Signature Associates

Couple that increased demand with a favorable ruling from the IRS in 2019 and industry roll-up, and in marinas you have a niche real estate class that has drawn increased investor interest. This is particularly true locally as Southfield-based real estate investment trust Sun Communities somewhat quietly became the largest marina operator in the country, spending nearly $3.4 billion acquiring properties in the last 18 months in several different transactions, including the acquisition of the Safe Harbor Marinas LLC portfolio.

Among them: Belle Maer Harbor in Harrison Township; Grand Isle Marina in Grand Haven; Great Lakes Marina in Muskegon; Jefferson Beach Marina in St. Clair Shores; and Toledo Beach Marina in La Salle and the former Kean’s Marina at 100 Meadowbrook in Detroit.

Sun Communities Inc. (NYSE: SUI) has bought 125 marinas — including putting down an initial $2.1 billion for the Safe Harbor Marinas LLC portfolio of 99 owned properties — since October 2020 and now has 19 percent of its rental income coming from marinas, according to a March investor presentation.

The company, which did not respond to an email seeking comment, owns approximately 45,000 wet slips and dry dock storage spaces in 24 states and Puerto Rico.

A separate presentation from November 2020 after the Safe Harbors acquisition says that the top five marina operators in the country own just 4 percent of the approximately 4,000 marinas in the country, leaving ample room for industry consolidation like has been seen in self-storage, manufactured housing and other sectors.

In addition, not many new marinas are being built nationwide for a variety of reasons including regulatory hurdles, scarcity of available land and cost to build, the presentation says.

So because of the high barriers to entry, it made sense for Sun Communities to start buying existing marinas rather than developing new ones.

Sun Communities would have been considering a variety of factors as part of its expansion into the space, including increasing demand as well as the implications of a private-letter ruling from the Internal Revenue Service, said a corporate taxation attorney who wasn’t involved in the company’s marinas deals.

Allison Stelter, a partner with Detroit-based law firm Honigman LLP, said that in that ruling, the IRS determined that rental revenue earned from things like wet slips, dry docks and floating docks count toward the service’s requirement for REITs that 75 percent of their revenue come from rents to maintain their REIT status. In turn, that meant that marinas count toward the IRS’s requirement that 75 percent of their assets, by value, are in real estate, Stelter said.

“I think it’s fair that they would probably have looked at this (ruling) and drawn comfort from it,” Stelter said.

“That system needs $20 million to $22 million worth of work that when it’s open brings in $500,000 a year. The only people with that is the government. We need to change the business model of Erma Henderson so it’s more viable. It’s exploding in the Great Lakes. There is a $250 million marina being built in Muskegon, but Riverside Marina has not had any significant investment since it was first commissioned in the 1980s.”

McGuire and others are trying to find a way to secure some of the $1 billion in funding for the Great Lakes Restoration Initiative through the federal infrastructure bill from earlier this year that Michigan’s U.S. Sens. Gary Peters and Debbie Stabenow helped secure.

Even with the capital improvement needs, McGuire said, things keep churning along at Riverside, which sits on a huge swath of land that was at that time it was developed envisioned as having things like condos and restaurants as well.

“A lot of people don’t know what’s going on over here because you can’t see us from Jefferson,” McGuire said. “But we have a good time over here, we just need some help, some infrastructure help. We are doing this right now with nothing. Imagine what we could do if we had some investment.”

Sales of new and used boats have hit recent highs. According to data from the National Marine Manufacturer’s Association, there were 320,000 new boats sold in 2020, a 13-year high and up 13 percent from 2019 — and 415,000 of the 1.3 million-plus new and used boats sold in 2020 were to first-time buyers. In Michigan in 2021, there was $8.3 billion in new boat, motor, trailer and accessory sales.

The NMMA says there are more than 800,000 registered boats in Michigan, behind only Florida and Minnesota, and boating has a $7.8 billion economic impact on the state each year, making it the third-largest marine market in the country behind only Florida and Texas.

And even though COVID-19 vaccines and boosters are widely available for those who want them and much of everyday life has resumed with few remaining restrictions on indoor activities, Nicki Polan, executive director for the Commerce Township-based Michigan Boating Industries Association, said she believes boating activities that surged in popularity in part because of those restrictions will continue to remain popular.

“Previously, our industry struggled to bring new people into boating,” she said. “The pandemic brought thousands of new people to boating, and it is the industry’s opinion that most will continue to boat even with the lifting of indoor recreation restrictions. Once you fully experience the benefits of the boating lifestyle — quality time, face to face with family and friends, away from the screens and stresses of the world — it is difficult to give it up.”

That speaks to the demand for boat space.

In addition, said Matt Putnam, the Tampa, Fla.-based managing director in the Leisure Properties Advisors division of Colliers International Inc., interest rates have been low so borrowing has been inexpensive, and low cap rates in other asset classes such as multifamily and industrial have driven investors to other sectors.

“You started to see people chasing yield and looking for other avenues to invest,” he said.

And although some industry consolidation started happening in the years leading up to the COVID-19 pandemic, the influx of new boaters has heightened marina investment interest even more.

“Everybody hit the panic button for two or three weeks there in the middle of March 2020 and said, ‘Oh my gosh, the world’s ending. What’s going to happen?’,” Putnam said.

“All the stuff you would generally spend discretionary dollars on, people said, ‘Well, we can’t do any of that. What else can we do?’ And boating really became an answer to that. And there was availability and supply and people started saying, ‘Hey, let’s just grab a boat.'”

 

Posted By: Crain’s Detroit Business on April 5, 2022.  For more information, please click here to read the source article.

To receive the In The Know from Signature Associates, please click here to be added to our mailing list.