There is no larger question mark in the marina industry than when marina lending will return.  Never since the great depression have we had such an example of what happens when the lending dollars stop flowing.  So what are the signs that marina financing is coming back?

It seems that each recession is different, yet the answer to this question remains the same due to the nature of marinas.  There are some simple realities that marina borrowers just have to face.

• The major banks have been out of the marina financing business for many, many years and they’re not coming back until memories fade.  I don’t know why exactly but I suspect it has to do with problems that the big lenders had with auditing.  Banks make more from bank fees than from commercial loans.  There are just too many fish in the sea to bother with the minnows, I suppose.
• When a lender makes a marina loan they must hold the paper.  They must service it.  They can’t roll it over into more loans – the money is spent.  That’s because there is no secondary market for marina loans.  Not just now, but even during hot lending markets.  It’s not like you could get a billion dollars of marina loans and sell them to investors like residential mortgages are sold to Fannie Mae.  So what does that tell you?  That you just are not going to see banks holding a portfolio of marina loans.
• The marina industry just does not have same standards that other industries have.  There is no recent operating expense study like BOMA puts out for office buildings or Dollars and Cents in the shopping center industry.  Accounting is not standardized like you have in the hotel industry.  Bank underwriters and auditors have few tools to work with so the major lenders have extra headaches when they make specialty loans.
• Marinas are a business even though the vast majority of value is vested in the real estate.  Many lenders do not want to loan on businesses due to problems with underwriting and, especially, auditing.

Let History Be Your Guide

I find it interesting that the answer to the marina lending question has been out there for years.  It’s simple history.

• Since banks must hold their own marina loan paper, they just aren’t going to hold much of it.  This essentially chops up the pie into so many little slices that finding banks that will lend on marinas will remain really hard.  Once they have their small fill of marina loans, the door is closed to everyone else.
• Since banks can’t securitize the loans, they can’t roll the money over into multiple loans.  That means they can’t make points and other fees on multiple loans for the same amount of money.  Let’s say Bank A can take that $2 million and lend it on marinas.  They get one set of fees.  If they were to lend it on, say, shopping centers, they could securitize it by selling it to investors, get the $2 million back and lend it out again.  And again.  How many times can they do this in, say, the 5-year loan term of a typical marina loan?  That’s why securitization has been, and always will be, king.
• Back in August, I wrote a blog about marina marginal demand that can be equally well applied to marina lending.  Call it lending marginal demand.  In a  nutshell, bank lenders become interested in making marina loans when they can’t make enough loans via traditional property types.  Using the jargon of that blog article, first tier lenders (nationals) gobble up most of the major property type bank loans leaving little for the second tier (regionals) or third tier (local) lenders.  The second tier lender takes the rest and only when the third tier lender has no other options do they hop on the bandwagon.  Perhaps the lending environment becomes hot again so the second tier lenders move into making marina loans.  Still, their efforts will always be hampered by the lack of securitization for marina loans.
• So the economy starts to heat up again and manufacturers start generating cash.  What shall they do with it?  One avenue is the finance company.  At that point some old favorites might reappear or new finance companies come on board.  It’s possible that we might see a rebirth of the marina finance company… or not.  Certainly when a couple or more finance companies come into the market, that’s a big sign that lenders are coming back.
• Speaking of finance companies, some of them make their money on float.  They borrower money at a certain interest rate and lend it at a higher rate.  The reason this type of finance company is no longer in the market is that their original financing source dried up.  If you can’t borrow you can’t lend.  So when you start seeing finance companies springing up in other industries, you’ll know that, for the most part, someone is floor planning them so they can loan it back out again.  Keep your eye out for new finance companies in other industries.  You’ll know money is starting to flow when you see new market entrants.
• Marinas are considered operating businesses by lenders and rightly so.  So when you start to see more financing sources for other operating real estate based business like golf courses or motels, marinas should not be far behind.
• Anyone in the industry will tell you that boats rely on discretionary income and the ability to turn home equity into dollars.  When you start seeing specialty lending on RVs or other types of recreational property, you can bet the demand for boating will go up.  That signals that the financing noose is loosening up.  Maybe it’s turning into a necktie.  It will take time to make it to real estate, but this is sure sign of a step in the right direction.

Here’s Your Bulls-eye

So what kind of picture am I painting?  Marina lending is cyclical.  It depends on a trickle down effect from the first and second tier lenders.  But before that happens you’ll see finance companies starting to spring up in other industries and lending on golf courses, motels and other operating businesses.  Maybe even in the marina industry too before the second and third tier lenders come along.  Even then, it seems that the deck is stacked and no one is going to be holding many chips (i.e. loans).  It’s kind of like an inverted funnel attached to a spigot.  When the water is flowing, you’ll get some out the other end but less than what goes in.  And what goes in will take time to flow out.

‘Hard to believe I said all that without using my crystal ball.  I try to save it for my marina appraisals.