It’s time for the approach to value I love to hate: the Cost Approach.
The Biggest Problem with Using the Cost Approach for a Marina
When you find that there is no sales comparison approach but there is an income approach and a cost approach, that will tell you you’ve got a bad appraisal. That may seem harsh, but it’s true… and the truth is an absolute defense, as they say on the crime dramas. Since the land value represents a large portion, if not most, of the value of a marina, the appraiser just has to get this part right. ‘No two ways around it.
The problem is that if there aren’t any marina sales, there really aren’t any marina land sales. What the appraiser used were land sales that weren’t approved for a marina… and as anyone in the marina industry knows, if it doesn’t have all the approvals you need for development, you don”t have a marina. Those that really know this lesson only too well lost their assets in this Great Recession.
It may be waterfront land, but it’s not marina waterfront land in most cases. Even if it is zoned for a marina, in most states, it takes years to get all the approvals, so since your marina has approvals because it has slips, the comparables all need to be approved, not just waterfront land. Since financing came to a scretching halt for existing marinas, you can bet it really died for marina land development, so I don’t see how the appraiser could even come up with three land sales in the same market. Appraisers just don’t win the lottery.
The Second Biggest Problem with Using the Cost Approach on a Marina
Regardless of whether it’s a recession or not, the fundamental problem with a cost approach is that the cost estimating services just don’t get marina construction costs right. There just isn’t enough of a pool of data in the U.S., let alone locally, from which to draw reliable numbers. Another problem is that marinas vary so much based on their market tier that a small sample just won’t produce reliable results.
The other issue is how to handle the length of time and cost of obtaining approvals for your comparables when they’re not in place. Well, good luck with that. Most appraisers just ignore it. ‘Sorry… you just can’t do that. Unapproved waterfront land does not equal approved marina development land. It’s like I said earlier in this blog series… it’s a different market with different market participants. Not only that, in this case, the market participants probably view the highest and best use of their sites as anything but a marina.
In Part 6, I’ll dive into the best and most reliable approach to value: the income approach. ‘Stay tuned.
