COVID-19 AND MARINA VALUATION
Marina pricing has enjoyed more than a decade of improvement as the US economy has grown and stabilized under both Democratic and Republican administrations. But, now enter the Coronavirus which threatens our country’s health and financial systems. Where are we heading?
Historically, the marina and recreational boating industries have weathered the financial storms. However, we may be sailing into uncharted waters which may test the resolve of the marina industry and related values. Let us take a look at the previous recessions and how they effected marina values.
The main source of marina revenues is storage, both wet and dry slips. This revenue stream drops right to the bottom line only offset by fixed costs with little or no variable cost and is the most profitable income source. In a declining economy, marinas tend to lose between 15% and 20% of storage customers.
The next most profitable group of revenues are marine service, retail sales and fuel dispensing. Owners can expect the gross income in this group to experience a 15% to 30% decline. The least profitable revenue stream tends to be new boat and outboard engine sales. The interest cost to floor plan this inventory has a chilling effect on the bottom line and often arrives without advance warning.
Now, how does all this effect the pricing of a marina. Appraisers and brokers alike search for the EBITDA (earnings before interest, taxes, depreciation and amortization). This process identifies expense line items that are non-recurring and/or owner benefit which enhance the net operating income. Once the EBITDA is identified, a current industry CAP rate is applied to determine the value of the marina based upon the income approach. The higher the CAP rate, the lower the price and vice versa. Marina owners push for a lower CAP rate and higher price.
Now let’s take a brief view of value based upon the market approach. This process requires an examination of comparable sales in the same general area and preferably within the previous 6 to12 months. Consideration is given to condition of the asset (docks, buildings and equipment) and additional land included not required for the marina operation or as an alternate use.
The third approach to value is the cost approach and is the least used means of valuation. It requires determining replacement cost less depreciation. Of course there are many docks to choose from just like you would find when buying a car.
In the end, buyers, sellers and lenders take a hard look at the income and expense summaries and tax returns to determine an asking price (seller), offering price (buyer) or mortgage amount (lender). That leads us the discussion of financing.
In a robust economy, lenders are likely to offer mortgage packages with more favorable terms such as lower rates, lower down payments and longer terms. For marina sales under $5,000,000, the SBA 7A and 504 programs may be attractive to a buyer as they require lower equity contributions, lower interest rates and longer terms. Further, certified lenders enjoy a portion of their loan to be guaranteed by the SBA.
BUT – There is a wild card out there and that is COVID-19 that does not pay attention to pricing, terms or value. It strikes silently and is relentless on our economy. Marina owners can insure against hurricanes, fire, theft and liability losses, but not a deadly virus. We are in the early rounds of a 10 round fight.
The good news is that history tells us that the marina industry always comes back and often with a vengeance. Although some revenue will likely be lost, but not enough to sink the ship. By carefully plotting your course and making prudent financial decisions you will arrive at your port of destination.<< Previous Post