So you’ve passed the litmus test that was Part 1.  This is what you want.  I hope you’re already in the marina management/ownership industry because this is a business and you need knowledge of the business to run it better than the last owner.  The clothes fit, but do they look good on you?  Will you take the time to look in the mirror?  That’s what this blog is all about.

Reducing Risk

If you were to buy an apartment building or a shopping center, you’d be concerned with risk and return on investment, right?  Marinas are another form of real estate so your return on investment should be considered if you divorce yourself from the emotionality of owning waterfront real estate.

So let me ask you this.  What return on investment should you get?  If I suggested 10 percent, 20 percent or 30 percent, would one of those numbers be right?  Well, I have a little surprise for you.  Whatever your return on investment is, forget about it.  Forget about the numbers I suggest.  It’s not that your estimate or mine is accurate or even approximate.  What I’m suggesting is that you cannot calculate your return on investment if you don’t know the risk.  If I said to you, here’s an apartment that’s 100 percent leased at market and if you bought it, you’d get 7 percent on your money, would you need a higher return for the vacant building around the block?  Of course.  As Mr. Obama would say, “you’ve got more skin in the game”.  If you can’t quantify risk you can’t quantify return.

How do we quantify and reduce risk?  There are only two ways.  Do your homework.  Then let others do the rest.  By that I mean take the time to make sure that any numbers you project are market based.  Then hire marina professionals that can help you determine if there are any investment landmines or floating mines that can destroy your return on investment.  As you can guess, I’ve seen people rush into a buy without realizing how much money had to be reinvested into the marina just to get it partially occupied.  More than one marina buyer has come to realize that not getting a Phase 1 environmental site assessment was a very expensive mistake.  I even know one marina buyer who bought a marina based on a certain slip count only to have the government rule against him in court, reducing his slip count by 43 percent.  The extra slips were not legal.  The same advice applies to restarting the marina business.  I could go on, but the point is made.

When in Doubt Farm It Out

Buying a marina without a condition survey, a Phase 1 environmental site assessment, the advice of a marina manager (if you are not already one), a title report or an appraisal increases your risk.  If it were me, I’d build these professionals into the contract.  Hire them during the contract study period.  Maybe the bank has a current appraisal you can get a copy of (it would have been prudent on their part so they don’t undersell their new asset).  I certainly hope they have a Phase 1 environment site assessment in their file… don’t repossess without it!  Ask for a copy.  Ask for a condition report too (it’s unlikely that they have it, but it doesn’t hurt to ask).

If the easy way doesn’t work it would still be a good investment to write the check for these types of services.  Here’s the logic:

• A dock condition report will help you determine the condition of anything that’s below the water.  It will give you a really good picture when you will need to replace docks.  Any decent marine engineering firm doing the condition report can also give you costs to replace the docks too.  You wouldn’t want to face a several hundred thousand dollar bill or more in the first year or two of restarting a business, would you?
• No one should have to inherit environmental liability when a Phase 1 would have saved them from it.  If you have a problem, I seriously doubt you’ll ever be able to sell your marina until it’s cured and that’s where finding out up front if there’s a problem is so important.  Also, most firms that can do a Phase 1 can give you a wetlands delineation and soil analysis so you can quickly get a handle on whether any plans you may have for expanding the buildings are possible or just a pipe dream.
• A marina manager can give you perspective you haven’t considered.  What can you do differently that the last owner did not?  How can you get boaters back to your facility in the shortest amount of time?  How can you minimize costs while you carry the asset?  Most importantly, a marina manager can tell you if your income and expense projections are realistic or optimistic.  If you don’t already have the knowledge and experience, you’re better off going to the casino.  At least there are books that can tell you the odds of each game.
• Get a title report before you buy.  Waterfront land has lots of potential title problems.  Are you buying just the uplands or is part of the basin included?  If you buy the basin, do you risk inheriting an environmental problem?  Just what exactly are you buying?
• An appraisal can be used lots of ways that will more than pay for its cost.  The marina may be available at or near what was loaned but that may have nothing to do with its real market value.  Show the bank an appraisal and you just might get the purchase price lowered.  If so, add up how much interest you just saved on the difference (if you finance the purchase) or how you’ve improved your potential return on investment.  You can use the appraisal to try to obtain a tax appeal reduction by the assessor just by giving him/her a copy.  I’ve blogged at length about that topic in Appraisal Matters; just see the Tax Appeals category.  Lastly, the appraisal will tell you whether you’re making a wise investment or a foolish one.

Doing Your Homework

Third-party professionals are invaluable but remember it’s your gold.  You are the captain – you can sail smooth seas, weather stormy waters or go down with your ship.  It your investment and your responsibility.  In Part 3 we’ll explore the things you should do to reduce risk and help you decide if this is the right investment for your money.