Marina Dock Age, November 2003

Is Your Marina Realy Yours?
…and if you are leasing property, should you invest in improvements?
by Dennis P. Kissman

I am currently working with a client who wants to expand his business, but hesitates because his upland marina improvements are built on land leased from the government.

This isn’t the first time I’ve come across this situation, because marinas are often built on waters controlled by the government, utility companies, or irrigation districts. And, in many cases, the waterfront upland is controlled by the same agency that controls the water.

Because these leases start out as government land-leases and the improvements are built and financed by the lessee, this normally does not create a problem. Most of these leases have terms of at least 25 years for the initial period, and lessees are able to secure financing for the improvements. Such leases also afford the marina operator enough time to get a fair return on his or her investment.

Lending beyond the lease

With shorter leases — or as time runs out on an existing lease — it gets increasingly difficult for the lessee to obtain financing to further improve the property and expand the business. Lenders simply will not extend a loan beyond the period you control the property, regardless of the prospects for continued operation of the business.  

This is not an unreasonable position for a lender to take. It doesn’t make any sense to lend someone money and let them have the right to assign the obligation to pay it back to an unknown third party. The bottom line is this: As the end of your lease approaches, you still may be able to borrow money, but the terms may or may not make economic sense.

So where does this leave you, the marina operator? The first conclusion many will come to is that the lease must be extended. Before you start down this road, however, you should read your lease carefully to see who owns the improvements after the lease expires. Most of the time, a lease will be written to have all the lessee’s improvements revert back to the property holder, without compensation.

Unless your lease contains buyout language, you may find yourself at the end of your lease having invested heavily in improvements, but with nothing to show for it. I’ve even seen some concessionaire agreements that stated that the lessee must remove the improvements at the end of the lease — for a marina manager, this is not a practical solution.   Continue »