Transactions-Based Index (TBI):
2008 Q2 Update

August 5, 2008

Results for the 2nd quarter of 2008 show a 2.7% decline in the capital return for the properties sold in the NCREIF database. The demand-side index continued to fall, by 2.7 percent and the supply side of the market also decreased its reservation prices by 2.8 percent in the second quarter.

Click here for press release.

Moodys/REAL Commercial Property Index (CPPI): July Update

July 29, 2008

The latest results of the Moodys/REAL CPPI show a decrease of 3.5% in May for the all properties national index. Click here for Press Release on MIT-RCA inde

I’m not sure I can add anything to this other than this is what we see in the field.

Eileen Simpson

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When the purchaser wants to use the site differently (condo development or new boat dealership), the price per slip becomes skewed. When there’s too much land, it becomes skewed. When there are lots of buildings and on-site amenities, it becomes skewed. When the marina is purchased by a “first-time” marina investor, it becomes skewed. If there are few slips but major boat repairs or sales going on, it becomes skewed. If it is a truly “investment grade” marina, it can become skewed. Whew!

The commonality and bottom line in the above is that marinas fit into a large number of categories that are mostly discrete. A typical market participant in one category will often have absolutely no interest in another category. Why? The answer is simple: the degree of specialization and knowledge of the marina owners varies so much.

Let’s take some real world examples. The boat dealer has knowledge of boat repairs, but do they know how to run a lodging business (hotel, motel or bed and breakfast)? I think not. The opposite holds true too. Does the basic marina operator, who has never owned a boat dealership, understand the boat sales business? How about the repair business? And so it goes.

If the participants differ, clearly the definition of “comparability” should also. Comparing marinas from one tier to another and using price per slip is like comparing price per tire of a Ford to a Mercedes. The buyers are different in both cases. So are the market tiers. It’s an apples-to-oranges comparison. That’s why most marina sales comparison approaches should be only used as a “rough” check on the income approach.

John Simpson, MAI

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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, and 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, only 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 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 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 are 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.

Eileen Simpson

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From marina surveys I’ve recently performed, there is a clear and almost universal pattern in demand-side obsolescence.  The following items of demand-side functional obsolescence reflect affect occupancy and rental rates:

• Single amp electrical power - the vast majority of boaters want dual amp configurations.  Each power post is shared between two boats, so what the market demands is two receptacles on each side (four per post).  Why?  One receptacle is used for plugging in air conditioning units when the boat is docked.  The other is used for everything else, of which the most pressing need is for recharging on-board batteries.  Marinas with single-receptacle only configurations have higher vacancy rates.
• 30 versus 50 amp electrical power - 30 amps is fine for most medium sized cruisers and sailboats.  However, 50 amp is demanded for larger boats (the size of which varies by region, but in general is 50 feet plus).  There are just more electronics to run.  30 amp-only marinas loose the larger boat market.
• Sewer pump-out - if you don’t have it, expect a large hit in occupancy.
• Slip location on the dock - There are two principal areas on many marina docks that are really hard to rent.  An interior corner location, such as you might find in a “T”-shaped dock configuration, is the most difficult.  You can find two of those in the “T” configuration, on both sides of the intersection of the horizontal and vertical lines that make up the letter T.  The second location is at along side some marina fairways (i.e. boat waterway entrance/exit points to the marina).  For instance, let’s say we have two “T” configurations next to each other (T T).  The space between the two T’s is the fairway.  Docking boats across from each other at the end of the T’s (the right end of the left T and the left end of the right T) are difficult to rent.  On a windy or stormy day, few boats want their boat to be docked at these locations for fear of a boat collision with boats entering or exiting the marina via this fairway.  Expect significant rental discounts and much higher vacancy rates at these locations.
• Water depth and draft - as you might expect, boats require a sufficient draft to not run aground.  Drafts are not universal by boat size, so I can’t give any firm guidelines here.  When silt builds up, boaters recognize low draft and will not rent at slips they might otherwise if there was sufficient depth.  This results in undersized boats being docked in overly large slips if the rental rates are based on price per lineal foot of boat.  If they’re based on the maximum boat size that can be accommodated at the slip, this is a big problem because smaller boats will not pay higher rent for larger slip sizes (i.e. a 32 foot boat will not be docked in a 40 foot slip because the owner will not want to pay the higher rate differential when silt prevents 40 foot boats from using the slip).
• Amenity inadequacies - this is a difficult topic to quantify because marinas vary so much in the amenities they offer.  By amenities, I am referring to services offered in buildings, not services at the dock or services offered under the banner of “repair”.  Boaters want clean, air conditioned restrooms and showers.  Pools are in demand too.  Wet bars and snack bars (perhaps restaurants in some locations) are also in demand.  Overnight accommodations in some areas are demand.  A lack of one and especially more than one of these items negatively affects occupancy, although the degree depends on what is missing and how much boaters in that market demand it.
• Wavy and warped docks and bulkheads - I’ve experienced this first-hand and can say the boaters that rent from marinas with such noticeable problems tend to be those with the smallest boats.  Most of the mid- and large-size boats just go elsewhere.
• Combination’s of the above - this double whammy is generally so expensive to fix that the marina suffers permanent functional obsolescence as a result.

In real estate, everyone talks about location, location, location.  Even the best location cannot overcome the demand-side problems above.  ‘Been there and done that.

John Simpson, MAI

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An excerpt on our home region:

5th District: Maryland, Virginia, North Carolina, South Carolina, southern West Virginia, District of Columbia. The economy weakened. Retailers reported slowing sales, increasing layoffs and flat wages. Manufacturers said orders slowed, and were worried about higher prices for raw materials and transportation. Exports grew.

Residential real estate was slow, and commercial real estate weakened. No major construction has been announced recently, and builders were having difficulty financing new projects.

Eileen Simpson

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• Vacancy rates have increased slightly in most marinas.
• Service revenue is holding steady in well developed and well positioned marinas, but way down in the rural facilities.
• Moorings typically have the highest vacancy rates due to their lack of water and electric service and they have increased noticeably in second and third tier marinas; for many marinas, mooring vacancy has increased.
• The larger boat slips (50 feet plus) are full and the vacancy is primarily in the 28 to 40 foot boat range.
• Many marinas did not raise their rates for the 2008 season to help maintain occupancy.
• The number and length of boat trips is way down.  A higher percentage of owner-repairs are happening or being postponed in second and third tier markets, decreasing marina boat repair revenues.
• First tier marinas, those with the best locations, the widest range of services and generally the highest percentage of 50 foot+ boats, do not seem to be affected much.
• Sailboat supported marinas have higher occupancies.  This is because the cost of fuel has made many powerboat users keep their boats out of the water, or sell them.

Across the board, conservatism and belt-tightening are happening in the industry.  It’s no different with all of us.

John Simpson, MAI

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The report was ordered with a specific inspection date needed. Up until then, our turn time was consistently 7-10 days, usually inspecting the property within a day or 2 after the order depending on the contact info accuracy and customer cooperation. Granted, 7-10 days is not stellar, but we are very busy, ours clients know this in advance and our competitors (that I would consider competent) have the same turn times as well.

You can see one of our employees frustrations toward the end because we had gone through great effort to accommodate the bank to inspect the property on the day they needed it done and they did not indicate early on that there was any “rush” plus they basically told us we were not needed, after a warm and fuzzy relationship that preceded this conversation. Very odd.

I guess what annoyed me in seeing this email later on, was the comment about their 0 default rate and yet the lender collapsed 2 1/2 months later. I am sure this person was responding to their own branch’s experience but it’s weird they brought up such a reference in the dialog, inferring (to me, anyway) that it was a big problem looming at the bank).

Incidentally, 300 banks are projected to fail in the next 3 years.
May 28, 2008 email dialog

IndyMac Please provide status on this report - thanks

Miller Samuel [address omitted] will be inspected tomorrow, May 28th.

IndyMac And how soon thereafter can we expect the completed report? Thanks

Miller Samuel All appraisal turnaround time is currently 7-10 business days starting from the time of inspection.

IndyMac We are going to have to cancel this order- sorry but your turn around time is just too long.

Miller Samuel [name omitted] we have worked an entire schedule around this appt. When do u need the hard copy and we will deliver it.

IndyMac We have appraisers that give us reports back within 2 days of the inspection. This is still not going to work. If you can get us the reports back in that time frame we will have a lot of business for you. I am sorry

Miller Samuel Yikes! That’s called bang it out, hit the number appraising. No that’s not something we participate in. That’s how subprime occurred and why the housing market continues to fall. Conditions for mortgage fraud remain in tact with many lenders because of a lack of concern for quality. 48 hr Speed = Bad appraisals and ultimately bad loans. We can do 5-7 business days. I really hope you guys don’t end up like countrywide and all the rest. But with 2 day turn time its inevitable.

IndyMac I understand your position and would never ask you to do something you are not comfortable doing. This branch does AAA business with typically low ltv’s, high credit, etc. Our default ratio is nearly 0 pct and we pride ourselves on efficiency and effectiveness. I think going forward we should help you gain access earlier in the transaction so you can adequately do your job. If there is something we can do on our end please let us know.

July 11, 2008

IndyMac collapses

July 17, 2008

FBI fraud inquiry after IndyMac collapse

IndyMac Collapse Fuels Fears About WaMu

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Eileen Simpson

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Eileen Simpson

True??? For appraisers it would be great for business but I hope this does not happen for the Country.  Should we be surprised?  Appraisers saw this coming at least 18 months ago, if not longer

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• Since many transactions are represented by Realtors, we rely upon them for data.  Many who were in the business have now left.  This puts their sales/rental file in limbo.  When we call into a company, they now have a skeleton staff who are so stretched and stressed they are unable to help us.
• The Realtor Companies are cutting back on their advertisements in Loopnet and Costar leaving many of the transactions a mystery.
• Many of the buyers no longer wish to cooperate because their properties are now losing value and they are embarrassed.
• More and more transactions are now private.  These have always been the hardest to follow up with and often finding the phone number of a participant is impossible.
• The number of transactions is very low.  It is difficult to get a handle on a market with such a small pool of data.

We’re finding after years of being spoiled by TOO much data, we now have to expand on our research to find meaningful comparable data.  This trend is worse in the small commercial market than the larger investment grade market.

Eileen Simpson

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