All Forum Posts by: Account Closed

I would look at what assets they have vs. what assets you need.  After that, use the operating agreement to protect your interests and control in the deal.  At the end of the day, your experience should be rewarded with both increased equity and more control.  For example: 

You have a newbie with a hot deal and plan to invest 50/50 in the equity.

1. Maybe you still keep the investment amounts the same, but state that the ownership is 55/45 with the 55 being your share.

2. You retain control of the big ticket items:  Large capital decisions, refinances, dispositions, etc.

3. You take the time to really work with and educate your newbie partner.  Take your mentorship role seriously in exchange for your equity and control.

Kalyb,

Here is a basic evaluation so you can get a feel for how it's done.  However, you need to negotiate off of the seller's numbers and use this as a snap shot of the potential of the park. My evaluation is just an example.  I don't know enough about the deal to give you one that is accurate to your deal.

Revenues-Expenses=NOI/CAP rate = Purchase Price

Gross Lot rent: 14*$220*12=$33,600
- Vacancy Loss/Bad Debt (2.5%) =$840
Total Revenue = $32,760

Expenses
- Water/Sewer ($50per resident/per month) = $8,400
- Trash ($14per resident/per month) = $2,352
- R&M (7.5% of gross) = $2,520
- Insurance ($80 per lot/per year) = $1,120
- On-Site Management (Free Rent) = $2,400
- RE Taxes (total guess) = $1,500
- Lawn care/snow removal = $800
- Legal & Accounting (1.5% of gross)= $504
- General Admin (0.5% of gross) = $168
- Advertising (1% of gross) = $336
- Replacement Reserves = $700
Total Expenses = $20,800

NOI = $11,960

If the park is billed at the master meter and then sub meters, your NOI will change significantly. Assuming a 10% loss on the water collections due to leaks and uncollectable accounts, your NOI will be $21,020

So, if the park pays for water, then your value will be $11,960/10%=$119,600

If the park bills the water, then it is $19,520/10%=$195,200

Again, this is just an example, but a lot of these expenses should line up with what the seller is giving you right now.  One thing you really need to look at is the upside.  What are the market rents near this park?

Chris,

One big thing that seems to get ignored is sacking away enough money in your numbers to handle the Capital Reserves.  Think of a property where the owner reports no R&M.  The numbers look great, but they are unrealistic of what is potentially sustainable.  Be sure you are building an appropriate budget for this in diligence.  Reserves should never be considered a part of your returns.  We use roughly $150 per occupied lot/per year in our initial evaluations on properties with well/septic combos.

On the septic side of things, most owners don't have them pumped as often as they should so these expenses are rarely reflected in the numbers you get from them.  When you are in diligence I would do the following:

1. Check to see that it is not in a flood plain or in an area where flooding happens

2. Check with the health department for past violations - past violations can steer you directly to any trouble they might have.

3. Check to make sure there can't be any new developments nearby that can affect future run off.  We are putting a mound in on one of our properties because new construction has caused drainage issues for our septic.

4. Have a thorough inspection done by at least two to three professionals.  Have them recommend a routine maintenance schedule, advice you on existing issues, and give you an idea of what might happen in the future based on the systems you have.

On wells, you will essentially follow the same steps but you will be using a plumber.  In addition, you will want to do the following:

1. Talk to the person who was doing the testing and get the test results from as far back as you can.

2. You will want to make sure the property has at least two wells.  A primary and a back-up.  If the park operates both wells (some do to side-step testing requirements) then you will want to be sure that each well could carry the park at full occupancy by itself.

One thing to watch for on properties that operate both private water and sewer is the potential for sewage to get into your wells.  You will need to get comfortable that this doesn't have the potential to happen on your property.  We've looked at three parks that have had this happen and the one common denominator in all three was flooding.  Again, flooding is bad!