Making sense of dockomania

When “submerged land” was recognized as saleable by marina owners, lawyers, lenders, government agencies and slip renters in the mid-1980s, condominium-like conversions of docks into dockominiums began in earnest.

Shortly after, the same principle was applied to air rights divided by steel racks — rackominiums. The concepts became national in scope and gained legs in time with the real estate boom of the mid-1990s.

The basic premises of dockominium development or conversions are sound. For buyers, they freeze the acquisition price of mooring or storage, guarantee a slip or rack where it’s wanted, create equity – assuming adjacent property appreciates — and provide a tax write-off if financed and structured correctly. For marina owners, they have opened a door to drawing equity out of the business, or cashing out if family or employees don’t want to keep running it. Dockominiums were never meant to replace slip or rack rentals, but for some they are a useful and prudent option.

Detractors emerge
However, with declining waterfront access and prices accelerated by gains in residential real estate, dockominiums have generated detractors. A common argument against them is that they keep the “little guy” from being able to afford a slip. They seem to favor bigger boats, too, since developers can make more profit on these (and often force smaller boats to racks). And when the cost to store exceeds the boat’s acquisition price — a fairly common reality today in active boating markets — even well-heeled buyers grumble about the stunning prices some pay.

Of the estimated 1.2 million boat slips in the U.S., hard facts are scarce about the number of dockominiums in use, or the pace of conversions. In a study titled “Working Waterfronts” prepared for the Florida Senate in late 2004, industry representatives said 57 marinas or boatyards, out of 1,546 marinas estimated in the state, had recently converted to condominiums or private use. That rate may have accelerated in 2005, but it has likely plummeted since the real estate bubble burst in the Southeast.

Authorities with purview over waterfront use are asking more questions and often slowing the development process. The general public, boaters or not, is asking that access to waterfronts be protected. Last year, North Carolina’s General Assembly was charged to re-examine and reformulate the state’s public trust submerged lands easement fee structure to ensure fair compensation by those privatizing and profiting from public trust assets — before more dockominiums are constructed.
The hype and promise of easy money from
property “flipping” has spread to shore from land. Even in today’s toned-down real estate arena, it is rare to find a cautious view of buying or investing in dockominiums. The numbers are both lofty and seductive.

In Florida, an article in the Palm Beach Post last
year cited prices ranging from $1,500 a foot to
$13,000 a foot, with the top end usually found in
the Florida Keys. Rack storage prices ranged
from $100,000 to $300,000. Annual appreciation
rates of 6 percent to 45 percent were reported.

Risk rises
Banks financed dockominiums for most of their history with notes secured by collateral value (e.g., mud). With the recent troubles in the subprime market, and the astounding increases — and recent softness — in selling prices of on-water property, involved lenders often require the pledge of additional collateral to do these deals. Developers generally don’t allude to this tightening, noting that dockominiums can still be financed through home equity loans. The lending risk in this case is multiplied if the value of both the dockominium and the owner’s home is linked to decline.

It’s hard to fight a basic economic premise of supply and demand: When the price of something goes up, its demand goes down. Dockominiums, in their best light, are all about simplified water access for true-blue boat owners. When their control, for whatever reason, passes from those passionate about the boating lifestyle to pure investors, availability, and thus access, will likely be reduced.

Looking ahead, perhaps the best scenario would be to maintain a mix of rental and purchase opportunities — at the same facility —for those seeking wet or dry storage. It would keep the access bar lower for buyers who are unsure of how long they will continue boating, and provide long-term purchase benefits for committed enthusiasts financially able to swing the deal and accept the risk.