The Lender and the Dockominium

Transcription

1 The Lender and the Dockominium June 2011 by Jay Kelley and Juanita Schwartzkopf Focus Management Group

2 Table of Contents Introduction: The Rise and Fall of the Dockominium 3 What Does a Dockominium Mean to a Lender? 4 Why is a Marina Unique? 4 How Should Lenders Move Forward? 5 Conclusion 6 Contact Information 7 2 The Lender and the Dockuminium

3 Introduction The Rise and Fall of the Dockominium Commercial real estate lenders often responded with large loans and high advance rates, based on a limited understanding of the complicated transactions being created. As a result, today s marina lender is often left with a complicated ownership structure, deferred maintenance, high operating leverage, and collateral values that are significantly below the outstanding debt. The boating industry, in general, took a huge beating through the current economic downturn. Leisure boating has never been an inexpensive hobby. Now, with high unemployment, rising gas prices and the reduction of discretionary spending, the boating and related industries are struggling to rebound. This has directly affected marina rental rates and occupancy levels. During the real estate expansion ( ), marinas rode the wave of increased valuations, and many underwent expensive redevelopment programs. Properties were sold by the traditional mom-and-pop single operator to larger developers who were focused on capitalizing on the -ominium craze that was pulsing through the country. Dock-ominiums (wet slips sold on a fee simple basis to individual buyers) and rack-ominiums (high and dry slips stacked in above ground facilities) became the new hot topic in boating circles. The initial flurry of sales elevated prices everywhere. The concept of unending demand coupled with the fear of limited supply created overnight value on paper for the few that could buy and sell fast enough. As a result, marinas that were renovated and converted to dockominiums have serious problems. A few sold but many did not. Today s marina lenders are wondering whether their borrower is a real estate developer, a marina operator, or an outright failure. Industry specific issues, local environments, and government regulations complicate the answer to that question but the answer is probably yes, yes and yes with the complication that clear ownership has been diluted via the dockominium ownership structure. To illustrate the complexities involved, let s review a hypothetical marina loan in a lender s portfolio. Consider an operation that invested $40 million in project development to produce 150 wet and 200 dry slips. Since the project was completed in 2007, a total of 30 slips have been sold. As a lender, what is an appropriate workout strategy today? The Lender and the Dockuminium 3

4 What Does a Dockominium Mean to the Lender? Prior to the dockominium craze, lenders would be able to foreclose on a marina and sell an operating entity. However, since the mid-2000 s, marinas increasingly have been owned by developers who incorporated dockominium projects with nearby land-based condominium projects or converted marinas to dockominium development projects. Therefore, lenders involved in such marina projects now face the same issues with unsold projects on the water that they face with unsold projects on land. These workout problems include fragmented ownership and owners associations and related association rules (often referred to as HOA or COA ). Marinas that have converted to dockominiums face the same owners association issues that exist for any commercial condominium project and are governed by laws related to these specific types of operating entities. Condominium laws are different in each state and regulations regarding proper management of an owners association often require a professional third party manager to ensure compliance. The dockominium lender today therefore has the complication of the ownership structure of a condominium coupled with the added issues surrounding marina management. Why is a Marina Unique? Marinas fall in to a specialized commercial real estate product class. Operators face unique management challenges, listed below. This list of unique marina issues provides only a sampling of the industry specific problems requiring a specialized set of management and operating skills. Abundant maintenance and repair complications resulting from the wear and tear caused by exposure to water. 1 2 A variety of life safety issues surrounding the access to water, as well as the use of heavy equipment. Risks associated with locations susceptible to flooding and storm damage. 3 4 Unique marina permitting and licensing issues with local, state and federal governments. 5 Deadlines for information filings, permits, and licensing requests are complicated to understand and track. 6 Permitting and licensing issues are further impacted by the political environment in the applicable jurisdictions. 4 The Lender and the Dockuminium

5 How Should Lenders Move Forward? As a lender, decisions need to be made to improve project management. The project will require a combination of a professional owners association manager and a professional marina operator. The skill sets of these two managers do not typically overlap. A separate set of laws and concerns would be confronted by the owners association manager and by the marina operator. A separate set of operating management decisions is required for owners association management versus marina project management. Steps to Consider from an Owners Association Management Perspective 1. The owners association manager will need to determine who is delinquent in their association dues, property taxes, etc. 2. The people on this list should be approached to sign a First Right of Refusal to provide the lender an opportunity to further consolidate ownership. 3. The owners association manager should influence the operating rules of the association in order to protect the cost structures, maintenance and other related operations. 4. The Board of Directors for the owners association needs to be formed and brought up to compliance with the Condominium s Declarations. 5. Legal counsel skilled in condominium law may need to review the current status of issues facing the owners association. Steps to Consider from a Marina Operator s Perspective 1. If maintenance and repairs are deferred, public safety risks may require additional funding. 2. If permits and licenses have not been maintained, there may be legal issues to deal with. 3. If insurance premiums have been unpaid or coverage has been reduced, there may be financial risks. 4. Maintenance and operation of heavy equipment needs to be assessed for necessary repairs. 5. Onsite operating personnel need to be managed. 6. Tenants and owners need communication. 7. Marinas with high levels of operating leverage and low usage may be unable to reduce costs to a level covered by current revenue streams, while maintaining safety and regulatory minimums. 8. As a result of these types of issues, lenders may be requested to provide funding for operations. The Lender and the Dockuminium 5

6 Conclusion If a lender has a marina project in its portfolio, the lender will need to determine the current ownership structure and make decisions regarding foreclosure, receivership and bankruptcy. To assist in this decision-making, lenders would be well advised to seek the input of both skilled owners association managers and skilled marina managers to help assess risk and next steps. If a lender already has a marina project in foreclosure, receivership or bankruptcy, the lender needs to ensure that the proper management skills are actively being employed for both the owners association and the operating skill sets. To conclude, marina projects are not just condos on the water and they are not just boater service providers. Marinas that are condominiumized are both and have the inherent problems of both. To adequately protect collateral value, a lender needs to reach out to skilled managers in both areas of expertise. About the Authors Jay Kelley is a seasoned finance professional with more than 20 of years experience in all aspects of commercial real estate investments for both public and private concerns. Jay specializes in real estate restructuring, as well as turnaround and rescue plans for businesses with financial difficulties. Jay is based out of Focus Management Group s Tampa office and can be reached at (813) or via at j.kelley@focusmg.com. Juanita Schwartzkopf is a senior consultant at Focus Management Group and has 25 years of experience in commercial banking, financial management and risk management. Juanita is an expert at analyzing and working with a variety of real estate assets, ranging from REITs to privately-owned real estate. Juanita is based in Focus Management Group s Tampa office and can be reached at (813) or via at j.schwartzkopf@focusmg.com.

7 Contact Information Focus Management Group is a leading business restructuring firm headquartered in Tampa, with offices in Atlanta, Chicago, Cleveland, Columbus, Dallas, L.A., Philadelphia and Washington DC. For more information regarding our experience in the marina arena, contact one of our experienced Managing Directors listed below: Corporate Offices 5001 W. Lemon Street Tampa, FL Tel: (800) Fax: (813) Key Contacts Jay Kelley: j.kelley@focusmg.com Juanita Schwartzkopf: j.schwartzkopf@focusmg.com