Various press has stated in no uncertain terms that dockominiums have gone bust as an investment.  The focus has been on appreciation.  But as yours truly has been fond to point out, selling an investment is only one part of its return.  The other is cash flow.  So for the heck of it, I’d like to explore dockominiums as an investment from a pure cash flow viewpoint.  That’s all that’s left in today’s economy.

A dockominium, which for simplicity I will occasionally refer to as docko, has the following definition as quoted from Wikipedia:

A dockominium is the water-based version of a condominium; rather than owning an apartment in a building, one owns a boat slip on the water.  The term is a portmanteau of “dock” and “condominium.”  In addition to the exclusive right to use the boat slip, ownership also provides one with the right to use the common elements of the marina, much the same as one would have the right to use the common areas in a residential condominium development.  Additionally a unit owner may use, rent or sell their unit at any time, subject to association approval.

During the real estate frenzy of this decade, some marinas were sold to investors who created dockominiums.  In other cases, marina owners created them.  Sometimes a joint venture would occur between the two.  Just like waterfront condominiums, it was all about building them and selling them as fast as you could.  The problem came when the market turned in 2006 (even though our government says the recession began December 2008… yeah, right.. I disprove that nonsense for dockominiums in Part 1 and Part 2 of Wild Swings in Dockomonium Values).

Domino Down

Real estate development is all about timing.  Miss the market and you miss the opportunity.  Worst of all, miss the market and you’re frequently stuck with a negative cash flow investment that you must carry for years to come.  For large companies that can cross-subsidize negative cash flow real estate with real estate that’s making money, it’s not so bad.  For the rest of the developer market it’s a disaster of supreme proportions.

Wasn’t the writing on the wall?  Could we have learned from the past?  Those are difficult questions to answer.  Articles I’ve read over the past couple of years and during the Savings and Loan Crisis present a negative image of a dockominium as an investment… in some cases on par with a failed marina.  Every form of real estate got hit then and now.  Dockominium speculation in some parts of the country was little different from high-rise waterfront condominiums, new regional mall construction or new Class A office building development.  All of them depended on the economy, the ability to get financing and demand.  I don’t see any major difference because if you caught the market right, it didn’t matter, but if you missed it you’re stuck in the same boat as every other piece of real estate.

Lenders Rule

And that’s where the similarity ends.  The demand factors for a dockominium are very different from office buildings, shopping centers, apartments and other common property types.  In this respect the demand factors for a dockominium are a lot like a vacation home, boat or recreational vehicle.  That’s because in each of these cases (and probably more if I wished to think that deeply), the ability for most people to buy a dockominium was tied to their home equity line of credit.  It was a lot like an inverted funnel.  First came the cars and the principle domicile.  Then came the boat.  Finally, if there was sufficient equity or money left over, then came the dockominium.  So in this respect the pie that represents the market had been sliced and sliced again.  A meal is now just a snack.

No one expected the credit markets to completely disintegrate.  What boater would have thought that the piece of paper they had from their bank giving them a line of credit up to a certain limit would be followed by a letter rescinding their agreement?  Who would have thought that much or most of their home equity would disappear with the market?  Docko demand depends on financing.  It’s the golden rule.

The Dilemma

Let’s get back to the present.  The problem with dockos have many facets:

• Existing dockos that are sold out are facing a higher percentage of unit foreclosures.  This means that existing owners have to absorb their delinquent neighbor’s share of common area maintenance, reserves and other items that are part of the dockominium association fee.
• Developers/marina owners of dockos that did not fully sell out are faced with inventory they cannot sell.  The alternative is to rent them.  The carrying cost of this investment is higher than if it were triple net real estate, yet less than typical commercial or residential rental real estate.
• Developers/marina owners are faced with deciding whether to keep them as dockos or convert the marina back into a rental form of ownership.  This is a big hassle because those people that have dockos are not so interested in selling their interest at a loss.
• Developer investors of dockos now must learn about how to run and manage a marina.  It’s not what they signed on for.  It’s not a part of their job descriptions.
• Owners of approved dockos have to decide whether to build them or keep the approvals and risk letting them lapse.

Now that we’ve shown the issues, let’s focus on only one player in the market – the individual dockominium investor.  That’s Part 2 and Part 3 in a nutshell.