Marinas have gotten a bad rap from financial industries.  Having dealt one-on-one with lots of lenders over the past two decades, the common viewpoint is that they’re recreational property in the same class as recreational vehicles, ski resorts and others.  Slowly all the major banks stopped lending on marinas.  So it’s been left in the hands of regional and local players, all of which do not carry a sizable number of loans in their portfolio.  I guess it’s hard to say “no” to a marina owner that has millions of dollars just sitting in your bank. Ironically, that’s good news for finance companies and hard money lenders that are more than happy to develop a portfolio of these loans.  Could it be that the small guys know something the big boys do not?  I think so.

Just the Facts, Jack

So let’s spell out the hard facts and dispel some myths in the process.  Yes, marinas are a lot like  multiple businesses.  They are more subject to swings in economic cycles because boats are expensive to buy and keep, making them vulnerable to changes in discretionary income.  It’s hard trying to restate the financial statements of the marina to exclude the owner’s personal investment in the business to show a true return on the real estate.  Lastly, it’s a weathering asset and has payroll expenses, so you cannot run it as cheaply as a triple-net office building investment or an apartment complex.

Myth #1 – Marinas are Riskier Loans

Lenders we have spoken with have a nearly universal consensus that marinas are recreational property and are therefore riskier loans than common property types like apartments or shopping centers.  That’s partly true and partly false.  They are recreational property.  Because they are a special purpose property with usually multiple operating business elements, they straddle the fence between business and real estate.  If you treat these loans the same as you do an industrial property or shopping center where the only third-party contractors that you hire are an appraiser and an environmental site assessment person (i.e. Phase 1’s) before making the loan, they are riskier loans.

Solution to Myth #1

At your disposal are several types of service providers that can reduce the risk of a loan to a level even less than that of a common property type.

• Marina management companies can help you determine if the marina is operating efficiently.  A simple annual review of the financial statements costs very little in relation to the benefits.
• Marina design and construction firms like Applied Technologies & Management can provide condition surveys for the docks and piling as well as a schedule of reserve allocations necessary to keep the facility running as well tomorrow as it is today.  Rarely do I see this done for other property types.
• Marina appraisers like myself can also examine financial statements and evaluate balance sheet ratio changes over time.  More importantly, for a low fee, you can hire us to do reviews of appraisals prior to lending that will help you determine if you are over-financing the property.

When you consider the second and third items above, you actually get more than you would with a common property type loan.  If you seek the help of specialists, I submit you can reduce your loan risk to lower than that of a common property type.

Myth #2 – Marina Loan Defaults = Big Losses

This depends on how you structure the loan.  If you use the experts I detail above that are available to help you prior to making the loan, you minimize your risk of loan default.  The ironic part is that since there are few marina lenders (mainly because the others believe this myth), you’re in a much better position to negotiate loan terms your way.  Interestingly enough, loans can be structured to be less risky than common property types because in most cases, you don’t have a competitor for which the marina owner can shop around with.  You can “almost” name your terms, especially if you want to hold only a small portfolio of marina loans.  There’s nothing wrong with being picky and choosy. If you treat it just like any other commercial property loan and don’t take the opportunity to use the consultants and marina talent out there, then I would agree that you have a higher risk of loss in an economic downturn.  The repossessed marinas where investors are looking to pay 50 cents on the dollar are loans where third-party contractors were not used.  I know because I bid on many of these bad assets appraisals.  Ironically, there are not that many of these loans out there because marina groups and others are buying the paper at a discount from banks when the owner starts falling behind on his/her payments.

Solution to Myth #2

I know of one loan portfolio of over 20 marina loans that used good third-party contractors and they are not experiencing a single default.  If you structure your loan using the help of experts, you shouldn’t have any fear of making a marina loan. The second part of this blog will cover lender risks and realities you should consider before making a marina loan commitment and some ideas on how to structure the marina loan.