There are many marinas in Maryland, ranging from large commercial ones the size of small towns to “informal” (or illegal) ones with a few slips and a ramp. The purchase or sale of a marina property has all of the financial elements of a regular commercial property, but with highly specialized business, riparian rights, zoning, and environmental concerns. There are many risks to purchasers, and they pose very interesting questions for the real estate lawyer that knows about waterfront and marine businesses.
I was recently hired by a cash buyer to review a potential marina purchase in Baltimore County. Intellectually, this was an exciting opportunity, since it meant that it was up to me to do the due diligence that is often handled by the lending bank, and it gave me the freedom (and responsibility) to know all aspects of the deal. Here are some of the things that I looked at.
Purchase/Sale Contract: No matter how familiar one might be with a property, the devil isn’t in the details – ITS THE DETAILS IN THE PAPERS. If a judge has to later review and enforce a contract for purchase or sale of a marina, that judge is going to read the words on the page. They may never even see the piers, slips, office or workshop. The only thing that matters is whether you received what the paper says that you are due. There are lots of attorneys that can read a purchase contract for a commercial property – there are a lot less than can determine whether the contract adequately describes the property and business that comprises a working marina.
Zoning and Development Restrictions: This property was in a very specialized and highly restrictive zoning category, and some face to face discussions with the zoning office revealed that prior sales had fallen through because the property had been considered as having the ability to convert to residential condominiums, when that was not possible under current zoning. These restrictions limited the upside potential of the property significantly.
Piers and Riparian Rights: The possibility of expansion of the existing marina was an intriguing aspect of the purchase. Careful review, however, revealed that the marina was already built out to the maximum side-lot restrictions and out to the harbor line, which prevented further expansion. The slips could potentially be reconfigured, but expansion was not possible.
Lease Agreements and Tenant Relations: The seller provided all of the lease agreements with current tenants for review. These were professionally done, transferable, and enforceable, but during the course of the review it came to light that one of the tenants was unlikely to continue at the expiration of the lease in a few months. Even more concerning, the largest tenant (who made up nearly half the revenue) appeared to be teetering on the edge of default, and had recently requested that the rent be renegotiated.
Environmental Review and Survey: With marinas, it is crucially important to be sure that there are no significant environmental concerns — especially buried or leaking hazardous materials. Also key is the question of whether there are easements across the property or other issues that might materially limit the access to and control of the waterfront. With this property, those reviews did not reveal any issues.
Revenue and Business Concerns: The seller in this instance was a well established commercial business with a known history and other similar properties. There were no concerns about its ability to deliver good title or to demonstrate that it had the authority to sell the property. The business concerns in this case were with the revenues generated by the property and whether they supported the investment. Secondarily, whether there might be future appreciation (or depreciation) with the property or upside from redevelopment. In this case, current revenues were good, but deviated from historical norms, and were also highly dependent on the largest tenant, who did not look sustainable. We ran numbers for return on investment based on historical norms and accounting for the possible loss of tenants — these made the property look riskier than it had initially appeared based on revenues. The difficulty redeveloping the site, in light of the restrictive zoning in place, also limited upside potential and future appreciation.
J. Dirk Schwenk is a Maryland lawyer in Real Estate law, Waterfront Property, Civil Litigation and Maritime Law from Annapolis, Maryland. He graduated cum laude (with honors) from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.