Planning for the long-term growth and financial success of your marina means predicting the future. This includes anticipating and budgeting for future investments in your marina’s infrastructure.
Have you given much thought about what it will cost to replace the docks in your marina 20 years from now? Although the idea may be mind-numbing, it’s important information to know.
Knowing this will not only better prepare you for the inevitable future but will give you a clear picture of the value of your current docks.
Owners and operators pour an amazing amount of blood, sweat and tears into building their marina businesses. However, too often planning for the marina’s future doesn’t occur until it’s too late to do it effectively.
How to Determine the Future Cost to Replace Your Marina
If you know the cost to build your original marina and the year it was built, you can get a pretty good idea of what it will cost to rebuild the same marina at the end of its useful life.
In order to make the jump from original cost to future cost, we need to make 2 assumptions.
- Make a reasonable guess about the dock’s useful life
- Assign a percentage to the estimated annual increase in the cost of construction. Given inflation rates and historical data on the cost of construction, we can assign a value somewhere around 3% to 4%.
Given these pieces of information, we can calculate what it would cost to build the same marina “x” number of years from now – 20, 30, 40, etc…
We can go one step further.
We can determine how much the marina would need to put away each year or month between now and the end of the marina’s useful life to reach the required replacement amount. All we need to do is plug-in an estimated rate of return the marina could earn in a conservative investment account on its monthly deposits.
Although there are a number of outside factors that can skew our assumptions about projected useful life, future cost of materials, and interest rate the calculation will give you a good ballpark figure.
The calculation is nothing more than a simple finance equation. An annuity problem that accounts for the time value of money and the future cost of something.
Bellingham Marine has developed a simple interactive tool that marinas can use to work through a range of different scenarios.
Armed with the knowledge of how much it will cost to rebuild your marina in the future, an owner may decide to start a capital replacement fund. In a capital replacement fund money is collected over a period of time to cover the repair or replacement of an existing asset. The fund provides a mechanism to ensure that the funds are available to replace the asset when it reaches the end of its useful life.
Example Scenario
A yacht club has just replaced the docks in its marina with concrete floating docks. The cost was $8.5 million.
The marina is expected to have a useful life of 50 years.
The yacht club decides to establish a capital replacement fund for the replacement of the marina at the end of its useful life.
The club estimates a 3% increase in the cost of construction each year. The club also determines they can earn 5% in a conservative investment account on monthly deposits.
Based on these assumptions we can determine that the marina will need to put approximately $14,000 into the club’s savings account each month in order to cover the entire cost to rebuild the marina 50 years from now.
Conclusion
It may not be realistic or make good business sense to plan to cover the complete replacement cost of the marina out of pocket. Perhaps your goal is to have 30% of the cost put away by the end of the marina’s useful life and plan to finance the rest. The important part is that you know what’s coming and have taken the time to plan for it. And in this case, budget for it.
If you’d like to learn more about the future cost to repair or rebuild your marina and what you’d need to start putting away, contact Bellingham Marine. We’d be more than happy to share our planning tool with you and to answer any questions you may have.
