Reviewing a marina appraisal

[Paul Ness MAI]

I need help from some of you with experience appraising marinas. I am reviewing such an appraisal and have one question suitable to raise here on the forum. The subject owner is proposing to add a large high-and-dry storage facility, which will increase supply of this product in its market rather substantially. There is apparent pent-up demand for it, plus the subject will have capability to store larger boats compared to competition. The subject is located off the Chesapeake near Baltimore.

Having given you this cursory background, my question goes to the discount rate applied in the DCF. The appraiser used a 12% discount rate, indicating this is at the high end of the range of the national investor surveys (Korpacz et al) for warehouse space. My contention is that such a facility would require a discount rate higher than a typical stabilized real estate investment in order to account for additonal risk from (1) the fact that this type of property has elements of a special purpose business enterprise that may be more sensitive to economic downturns, and (2) the value assumes completion of construction prior to stabilization and cash flow projections reflect absorption, hence the risks associated with the absorption estimates. I should note that other sources of income include tenant rentals to the marina operator, a canvas shop, a small office, and residence - but 3/4 of the income is from the high-and-dry storage. What do you marina appraisers think of this discount rate?

 

[Curtis West]

Paul,

I do not wish to violate this forum's rules regarding advertising, but I beleive that you might find my Income Capitalization program useful in your review. It is listed as N-CAP'R Income Capitalizer under Software Companies in the Appraiser Links section of this website. You can download a fully fuctional evaluation copy and use it for 30 days free of charge - which should be more than enough time for your review.

For a marina property I suspect that most lenders would require a higher debt coverage ratio (and possibly a higher loan-to-value ratio) than they would for other property types. This can easily be verified by surveying probable lenders.

I hope this helps in your review.

Curtis West

 

[Paul Ness MAI]

I don't really need help with software to complete direct or yield capitalization, or valuation using debt coverage. My question pertains to stratification of risk. INMHO, a potential investor would require a higher yield on a marina property with a projected income stream versus a stabilized institutional-grade warehouse (which is essentially what the appraiser used from Korpacz). I'm interested in hearing from any appraisers with marina experience as to yield rate levels for such property.

 

[Curtis West]

Paul,

I did not intend to be non-responsive or offensive in any way. I have had more experience as a student of the income capitalization approach than I have had appraising marinas (although I have appraised a few in the past – none recently).

I agree the overall yield rate (discount rate) for institutional-grade properties is probably not appropriate for appraising a local marina property (unless it too is an institutional-grade property).

I do have one other suggestion. Take a look at the relationship between the overall cap rate stated in the appraisal you are reviewing, and the reported change in value forecasted for the property, to see if they agree with discount rate conclusion. Some years ago I discovered an easy method for doing this with an HP12C calculator. The keystrokes are:

1 CHS = PV
Holding Period = N
R = Pmt
1 + Change = FV
Solve for Y = I

 

[Paul Ness MAI]

Thanks for your suggestion and the keystrokes. I often use the simple equation Y=R+change as a test of reasonableness (where change is the blend of change in income and change in value over the holding period). However, since this cash flow model reflects absorption in the first few years (the valuation is assuming completion of construction prior to stabilization), the going-in cap rate is not a useful tool, nor is the base equation.

 

[Kathy in FL]

I've done a few marinas and I agree. The element of risk is higher.

Kathy in FL

 

[Anonymous]

Paul,

Just playing the devils advocate here. You say you assume there would be higher risk, yet you state there is a pent up demand for the service. This wouldnt appear to be higher risk. It might be true that in an economic down turn that these higher end "toys" are the first to go, but where would the banks asset actually go? The lender would still need somewhere to store the boat til sold. Once the boat exists, it must be stored. From the sounds of the type of facility, these are not trailerable boats.

Second, as far as the rate, how about a blended rate? What is a typical marina rate in the area? Is it close to the warehouse rate? How about rates for other higher risk properties that might suffer in a downturn? In some areas, I am not sure of yours, there are higher end downtown rental apartment buildings that are used by professionals during the week, then they commute "home" on weekends. I would imagine these properties would suffer from a similar risk that would be affected in a downturn.

Just a few thoughts.