All Forum Posts by: Jack Martin

@Bob B. first of all, I would echo the response by @Dave Foster on the 721 issue. IMO, he's one of the sharpest knives in these threads. 

An alternative strategy is to consider is a passive investment with bonus depreciation. This is often referred to as "the lazy 1031" and combines cost segregation with bonus depreciation. This allows investors to take a significant passive loss and one of the most attractive attributes is time. While a 1031 exchange has short time restrictions, the bonus depreciation strategy allows you the entire calendar year to execute.

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as your gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years.

Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will not be buildings, rather properties with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner significant passive losses, and sometimes can equal the amount of capital invested, even in years where the 100% has started to sunset.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us. As we acquire parks, we perform a cost segregation study and elect bonus depreciation for the property. We also make capital improvements to the parks on an ongoing basis and elect bonus depreciation on those items as well.

The bonus election allows investors significant passive losses on their K1s, which they can use against "like-kind" gains from other activities in their life. Common examples are gains from the sale of other investment real estate, income from other passive real estate investments, or investment income from other passive investments that qualify.

Also, you can "drip" into these kind of investments, so if you choose to spread your allocation around, or sell off your portfolio in chunks, that can work out well. 

Feel free to DM me if you'd like to discuss further. 

All the best,

Jack

@K S. if you cannot find a suitable 1031 replacement property, keep in mind an alternative strategy is to seek a passive investment with bonus depreciation. This is an accelerated depreciation strategy sometimes referred to as "the lazy 1031" that combines cost segregation and bonus depreciation. Instead of completing a 1031 exchange with short time restrictions, the bonus depreciation strategy allows investors to take a significant passive loss, which is used to offset gains, and one of the best parts of the strategy is you have the entire calendar year to execute.

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years.

Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner significant passive losses, sometimes equal to the amount of capital invested, even in years where the 100% is beginning to sunset.

As also mentioned in this thread, a few words of caution; be careful not to let the "tax tail" wag the dog. Each real estate type has different intrinsic performance characteristics, so make sure you understand the property type's risks and potential as an investment, separate of the tax benefit. In other words, be careful not to invest in a poorly performing property simply for the depreciation. In that same vein, if you are investing passively in a syndication for bonus depreciation benefits make sure you vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with the right kind of investment properties that produce cash flow and appreciate, that will be the wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us. 

All the best,

Jack

@Michael A Pansolini a good way to find the guy you are looking for is to jump on Crexi and perform a search for listings of MHPs in the market, state, or region. Then look at the broker's profile and check to see if they specialize in MHPs or if that is their only deal. You'll want someone with significant experience, so make sure MHPs is all they do. If you get stuck, DM me and I can make some recommendations. 

All the best, 

Jack

@Hiren Patani the most important item to gain clarity will be market demand. When you have a project where the ability to sell homes will be the main factor that determines success, you will have a tough time meeting your objectives if adequate demand is not present. 

First, spend time and effort to understand population and job growth in the market. There are a ton of resources online for this, but some of the data is old or too general, so make sure to scour every resource you can find. Have a neutral mindset while you do this so you avoid bias to information that supports your thesis. The goal is to look at a wide variety of data so you can understand the collective truth from many sources. If you find the population is declining, that would be a market to avoid. If you find high unemployment and slow job growth, that would also be a market to avoid. You want to achieve a high degree of confidence that there will be demand for affordable housing, plus jobs for your new residents.

Next, gain a strong understanding of the median home values in the market, along with the volume of lower priced homes available that will be your competition. Start with realtor.com and see what the average value of single family homes are in the area. In general, if single family homes are not at least 2x the cost of a new mobile home, then don't waste your time in that market. You cannot sell a mobile home in a park for 100k if a single family home can be purchased outside the park for 150k. There needs to be a significant delta for a mobile home to be attractive. Make sure to compare apples to apples here. If you intend to sell brand new 1200 sq ft 3/2s in your park, then look at the pricing of 1200 sq ft 3/2s. If there are 800 sq ft 1/1s available in the market prices lower, that would be okay, but if similar quality and size homes are available for less than 2x the price, that would be a red flag. And if there are a high volume of homes priced lower, that would also be a red flag.

If the single family home market is strong in that market, then you should talk to your competition. Call all the mobile home parks in the market to find out what the market activity is. Ask them what their current lot rent is and what else is included/excluded? This will help you understand what the lot rent should be at your park. Ask if they have any rental homes in the park and how much those rent for. Ask if all the homes in the park are rentals? If that is the case, that means the market cannot support home sales, so you will likely be renting all your homes too. Ask them if they have homes for sale in the park, what kind of homes, and how many homes have sold recently. Do they provide brand new homes, or only older used homes? Do new residents obtain their own financing, or does the park carry the financing? If they carry, how much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park how they are filling them up. Ask what incentives would they offer if you brought your own home into the park. From those calls, you will learn what the competition is related to lot rent, the sale of homes, how many rentals they have, and what incentives you may have to offer as you prepare to sell homes.

If you uncover positive feedback from those calls, make sure to spend time comparing the quality of your competition to what you intend to bring to the market. Google street view should allow you to do a virtual drive through or drive by to see what your competition looks like. Pay attention to the amenities, roads, age of homes, landscaping, etc. 

Take the time to do this right and you will be glad you did. If you get positive signs from all those efforts, then it's likely you will be able to achieve success in that market. Remember, market DEMAND is the foundation of your pro forma, so make sure to gain a high degree of confidence that it will be sufficient.

All the best,

Jack

@Peter Morgan yes, the passive losses you would get on your K1 from a syndication would carry over to subsequent years. Look at it like having many arrows in your quiver that you can use if you have passive gains to offset. If you use some of the arrows, then there would be a recapture of those arrows when the property is sold in the future. The good news is the recapture occurs at a flat rate (currently 25%) so depending on your tax bracket, that may be more favorable to you. On top of that, you have the time value of money invested working in your favor, allowing you to defer tax payment in the future when the property sells. And if your situation doesn't create enough qualified passive gains to offset all the passive losses, then you only have recapture on the losses you use. In other words, if you don't use some of the arrows, then there would be no recapture on those arrows. 

All the best,

Jack

@Rosemary Montgomery you shouldn't need to get your investors exposed to a personal guarantee. As the sponsor of the deal, you can take the responsibility of the guarantee yourself. This is quite common and should be expected by your investors as they want to be just as confident you will be a good steward of the deal and make the loan payments as the seller would. 

All the best, 

Jack

@Julia Parton I would echo the guidance from @Rachel H. particularly due to the fact that each state may have specific nuances that are not present in another state, so it is always best to check with your state's MHA before you issue new leases. Keep in mind that things can change from year to year within each state as new legislation is passed, so a relationship with the legal expert(s) that are aligned with your state's MHA is a valuable asset to have. 

All the best, 

Jack

@Paul Coleman keep in mind some property types will produce more bonus depreciation than others. I am a MHP sponsor and we are actively using this strategy, so I will unpack this for you so you can see why. 

When a property is purchased and a formal cost segregation study is performed, the value of the property is segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. When the bonus election is chosen, then the portion of the property's value with a useful life of 20 years or less can be taken as a passive loss in the year the property is purchased.

Since bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves, the property types that are the most favorable to generate bonus depreciation will be those with a high degree of "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner significantly more passive losses for investors as compared to other commercial real estate. 

Keep in mind that 100% bonus depreciation will be phased out starting in 2023 by increments of 20% per year. The amount allowed in 2023 is 80%, then 60% in 2024, 40% in 2025, and 20% in 2026.

If you are seeking to offset qualified passive gains you have incurred (or gains you expect to incur) be aware that the gain AND the investment where bonus depreciation is being taken need to take place in the same calendar year. With that said, any allocation of passive losses you receive on your K1 that you cannot use in that calendar year will carry over, so they can be used in subsequent years.

A few words of caution; make sure the sponsor is choosing the bonus election. Also, make sure they are performing a formal cost segregation study and not just "winging" it on their own. And make sure you vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with an experienced sponsor and quality investment properties that produce cash flow and appreciation, that will be a winning formula.

Note: I am not a tax advisor or CPA. This perspective is solely from my own experience managing mobile home park funds and working with the experienced tax experts we are fortunate to have around us.

All the best,

Jack

@Preston Dean I may be interested. We are about to close on a 30MM deal in Texas and would like to grow our footprint some more. Please PM me. 

@Steve Frye there are major differences between the POH and TOH strategies and I will share a little here for context. 

A park where all the homes are owned by the tenants (these are called "tenant owned homes" or "TOHs") results in the park owner simply owning the land, the roads, the common amenities (like a clubhouse, laundry, pool, etc.) and the lot improvements. The residents are responsible for the maintenance of their home and the upkeep of the lot where their home sits. They pay lot rent and utilities.

A park where all the homes are owned by the park (these are called "park owned homes" or "POH"s) results in the responsibility for home maintenance falling on the park owner, so while the rental amount is greater, the expenses go up as well. So does your tenant turnover, since POH tenants do not have any ownership, or vested interest in staying long-term.

What makes mobile home parks such a great investment is the low turnover and stable cash flow that is created by having residents own their own homes as mentioned in the TOH model. For this reason, you will find almost all professional park owners focusing on the first model. As soon as you shift to the POH model, you lose that key strength and essentially now you have created an apartment style investment, but with mobile homes. 

With that background, when valuing a park it is common to ONLY give value to the lot rent, similar to how an appraiser or lender would approach it. Therefore, the value of the park is determined by the market lot rent, not the income from home rentals. 

In this example: 16 lots x $300 (assuming that is market lot rent for Tullahoma) = $4,800 x 12 months = gross income of $57,600. That's a long way off from the $200k gross income you mentioned from home rentals. Apply a generic expense ratio of 40% and your NOI is $34,560. At a 7% cap rate (assuming that is market cap rate for Tullahoma) the value of the property is just under $500k.

That same deal using the rental income might look like this: 16 lots x $1041 (seems kind of high, but that's how it pencils out) = $16,666 x 12 months = gross income of $200,000. Apply a generic expense ratio of 50% and your NOI is $100,000. At a 7% cap rate the value of the property is over $1.4M.

That's a HUGE difference in value, so make sure to understand the way professional park owners, brokers, lenders, and appraisers will approach valuation. Otherwise you will likely end up overpaying. 

Also, keep in mind that the management side of the business is dramatically different with rental homes than it is with all TOHs. With all POHs your expenses will be much higher, your tenant turnover will be much higher, the cost of unit turns will be an additional expense, and your management headaches will probably triple. 

All the best,

Jack