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January February 2020 Marina World

The magazine for the marina industry


BOOK YOUR STAND AT EARLY BIRD RATES BEFORE 1 MARCH! THE WORLD’S LARGEST MARINE EQUIPMENT TRADE SHOW The Marina & Yard Pavilion, one of the three specialised pavilions of METSTRADE, brings together the world’s largest concentration of exhibitors from the marina & yard industry. It has become the first port of call for marina professionals from around the world. 17 18 19 NOVEMBER 2020 RAI AMSTERDAM THE NETHERLANDS METSTRADE FEATURES ORGANISED BY POWERED BY MEMBER OF OFFICIAL METSTRADE MAGAZINE OFFICIAL SYP MAGAZINE OFFICIAL MYP MAGAZINE

MARINA LEASES initial and ongoing investment security of marinas. Marina concessions are many decades in length and payback periods on marina investments are long. This can be very challenging in an environment where government policy towards concessions changes in cycles more commensurate with political cycles of a few years and consumer behaviour and technologies require ongoing adaption and investment. Fixed term leases undermine the ability to attract and retain investment capital. Debt funding remains challenging as marinas are treated as ‘specialised assets’ under Basel III banking standards and, as such, are subject to tighter lending criteria than competing landside investments. This manifests in a larger demand for equity and consequential higher weighted cost of capital ( WACC) compared to landside investments. This is primarily due to the uncertainty of the security of government concessions, but can be overcome with adoption of lease or concession principles that encourage and support investment as set out below. There are four key elements of marina concessions/leases that affect the investment quality of the lease/ concession: • Rent • Lease term, options and renewability • Administrative burden and constraints • Performance criteria Rent Rents payable for marina concessions should provide a fair return to government while meeting the criteria of being a sustainable cost of occupancy for the marina investment. Consequently, this sustainable occupancy cost of marina concession rents needs to be considered on a case by case basis based on the business model for a given marina. Seabed area is not a reliable factor in determining the amount of rent a marina should pay. The amount of area required to accommodate a given amount of boat storage is highly dependent on a number of key factors including: • The water depth and seabed profile – this will affect how far from the shore the boat storage can start, the configuration of the marina and the depth of piles or other supporting infrastructure. • The exposure and fetch – this will determine whether a breakwater or wave attenuation system is required to create a marina basin that is suitable for boat storage. • Tidal range and current – this will determine marina orientation and gangway design and location. • The size and nature of vessels to be stored – larger vessels, motor boats and sailing yachts have different physical characteristics, infrastructure needs and manoeuvrability which affect the design and configuration of marinas. Based on the factors above, seabed area requirements can vary by more than 100% for a given amount of boat storage and, as a consequence, seabed/land area is an unsuitable factor for use or comparison to determine marina rents. Marina rents can be determined using a residual land value/rental cost from a marina business case and investment model. This approach looks at the potential earning capacity of the marina less operating costs to determine gross profit from operations and then factors in the initial investment, depreciation, amortisation and market referenced benchmarked returns to determine the component of revenue the marina can afford to pay in rent and remain a viable, sustainable and competitive investment. This is known as the ‘Sustainable Occupancy Cost’, the principles of which have been established by Industry and are the subject of an ICOMIA IMG Policy Statement dated June 2018. Sustainable occupancy cost is often expressed as a percentage of Fig 2 – re-investment versus amortisation. turnover for a particular component of a marina operation. This will need to be determined from first principles in each jurisdiction but is based on a ‘residual land value’ valuation approach outlined above. The variable nature of these factors means that there is a range of outcomes. Review of rents around the world sees a 90% range of 2-8% with a mean of around 6% of annual gross turnover before taxes. This is applicable on the basis of long and renewable tenures and where the creation of the marina basin (excavation and breakwaters) is not funded by the marina investor. Rents above these levels lead to poor investment outcomes, and consequently poor public infrastructure and economic and employment outcomes. Marina concession rents determined using the sustainable occupancy cost model and reflected as a percentage of turnover have the following advantages: • They are a fair reflection of the earning capacity of the site • They adapt to relative market values as higher berthing charges in premium areas are reflected in revenue and vice versa • They adjust to market fluctuations in the long term • The percentage of turnover can reflect the scale of investment and security of tenure • They overcome the challenge that market comparisons are difficult as no two marinas are alike and other land uses are not directly comparable It is essential that long term marina lease clauses do not contain ratchet provisions for rent. The benefit of turnover rents is that they respond to economic conditions over time such that the landlord and lessee share the - January/February 2020 19

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