Reserves Based on What?

One question that is seldom addressed with reserves is what they are based on. If a marina has a large income from fuel sales, do we apply a percentage that includes them? Do we apply that percentage based on total fuel sales or just the gross margin? Since many marinas do not own the fuel dispensers, is it fair to include them in reserves? Do we exclude boat sales revenue and boat repair revenue? Do reserves include land lease income? Is there any end to my list?  The quandary is obvious.

To answer this question, there are two tests to apply. First, what does the reserve encompass? If the revenue line item is covered by the reserve, as in the case of wet slip revenue, that income line item should be considered as part of a reserve. Second, how large is the reserve amount when applied to that component? It would not be fair for a marina with $3 million in gross fuel sales to have, say, a 2 percent reserve levied against it. That’s $60,000 in fuel sales only (with no real physical marina component) that would instead be profit for the owners. Similarly, given the wide fluctuations in boat sales revenue based on market conditions, a reserve should omit this component from the reserve calculation.

The Dredge Reserve

This brings us to the final variable in allocating a reserve for replacement allowance: how do we handle the high cost of dredging? By dredging I am mostly referring to the cost of obtaining the permits (often via a third-party dredge consultant) and the cost to transport and store the spoils; the cost of dredging itself is frequently the lower of the three. The reason I mention a dredge reserve rather than any large capital expense is that the latter is already considered in a typical reserve allocation whereas dredging is not.

First, let’s be fair.

• Most marinas don’t need to be dredged frequently. If a marina is dredged every 20 or 30 years, allocating a dredge reserve would be overkill.
• There should be some historical pattern that would indicate how frequently a marina needs to be dredged. Some consideration needs to be given to the possibility that the channel main may not have been dredged by the U.S. Army Corps of Engineers or other similar jurisdictional governmental entity, thereby making dredging a marina overkill.
• It may be very difficult to gauge what dredging will cost in the future given rapid increases in dredging costs.

That being said, a dredge reserve needs to be decided on a case-by-case basis. For the unlucky marina that is sitting at the mouth of a river that will need to be dredged every two or three years, sure. The marina that requires multiple New York and Connecticut agencies approval for transporting spoils to a very expensive federally-approved dredge disposal site, absolutely. For the marina sitting on that nice, calm lake… no way. Everything in between fits into the case-by-case situation. For those in between situations, let the market be your guide. If dredging is imminent, it is better to take it as a lump sum deduction from the final value conclusion (if it occurs in year two or three, discounting the lump sum deduction is acceptable unless market participants would demand it deducted in totality the first year). If it is not imminent and the market does not recognize it, there is no need for a dredge reserve. Fortunately, the vast majority of marina situations fit into this last category.