During the past few years of explosive growth, the highest and best use for marinas very often was not as a marina. Many traditional marinas changed to mixed use or condominium developments, especially in the southeast. Now that that the real estate bubble has burst, development is often not the highest and best use of the land anymore.
Value-in-use is the net present value (NPV) of a cash flow or other benefits that an asset generates for a specific owner under a specific use. In the U.S., value-in-use is generally estimated at a use which is less than highest and best use; therefore value-in-use is generally lower than market value. Every person that calls wants to know what the market value of their marina is, but of more importance may be the value-in-use. For marinas with no development potential or expansion ability, both market value and value-in-use may be the same.
Why Value-in-Use is Important to Lenders
During the easy lending times, lenders loaned on the highest and best use market value of the marina. There is nothing generally wrong with that, but it is risky. Every downturn in the market has hit marinas hard and fast. Often lenders will ask us to calculate fee simple and leased fee value on traditional properties and provide them with the lower number to lend on. Underwriters should think about doing the same with marinas… asking for the lower number between market value and value in use.
Lending is tight right now for marinas, but what if underwriters used value-in-use? Wouldn’t funds become more available and help alleviate the credit crunch for marina owners? These loans would be stable and well supported by the current income streams. Lenders should not be afraid of asking for something other than market value. We also find that cap rates for marina sales are based upon the value-in-use income stream, not highest and best use.
Why Value-in Use is Important to Marina Owners and Potential Investors
Yes, we know that when going for a loan, you are looking for the highest value… but should you? Limiting lending to a number that can be supported by your income stream is smart in the long run. Some of you who are out there have crushing debt based upon development potential. At the time it might have seemed like a good idea. Does it now?
How about that tax bill this year? In most jurisdictions marinas are assessed at their highest and best use. Almost without exception the taxes for this year are based upon sales that were very high and had sold for development. Assessors use highest and best use and now the tax bills are crushing many marinas. With high operating expense ratios already on the books, these increases in taxes are causing a crisis in the industry. Of course assessors must follow their local rules which tell them to value at the highest and best use.
Thinking of buying a marina? Unless you know you can redevelop, purchase on value-in-use.
Why Using Value-in Use is Important to Communities
The heart and soul of waterfront communities is their marinas and fisheries. What will happen to the local economies if they go away? That is a distinct possibility if something is not done to protect marinas from economic ruin. I know that governments are strapped by the downturn in the economy and any mention of tax relief is not popular.
Think of the alternative. We live in the Chesapeake Bay Region. I talk to owners daily about their inability to survive based upon tax assessments that consider redevelopment rather than their current use. If the economy had not changed, how many owners would have been forced to sell for development? Where would our soul and traditions have gone?
Agricultural assessments came along to protect the farmer. I think it is time to start protecting our marinas in a similar way or we will have no boat services left. Marinas are a special use that is important to local economies. Farm land was worth saving… so are marinas.
There have been some efforts throughout the country to change how marinas are valued for tax purposes, but they have not been widespread. We had an aborted try in Maryland this session with the original bill being corrective, but it was vetoed by the Governor. A watered-down bill was passed that only helped a very small subset of users. In Florida some communities have moved toward using value-in-use to save their waterfronts. It is time to open this dialog across the country.
The Environmental Movement and Value-in-Use
Things are changing. Waterfront development is not popular and many areas put great restrictions on this development. As appraisers, determining the highest and best use of a property is extremely difficult. To do so properly, very expensive studies are needed. How many marina owners have a current wetland study in place? How many have soil studies? We are asked all the time if a waterfront property can be developed. The bottom line is without very expensive engineering studies, it is impossible for us to know. The chances for development become less and less as the environmental movement continues to gain momentum. Value-in-use can be easily found. Highest and Best use without these studies? It is not so easy!
The marina industry needs relief and help. It needs access to funds and tax relief. Using value-in-use would help on both fronts protecting lenders from risky loans and preserving marinas for waterfront communities.
