Rochester, MN MHP Deal Analysis: 215 pads, 59% Occ

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Rochester, MN MHP Deal Analysis: 215 pads, 59% Occ

Jaden Ghylin
Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes

All, I've been poring over the numbers for a park just north of Rochester, MN and would like some other perspectives.  The park is Oronoco Estates, and I'm guessing a few of you have looked this one over already.  I live about an hour away from the park, so I know the area pretty well.  The main draw for me other than being close to it, is that it's near Rochester, MN on the good side of town in the direction of Rochester's rapid expansion.  Rochester currently has a $5 billion city/state/private investment project for the Mayo Destination Medical Center going on.  This is driving down vacancies and driving up rents, but it's only just getting started.  There is another 18 years oe so of investment to go.  This would seem to be as recession-proof of an investment as you could find. Mayo is unaffected by recessions.

The park, Oronoco Estates, is a disaster. It's an REO being auctioned May 16-18th. 215 pads, 59% occupancy. It's on a lagoon, which may need some serious work in 2019 when the permit is up. The secondary lagoon required $300k+ of work recently and the primary lagoon is much larger. The park is about 80 acres, has a lot of vacancy and has a number of abandoned homes and homes that should be abandoned. Net income in 2015 was about $82k. Lot rents are at $275/mo for 127 rented lots, well below market rate. It is sounding like the reserve for the auction is over $1 million, which doesn't jive with a 10 cap buy price, however, there appears to be massive upside on this project. By my calculations the park should be worth at least $4.5 million if it's brought up to 90% occupancy, which means bringing in 67 homes or so and selling them. A big project no doubt, but a big spread to pay for it as well. A lot of my experience is in rehabbing/flipping residential properties, and a spread like this would be unheard of in that business.

What am I missing here? Is it really that important that the buy price be at a 10 CAP if there is this much upside? Wouldn't it make more sense to analyze the deal as a rehab/flip focusing on the ARV? I'd appreciate any insights here. Maybe this project is just too much of a headache to be worth it, but I just keep coming back to the potential value of this thing.

Jaden    

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y

@Jeffrey H.  Well since I am an old dog.. The one I recall the best

was for a 150 lot development we did just above Beale airforce base  ( home of the SR 71 and U2's which are too cool to watch )

this was in the early 90's plant was going on 250k then and then the spray fields were not to bad..

I have seen others that are self contained but then dump into sewer lines.. that take them for the final treatment.  we did one of those in Tangent Oregon.. actually each home had a septic tank but it then just separated the solids from liquid, liquid went out to a force main.. tank needed to be service annually. ground was too wet for leach systems.

The Canadians have some great systems but we could never get them approved in Oregon or CA.

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  • Marshall M.
    Washington, DC · Member since 2015 · 81 posts · 49 votes
    10y

    @Jaden Ghylin funny you bring this up, I was just looking at Minnesota parks today! 

    Anyways having worked on a lot of deals, here's my two cents:

    1. Have you managed a mobile home park before? It's not a single family home and it's not an apartment. Bringing in 67 homes will be expensive and time consuming. In short it could take years to fill up those lots with home owners. If you rent the homes you risk not finding a solid buyer due to having a high percentage of park owned homes (not everybody likes them).

    2. What do you mean by the lagoon needs work? If it's in a flood zone you really need to make sure you can even use the lots that are currently vacant (e.g. Has the property flooded before?)

    3. Cap rates in this business have been at all time lows in this business. If it's in excellent condition you can expect to pay a six cap, if it's not then maybe a nine or a ten is in the cards. There's no hard and fast rule that mandates a ten cap in this business.

    4. What diligence have you done so far besides running the broker's numbers? Did you notice that the park has some very aggressive rent and move in specials? Shouldn't that make you wonder why the occupancy isn't higher?

    I don't think this is a business for flipping unless you have a long term outlook and believe in the location. But who knows! This park could be great and I could be totally wrong. 

    Happy to help if you've got more questions.

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  • Jeffrey H.
    Houston, TX · Member since 2015 · 512 posts · 338 votes
    10y

    Before you even think about bidding on this property, you need water tight diligence knowing what is going to happen with this lagoon in 2019 from the city, county, state authorities.  If there is any doubt about it being able to remain in operation then you need to walk, with one exception - if there is public sewer at the road already.  Onto the rest now...

    For a Park that brings in ~420K of revenue per year this has an 80% expense ratio, which is horrible for this asset class.  Is this consistent over a 3 year period, or was the lagoon and other capital improvements to blame?

    What about the water source for this Park and what sort of shape is it in?  What other major capital improvements need to be considered (e.g. roads, tree trimming, other infrastructure)?

    How do the average lot rents for the area look?  How much would you expect to be able to increase rents immediately after purchase?

    Basically need more information to know if this is worthwhile, but on the surface it still seems overpriced...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jaden Ghylin  yup this one is going around I talked with another investor this morning about it.

    I personally would not buy a property that used private water and sewer.. And the bigger players I know on the west coast will not either.

    I made a loan on a park a few years back and it got condemned and need hundreds of thousands ot get it back up and running in the mean time all the homes had to be moved or vacated.. nightmare on elm st.

    If it has city utls at the street I would factor in converting it into the buy price.

    just because you have explosive growth does not mean a park will fill takes the right kind of folks that want to live in a park in the first place.

    Of ocurse if you make it a A to B park it is easier.. pictures I saw had some single wides at least that's what I thought I saw when I glanced at it.

    good luck

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Marshall M. thanks for the comments.  I'll try to provide more information.  

    1) I've not managed a park before, but I have a partner who owns them.  I understand bringing in 67 homes is awfully expensive and time consuming.  The potential value of the park would need to justify the headache.  The bigger question is how long would it take to get 67 solid families into the park?  That is a major risk given the current condition of the park.  I would definitely not rent homes.  

    2) The primary lagoon was cited in a 2013 property condition report as needing about $600k of work.  The MPCA permit is up in 2019 and it sounds about 50/50 whether it would get renewed without major work being done.  The secondary lagoon had about $300k of work done recently, and the primary so far has had no work done.  They are the same age, about 45 years.  Anyone who buys this park needs to be prepared to install a package plant or septic at about $600k.  Does not appear to be in a flood zone.

    3) Understood on cap rate.  This park is a dump and is on a lagoon, so currently that would drive a higher cap I imagine.

    4) I've thoroughly investigated the lagoon issues with calls to MPCA, wastewater engineers, and the excavation company that has been servicing the property.  I've driven through the park and understand that the reality of the park is far worse than the pretty photos the broker has posted on the auction site.  There are numerous abandoned homes and a number that should be abandoned but appear to be occupied.  

    The park has aggressive move-in specials, etc.  I've called around to find out what's going on here.  Number 1, the manager doesn't answer the phone, so good luck renting a lot if you want to move in.  Number 2, the local mobile home dealer said the park has had a bad reputation in the past, but more recently has started to clean up it's act.  I don't think you can rely on move-in specials and waiting for people to bring homes in.  Homes need to be brought in and sold.  

    I agree that it's not really the same model as flipping.  My plan would be to bring the occupancy up to 80+% and refinance the equity back out.  This is clearly a large project, but the pay day appears to be there to justify the effort.   

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Jeffrey H. 

    Understood about due diligence on the lagoon situation.  My brother is a WasteWater Engineer and he deals with this every day professionally, so I've got a pretty good background for understanding and managing this.  I would plan to replace the lagoon with septic within 3 years.  That area of MN has extra requirements on treatment due to the geology, but we have it understood and know what is needed.  Public sewer is not going to be an option for at least 15 years...

    The park has very high staffing costs.  There is a full time manager, full time maintenance guy, and also regional asset manager on the P&L.  It also appears that the staff have a pretty high spending budget for purchasing things.  From my perspective there is a lot of excess spending because noone is keeping an eye on it. It's bee banked owned since 2013.  The previous owner's P&L showed $140k net income.

    Water source is well and it has recently been updated with new pumps.  

    Roads need some work, there are potholes, but overall not in bad shape.  

    Trees are trimmed.  The electrical pedestals should be updated, they are at 50 Amps and are 45 years old.  

    Lot rents look low at $275.  $310 is doable immediately and could be pushed higher when the park is cleaned up.    

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jaden Ghylin  if you can do the package plant that's what I would do straight away I have done a few in CA in subdivisions that were rural in nature .. they are expensive but they work..

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Jay Hinrichs 

    Understood on the fear of lagoons.  Need to price it in.  I am planning to put in an entirely new treatment system, which in my opinion is a necessity.  In this case the lagoon is pretty far removed from the park on a separate piece of land.  There would be little chance of the entire park being condemned.  City sewer is 15-20 year out.

    Understood on being able to fill houses.  Would need to bring in nicer houses to attract people.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jaden Ghylin  sounds like you have thought this one through.. my last post passed yours in the either. if it was me I would just go right for the package plant... I have built two and they work well.

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  • Marshall M.
    Washington, DC · Member since 2015 · 81 posts · 49 votes
    10y

    @Jaden Ghylin 

    1) Awesome that you've got a partner that owns MHPs. That's very helpful. To answer your question, even if you're selling homes for dirt cheap, mobile homes can take a while to sell. Hate to be a bearer of bad news, but generally speaking, lease-up in mobile home parks takes many years, not months, even if you're in a really hot area (some possible exceptions include parts of Florida and California). I would underwrite about five sales per year, which is a bit on the conservative side, so you're looking at about 13.5 years for just the 67 new homes to the property, not including the abandoned homes. 

    2) Good that it's not in a flood zone. The downside about private waste water treatment is just what you describe with the park requiring substantial cap-ex when they are not properly maintained. If you can get comfortable with this, you'll have a serious edge over other investors. 

    3) On cap rate, I've seen some sub-10 cap rates on properties that have needed hook ups to public sewer and on properties that have run out of water in the wells. This industry is getting a lot of attention from financial funds which has definitely drive cap rates down. I'm sure you have a target return that you need to meet that is driving a range of price you are willing to pay. From what it sounds like, hopefully you've underwritten this conservatively and have an additional expense contingency priced into your model. 

    4) Looks like you have done a good amount of due diligence. If you find that your numbers work, you're comfortable with its physical condition, you've got the capital and you have the patience to see this play out then you might just be in a good position to go through with this deal. 

    Best of luck. Keep us posted. I'd love to hear how it goes. 

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  • Jeffrey H.
    Houston, TX · Member since 2015 · 512 posts · 338 votes
    10y

    @Jay Hinrichs what does a plant servicing 215 pads cost you estimate?  This sounds like a $1MM animal if you pay retail prices...ouch!

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jeffrey H.  Well since I am an old dog.. The one I recall the best

    was for a 150 lot development we did just above Beale airforce base  ( home of the SR 71 and U2's which are too cool to watch )

    this was in the early 90's plant was going on 250k then and then the spray fields were not to bad..

    I have seen others that are self contained but then dump into sewer lines.. that take them for the final treatment.  we did one of those in Tangent Oregon.. actually each home had a septic tank but it then just separated the solids from liquid, liquid went out to a force main.. tank needed to be service annually. ground was too wet for leach systems.

    The Canadians have some great systems but we could never get them approved in Oregon or CA.

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Jeffrey H.

    I've got estimates in the $550-600k range for a package plant.  These are not binding quotes, but I've gotten similar numbers from 3 different sources that work in the Rochester area.  

    -Jaden

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  • George N.
    Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes
    10y

    Seems like a decent deal in every way but the utilities. At the end of the day even with a new packaging plant you'll still own a park on private utilities which will scare away most buyers/banks. Even if they're new. 

    I would worry less about filling lots. Rochester is a decent sized and fast growing metro. MN has a reputation of having a good tenant base. Run a test ad and see what kind of response you get. Clayton has a program where they will finance new homes at little to no cost to the park owner. Champion is coming out with a similar program. If the test ad is successful then you will likely be fine there. 

    I'd get with Frank Rolfe. Talk to him and see what he thinks. Personally I'm betting he would recommend walking the deal. But your appetite for risk seems higher. I guess in the current market if you're gonna really score you need to be willing to accept a black eye or two most of the time.

    Is the seller carrying paper? Financing this place is going to be a beast between occupancy and utilities. While the real money to be made is on the upside I think a 10 cap on current performance is still steep unless there are stellar seller financing terms. You're going to be dropping serious money into this thing even at 0 down and will be at the mercy of government bureaucrats, a thought that would keep me awake at night. 

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  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    10y

    Frank doesn't buy parks without public water/sewer. He might make an exception here or there, but those are both big no no's in his book. 

    This park sounds like a disaster to me and I bet it will bleed you dry. What you're also not calculating in is the cost to maintain the number of homes you have in the park. People do move. When that home goes up for sale you need funds to acquire it otherwise your competitor might and they'll drag it out of the park leaving you with more lots to fill. If I owned a park nearby with vacant lots, I'd be shopping in this park every month.

    There are so many red flags on this park that I wouldn't even consider it. I think you're blinded by the finish line, and overlooking the life sucking and financial bleeding you'll suffer through to try to get it there. Unless you have an extra $3M sitting around earning .01% at the bank, keep looking.

    You can pay Frank a consulting fee. Not 100% sure he and Dave still offer it, but they would look over your deal for a few hundred bucks. I guarantee you they are aware of this one and most certainly gave it a big pass.

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @George N.

    Thanks for the input.  I realize the private utilities potentially make it less attractive.  I figure that just drives it to a higher cap rate to compensate.  Some buyers and lenders will be scared off by that, but I have spoken to lenders that will do 30 year on it and I have a local bank lined up to finance the initial purchase.  It's interesting how different perceptions are out there about private treatment systems.  I understand people have been burned, but I think if you plan ahead for the capital expense and budget for it, shouldn't be an issue and should offer higher returns.  

    I do tend to seek deals with higher perceived risk as they can yield a discounted price and higher returns.  Most risks can be managed and as long as the return is higher and there is margin built in for risk, I am ok with it.  Just plan for the worst.  

    I emailed Frank about the park, but haven't heard back yet.  I'm pretty sure his response is going to be "walk".  He really doesn't like lagoons or private utilities.  When I've asked him in the past about lagoons he's pretty much said to steer clear unless there is major upside, which in this case there is.  

    Seller is not carrying paper.  I have a local bank lined up to finance the deal.  The government bureaucrats don't concern me as much.  My brother is a Ph.D. in the wastewater business, so I have confidence that we know what we're doing in that regard.  

    Jaden

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Aaron Mazzrillo

    Thanks for the input.  You are probably right on this one.

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  • Bryan Wilhelm
    Harrison Township, MI · Member since 2015 · 39 posts · 6 votes
    10y

    I say go for it. You have a strong partner and a bank already lined up. Let the bank see your capital improvements and value added over the next 3-5 years. Show them your reduction in expenses from 80% down to 40%, then refinance it for 3 million, take the capital, and buy some more.

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  • Bryan Wilhelm
    Harrison Township, MI · Member since 2015 · 39 posts · 6 votes
    10y

    of course, I don't own any parks, lol.

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  • Jeffrey H.
    Houston, TX · Member since 2015 · 512 posts · 338 votes
    10y

    Frank and Dave do have a Park evaluation service on their MHU website - they get emails about stuff like this all the time and cannot respond to all the requests.  Even if you have a higher risk tolerance Frank can offer perspective on the gotchas and other things to watch out for in this specific scenario if you do plan to proceed - it will be a couple hundred bucks well spent.  I believe they only own one or two Parks with Lagoons, and simply because there are public utilities at the road in the event it fails and their tenants won't have to all pick up and leave.

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  • George N.
    Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes
    10y

    @Aaron Mazzrillo makes a good point I wanted to hit on in my last post. If you have a huge chunk of cash burning a hole in your pocket and nowhere to put it maybe you tackle something like this. But if not, probably a really bad idea. So my saying it's a maybe is based on the assumption that you are very cash rich/liquid. 

    You can also call Frank on the weekly call in show if you don't want to do a full deal review. 

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @George N.

    I agree.  This is not a project for the faint of heart or the light of wallet, but the returns appear to justify the effort.  

    -Jaden

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    The upside does look good but how do you view a potential 8-10 year turn around time.

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    @Thomas S. what is driving your 8-10 year estimate?  Do you think advertising could help move houses faster?  Keep in mind, this is a large market, with strong job growth.  There is demand for housing.

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  • Jaden Ghylin
    OP
    Developer · Prior Lake, MN · Member since 2010 · 118 posts · 46 votes
    10y

    1,156 new apartment units came online in Rochester in 2015.  That number is likely higher this year.  If the city can absorb that many apartments, it seems certain that it can handle 65 new mobile homes.....

    http://www.startribune.com/rochester-is-in-the-midst-of-an-apartment-boom/367709571/

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  • David Huynh
    Investor · St. Paul, MN · Member since 2014 · 109 posts · 37 votes
    10y

    @Jaden Ghylin I'm going to be following you on this one. I had peeked at it myself and wondered how I'd approach it, add value, etc.. Excited to hear how this one turns out. 

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