The Small Business Administration (SBA) in conjunction with the NAICS (North American Industry Classification System) recently came out with their loan performance report. The report measures the historical loan performance of SBA loans (both 7a and 504) within each business type throughout the nation. It measures the level of SBA loan failures (default) and loan charge off rates within each business category, including marinas.
Underwriters and bankers droll to get their hands on this report as it gives an excellent overview of the strength of individual business categories, helping them assess where they should lend. It’s also just plain interesting to examine which business categories are winning and which are losing.
Marinas did extremely well and especially so when compared to other “special purpose property types” such as car washes, restaurants, hotels, gas stations, etc. You may not agree that marinas should be put it this category but from a bank underwriting perspective, they are. Special purpose properties are those that have a single use to them i.e. you can’t readily turn a marina into an office building.
But before we go into the numbers let’s take a step back. The Small Business Administration is a government agency that guarantees/insures loans to banks/lenders, in case of borrower default. You may be familiar with the SBA 7a loan or the SBA 504 loan programs. Both of these programs are used to finance marinas.
The NAICS code is used by the IRS to classify all business types. You may have noticed the code on the upper left hand corner of the first page of your tax return. It is a six digit number; the NAICS code for marinas is 713930.
The study was done from 2000 to September 2010 (which is the fiscal year end for the SBA). Even though the data is slightly old, it gives a nice overview of both the boom times (2004 – 2007) and when the economy got into trouble (2008 – 2010).
The report covers 1,127 different business types and 675,574 loans, both SBA 7a and SBA 504. The overall total percentage level of failed loans was 19.42% of the 675,000 during this time. So just under 20% of the business owners that received an SBA loan during that time defaulted.
Marina’s SBA loan failure rate was 11.45%. Ranking the business type at 191 out of 1,127 or said in another way, marinas failure rate was better than 83% of all other businesses examined.
You may not be that surprised to read this. But these statics are surprising to bankers and underwriters. Most bankers do not just shy away from marinas, they run from them. The generally accepted attitude is that marinas have a very high failure rate and when they do fail, it is very difficult for banks to sell/liquidate the asset.
This leads to the next point. The “charge off rate” as defined by the report, equals the dollar amount of loans charged off divided by the total dollars of loan disbursed in each category.
The charge off rate for marinas was a shockingly low .5%. Ranking marinas at 120 out of 1,127 or 89% better than the rest of the NAICS business categories… What this means is that on defaulted marina loans, banks got their money back.
Compare these results with other “special use properties” such as hotels, restaurants, car washes, self storage, gas stations and you’ll see that marinas do not deserve the level of criticism that they receive from bankers. We will also throw in mortgage brokers into the chart so you can see one of the worst performers to broaden your perspective.
Type of Business Failure Rate % Better Than Charge Off Rate % Better Than
Marinas 11.45% 83% .5% 89%
Hotels, Limited Service 7.02% 94% .61% 88%
Restaurants 23.38% 30% 4.4% 34%
Car Wash 15.85% 66% 1.81% 71%
Gas Stations 17.27% 59% 2.08% 66%
Doctors, General Practice 7.46% 93% .97% 83%
Mortgage Brokers 46.56% 1% 9.57% 7%
As you can see marinas charge off rate is actually better than general practice doctors (doctors are the holy grail of SBA lending)… and their failure rate is pretty close as well. Hotels are another surprising performer as they share a similar attitude within the banking world as marinas, most banks do not want to lend on any more hotels. And it continues to be very difficult to secure hotel financing at this point.
Perhaps marinas did so well over this period because they never received the aggressive underwriting and higher leverage that these other special purpose properties received because of the lack of interest from most banks to lend to this category in the first place. Or marinas could be just a better business model, one with less competition and higher demand from its customers.
No comment on mortgage brokers… All in all it appears that marinas have weathered the recession much better than most. Clearly bankers need to reevaluate their reluctance to lend to marinas and replace their misconceptions with facts.
For those of you that have extra time on your hands, go here to download (free) a full copy of the NAICS report. Enjoy!