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2017 Nov Dec Marina World

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The magazine for the marina industry

FINANCING & VALUATION

FINANCING & VALUATION How do you value a marina? There were a significant number of notable marina transactions in the USA between January and September 2017 and the demand is expected to continue as more qualified investors target this asset class. But when it comes to valuing marinas, there is no clear cut formula. Gerard McDonough examines some methodology. Unlike other asset classes, such as self-storage, offices, apartments and lodgings/hotels, which have a plethora of published income and expense information, as well as capitalisation rates or income multipliers, similar information is not readily available in the marine industry. The lodging industry, for example, has extensive information regarding various categories such as luxury hotels, mid-range and limited service. The marine industry also comprises various types of facilities, such as marinas with only wet slips and limited upland area, and full-service marinas with significant upland area dedicated to boat maintenance and repair, summer and winter upland storage, rack storage, marina stores, and fuel and commercial retail oriented tenants. However, there is little available data regarding income and expense ratios, capitalisation rates, or income multipliers for marinas and boatyards. Currently, in the marina sector, the typical unit of comparison is price per slip. However, it’s also one of the most unreliable units of comparison, particularly when a facility with 100 slips and a 30ft (9m) average boat length is compared to a marina that has 100 slips with an average slip length of 55ft (17m). In this instance, the most relevant unit of comparison is price per linear foot, which is derived from the total linear feet of boats in the basin area. The comparison can be further compromised by the amount of upland area, which may include significant rack storage facilities, outside boat storage, multiple retail tenants and a robust boat maintenance and repair business. In most instances, trying to utilise the traditional sales comparison approach is akin to hocus-pocus. The aforementioned ‘income multiplier’ is, however, one component of the sales comparison approach that is rarely utilised in the valuation of marinas but worthy of closer consideration. It is derived by dividing the purchase price by the revenue generated at the time of sale. For example, a million sales price divided by income of 0,000 results in an income multiplier of four (4). However, a multiplier adjusted for cost of sales is preferred. One of the issues in developing this unit of comparison is consistency in determining which income the appraiser must consider. For example, applying an income multiplier extracted from a marina where the income is entirely generated from wet slip and upland storage to a marina where a significant portion of the income is generated from fuel sales and boat maintenance/repair can result in a very misleading conclusion. The income approach is the primary approach utilised in the valuation of marinas, and the values are derived through capitalisation of the net operating income. When someone is aware of a transaction, the first things that must be established are the price per slip and the capitalisation rate. As previously noted, price per slip is very unreliable, and the capitalisation rate conclusion can also be very misleading unless like-for-like facilities Gerard McDonough are being compared. Comparing a capitalisation rate abstracted from a marina that only has wet slips to a full-service facility is not a relevant comparison. Even if capitalisation rates are taken from like-kind operations, the derivation of the net operating income must be analysed closely to make certain that similar expenses were deducted from the adjusted gross income in deriving the net operating income. Some of the primary expense categories that can result in a misleading comparison include maintenance and repair expenses, on-site and off-site management fees and reserves for replacement. If these expense items, for example, are not treated similarly, the reliability of the capitalisation rate comparison and selection process is compromised. Due to the diverse physical and operational characteristics of marine facilities, a more meaningful and reliable unit of comparison in the valuation process may be an income multiplier (adjusted for cost of sales) as opposed to the traditional capitalisation of the net operating income. Gerard H. McDonough, MAI, FRICS, is the senior managing director of the Rhode Island and Connecticut offices of Integra Realty Resources (www.irr.com), a national property appraisal company with offices throughout the USA that provide commercial property market research, valuation, counselling and consulting services. McDonough is also president of Marinevest (www.marinevest.com), based at the Newport Shipyard in Newport Rhode Island. Recent marine-related valuation assignments have been completed throughout the US, Caribbean and Central America. 52 www.marinaworld.com - November/December 2017

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