This question, or a variant of it, is the single most frequently asked question that I receive.  I get it from marina owners, brokers and especially appraisers.  I suppose they see me as a wild west gunslinger with a gun full of magic bullets (please tell my wife that!).  So let me answer the question in the public forum. The first time I started speaking about marina cap rate on page 3 of my Valuation of Marinas book.

Capitalization rates vary widely, depending on the business and services offered at the marina and their interrelationships.  It is difficult to derive the correct capitalization rate by simply looking at the location of the facility and the condition of the improvements.  Such factors as the presence and types of utilities, water depth, siltation patterns, proximity to access points leading to the ocean, marina equipment included in the sale, and the relatively small number of potential investors in this market make it difficult for the appraiser to observe capitalization rate differences.  To discover the appropriate capitalization or discount rates for the subject, an appraiser needs to speak with participants in the market.

Let me elaborate.

One Size Does Not Fit All

Let’s play the analogy game.  Would you expect to see the same cap rates between a Class A, Class B or Class C office building?  How about between a high-end hotel chain, a low-end chain and those in the middle?  Did I forget a new regional mall, a community shopping center and a neighborhood (strip) shopping center?  Just like you would not expect one cap rate to fit each market tier, the same applies to marinas.  I’ve referred to marina market tiers in numerous other blogs, but for the sake of brevity, let’s call them the top third (top tier), middle third and bottom third.  The percentage may vary from market to market but the idea still holds.  Marina cap rates vary by market tier.

Sometimes It’s Location, Location, Location

So let’s say we narrow the list down to the top tier marinas.  Even with similar businesses, you can find a large difference in the cap rate.  I won’t mention names but one marina I know is situated at the end of a peninsula at the junction of the Atlantic Ocean and the bay across from a major city.  You can bet that the land of that marina is viewed as more prime than that high-end marina two miles away well within the bay.  As you might expect, there’s also a difference in water depth with the peninsula marina have deep water slips and the other one not so deep.  So here’s but one example of very similar marinas that are quite different due to their water locations and water depths.

Number and Timing of Sales Data

Not all marina markets have the same number of sales at any given time.  Some areas become “hot” and there’s lots of data you can use to derive a cap rate.  Eventually “hot” becomes “cold” so the data becomes dated and you don’t have much or anything to show what the current cap rate is.  Multiply this by the number of p0tential markets and submarkets in any given area and you see that coming up with a single cap rate or even a range is speculative.

Motivations and Highest & Best Use Perceptions

Permit me to unwrap my crystal ball yet again.  This time it’s not so cloudy because I’m looking into my past.  I’ve verified sales for court where the buyer’s perception of highest and best use and their motivation for buying were completely different from what was there at the time of sale.  The best example is one marina that sold to a boat repossession service.  No longer is it offering boats for rental to the public – the owner bought it to warehouse repossessed boats based on his gut instinct that the economy was going to implode.  Price per acre was more important than price per slip.  Although he waited a couple of years, I’m sure he’s laughing at us as the Brinks armored car pulls up to his office to make the daily deposit. Another great example is the mass of marinas with entitlement for mid- and high-rise condominiums that sold to developers/investors who had not a clue how to run a marina.  Unfortunately, it’s the banks that made those loans that are learning the most. A final example is the wave of workout resales and “50 cents on the dollar” hard money investors who will buy a marina at a cap rate that was virtually unheard of several years ago.  Those high cap rates reflect liquidating motivations and frequently the marketing period was too short to say they were exposed on the market for a reasonable length of time, as the definition of market value intones.

But You Don’t Appreciate Appreciation

Well, that’s true, but after all, what is appreciation as it applies to a marina?  Purchasers willing to buy a marina for a low cap rate and first year cash on cash return based on expected rapid appreciation are now gone.  The new financial realities of all real estate in this recession, not just marinas, is that deals have to be based on income in place.  Without appreciation expectations, the deals have to make financial sense.  That removes an entire class of purchaser from the market so comparing a sale two or three years ago that still included this expectation is not very useful.

Let’s Not Forget Listings

There are a lot of marinas available for sale, which is the same for just about all real estate today.  What kind of cap rates are being offered by buyers?  They sure are a lot higher than several years ago.  There is also a spread between the cap rate that a purchaser is willing to buy a marina for and what a seller is willing to sell it for.  This gap has widened because at the purchaser end of the spectrum, the investor willing to lower their cap rate due to appreciation is long since gone from the market.  At the seller’s end of the spectrum, there are listings with higher cap rates than a couple of years ago that reflect the owner’s financially greater need to sell.  Yet although they are generally moving in both directions, they are not moving to the same degree.  The gap has widened because investors need much higher first-year returns than two or three years ago… but owners have not matched this increase with a corresponding increase in their asking cap rates.  Still, asking cap rates are the first place to start when looking to get a handle on the “market” cap rates.  They’re quick and easy to get too via CoStar.com and LoopNet.com.

Conclusion

Now I don’t want to give you the impression that I can never answer your question with a single cap rate or a range of cap rates.  Far from it.  When we research cap rates, we research an entire market, but like I said above, the data gets old… sometimes more quickly than I would like.  Sometimes it’s hit or miss in different markets.  Sometimes there are virtually no sales data, just listings. Keep calling and asking me the question, though.  It might just be your lucky day!