We’ve had some interesting roundtable discussions about reserves in the office. The big question is why don’t we see reserve line items on income statements or as a separate deposit/bank account on the balance sheet? For marinas, this is an even more important question because it seems that lenders don’t understand how much of a reserve to put on this property type.

The reason is simple, as suggested by my title – real estate owners refinance their properties when they have to make major capital expenditures that should be taken care of via an annual reserve allocation. If the reserve were, say, 4 percent, that’s 4 percent of gross profit that cannot be returned to the owners. More importantly, this is a much higher percentage when you consider how much that is compared to cash flow (net operating income less debt service), which often goes into the pocket of the owners. We’ve seen this several times with marinas that get second mortgages to pay for bulkhead repairs and dock reconfigurations.

We’ve also noticed a slight trend with marina reserves. Some of the larger national and regional banks are specifying how much of a reserve a marina owner must allocate and it’s written into the loan documents. They also require a separate reserve account to be held at their bank. One lender we know of specifies a 4 percent reserve (very few appraisers even dare to put a reserve above 2 percent in their appraisals). It makes sense because the majority of repair expenses in a marina are to the docks and sometimes bulkheads (if they are not stone/rip rock); this is also a weathering asset. I won’t quote reserve ranges because labor costs vary substantially between union and non-union labor and they also vary by region of the country.

Not including a reserve is also conceptually so much easier for marinas owners.

• They don’t have to calculate how much they’d have to spend to replace the items above
• They get more money to reinvest in the business or to take home as entrepreneurial reward
• Many of them figure they’ll have to refinance anyway if the interest rate is favorable or they run into their balloon payment
• It can be hard to justify setting money aside when a marina has multiple owners (frequently family members) who may feel differently about setting money aside
• There are no tax incentives for them to do so

Since this is how market participants think, I’d say that the items above make the case that owners don’t reserve. Given the current crunch of the mortgage markets, lenders should start thinking about requiring it.

John and Eileen Simpson