, hotel, and self-storage. It can also apply to less common asset classes like...a marina.
In this post, we are going to describe what a marina is, the risks, benefits, and economics of owning one, and we will make the case for why there is a compelling case for investment in this asset class.
Let's start with a simple definition.
What is a Marina?
It would be far too reductive to describe a marina as just a place where people rent boat slips. While they are a place to park boats, they are also gas stations, new boat dealerships, storage facilities, boat maintenance shops, boat rental locations, retail stores, and even restaurants.
Given the breadth of boat-related service offerings, it is more accurate to describe a marina as a diversified, full-service, boat-related business whose purpose is to cater to all of the needs of their boat owner clientele.
Benefits and Risks of Marina Ownership
The business case for marina ownership is this:
- Real Estate: By definition marinas must be on or near the water. As such, the real estate they occupy is often in a prime, difficult to replicate, location which can help to minimize the risk of investment for marina owners.
- Income Diversification: As described above, marinas benefit from multiple income streams that can help smooth out seasonal variations in traffic and income. For example, summer may be peak boat slip rental and restaurant season, but income from haul-out dry storage and maintenance in the winter can help marina owners get through slower seasons.
- Scarcity: Except for the most popular locations in places like New York and Florida, there may be only one or two marinas near a freshwater lake or ocean location. Less competition gives marina owners pricing power and increases the odds of keeping their slip occupancy high.
- Credit Risk: According to the United States Coast Guard, 69.8% of boaters have households with an annual income of $75,000 or more. So, they tend to be relatively affluent individuals who represent lower credit risk.
- Income: If managed efficiently, a marina investment should produce a steady stream of distribution income for its owners, providing a healthy return on investment.
But, a marina is not without risk. The benefits described above should be weighed against the following risks.
Risks of Marina Ownership
Some of the risks of marina ownership look awfully similar to a traditional commercial real estate asset. These include things like:
- Missed Payments and Collections: Boat slip tenants could make late rent payments or refuse to pay their rent at all. Just like a traditional property, it can take a lot of effort and resources to chase these payments, which can reduce the profitability of a property.
- Liability: Boating is an inherently risky activity and the risk is compounded with a marina's close proximity to the water. Slips/falls and boat crashes are two sources of potential liability. In addition, those that sell gasoline could be exposed to even higher risks.
In addition to these risks, there are also some that are unique to the marina industry. They include:
- Seasonality: Summer is the prime season for the marina business. The other seasons may experience significantly reduced sales volume and cash flow. Other lines of business could potentially mitigate this risk, but the bottom line is that boatyards can be a very seasonal small business.
- Natural Disasters: Because marinas involve waterfront property, they are particularly vulnerable to unforeseen weather events. In the summer, they could be damaged by a hurricane or flood. In the winter, marinas located in the north could be damaged by encroaching ice or particularly bad winter storms.
- Wear & Tear: This risk is particularly prevalent for salt water marina operators. The salt in the air and the wear and tear of tidal changes can be particularly damaging to the wet slip structures.
To mitigate these risks, marina owners needed to make sure they commit the needed capital to maintenance costs and follow all environmental regulations to ensure the safety of the marina for both human and aquatic residents.
Marina Ownership Economics
The economics of owning a marina are remarkably similar to those of traditional commercial real estate assets. Let's break down each of the major components.
The primary driver of marina income is the number of slips available for rental, the size of the boat(s) that the slips can accommodate (bigger are more expensive), and the rental rate for each. To supplement this income, smooth out seasonal variations, and cater to customer needs, marinas have complementary services like gasoline, repairs, maintenance, storage, boat sales, and food. Clearly, these "other" sources of income are also levered to the number of boats in the marina and the popularity of the location.
The operating expenses for a marina look very similar to those of an office building or multifamily property. They include property taxes, insurance, maintenance, legal fees, admin, utilities, and security.
Income less operating expenses results in the marina's net operating income.
Marina cap rates can vary widely by market, location, occupancy, profitability, class, and cash flow stability. According to the CCIM's industry snapshot on Marinas, cap rates can range from 8% - 14%, with averages in the 9.5% - 10.5% range. Of course, well-placed marinas with stable cash flow can trade below this range and those that have more uncertainty can trade above it. The higher average cap rates represent the incremental risk over traditionally stable CRE asset classes like multifamily.
Given the incremental risk and marina management expertise required, it is unlikely that a traditional retail bank lender will finance a one-off marina deal without special circumstances. Potential buyers will likely have to work with a brokerage or specialty lender that has specific expertise in the marina space. Even then, it is unlikely that the terms will be as generous as those for more traditional property types. Interest rates, down payments, reserve amounts, and debt service coverage requirements are likely to be higher while amortization periods are likely to be lower.
The key point about debt is that potential investors need to understand the mechanics of these financing facilities and model the potentially higher costs to ensure that the marina income is high enough to cover them.
If the economics work, marina ownership can be a profitable (and fun!) small business endeavor.
Summary & Conclusion
A marina may not be the first asset class that commercial real estate investors consider when searching for potential investment opportunities. But, the waterfront locations, diversity of income streams, relative scarcity, and high net worth clientele make for a compelling business case. However, those interested should weigh these benefits against the risks of seasonal income variations and exposure to potentially damaging weather events.
The economics of marina ownership are very similar to those of a traditional commercial real estate asset. For example, income drivers include the number of slips available for rent, the size of boat that those slips can accommodate, and the ancillary services provided. Operating expenses include property taxes, insurance, maintenance, security, and utilities. The resulting net operating income is "capped" at rates that typically range from 9.5% - 10.5%, but there can be significant variability based on the unique aspects of the property and the stability of its cash flow stream.
Financing a marina purchase may prove to be a challenge in the sense that there are a relatively small number of lenders who provide these types of facilities and the terms will likely be more expensive than a traditional CRE loan. Investors need to model these terms as part of their proforma to ensure that their return objectives can be met.If the economics work, those that decide to take the plunge into marina ownership may find that it is a unique, profitable, and fun investment.