Posted by Dr B(OH) on January 21, 2009 at 18:20:57:
Brian,
Naturally, it would be more work to break the properties/businesses apart to evaluate them. However, I think you would be able to get a better handle on the value of the package. You also may discover which entity is causing the high expenses and why.
Steve
Hybrid MH Park Deal - Good Deal or Bad Deal? - Posted by Brian in Columbus
Posted by Brian in Columbus on January 19, 2009 at 13:27:42:
OK folks, Iâ??m looking for a little advice on a hybrid park deal that I am working on. I have a family friend who has a nice park complex about an hour from me that heâ??s lost his will to manage. I guess he’d rather spend his free time at on of his 3 retirement houses. Anyway, the entire property consists of three 55 and older parks (136 spaces), a 9 hole golf course, 4 unit rental bldg and a self storage facility (194 units) all on 100 acres. The parks have a 15% vacancy (total) and the Self Storage facility has 19% vacancy. The seller has a note on the park for $2 Million at 6.5% interest over 20 years. The park is well maintained and the opportunity lies in filling the vacant lots and Storage units. Thereâ??s also room to expand the park and plans have been drawn up. I can buy 50% equity/ownership in the park for $500k ($100K cash and the seller will carry back $400k over 10 years 0% interest). I will have the exclusive right to fill lots and sell new/used homes at the park and the income will be credited against my buy in. This comes with the dealerâ??s license that I have 50% ownership of which I currently do not have. I will oversee the management of the park from afar with the local PM handling the daily grind. Sheâ??s been with him for 10+ years so she knows the ins and outs of his business. The dealership license will also allow me to do my Lonnie Deals from afar, so it adds value to the deal. The property generates a total of $515K/yr income and $313K in expenses leaving $202K NOI. There are opportunities to â??trim the fatâ?? at the park, but Iâ??m giving you what I hope to be the worst case scenario. The current debt service is about $183K annually on the 20 year note leaving a $19k bottom line. The lot rents have not been increased for over a year and are due for an increase. $10 across the board would result in $15K in additional income. Refinancing after the markets settle down would also improve cash flow. My plan is pay the seller back through the park income and make up any difference (hopefully none) through the Lonnie deals I sell to investors. I have been doing Lonnie deals for a year now and have a pool of investors that I can utilize filling the lots with used homes, so Iâ??m not worried about that. Heâ??s also agreed to be flexible on a re-payment plan in the event cash flow is tight and I will not (according to him) be personally liable for the performance of the $2 million note. Heâ??s well healed and living large in his retirement and want’s no part of the daily grind.
For tax purposes the seller does not want to be liquidated all at once and with todayâ??s credit markets, it may be difficult to accomplish anyway. Does the group have any thoughts on how to structure this thing? Essentially we have agreed to a partnership agreement with a buy/sell option at a later date. Iâ??ll earn sweat equity through the management side and filling the lots/vacancies. Iâ??m not looking for a monthly pay check per say, but I donâ??t necessarily want to give away the farm.
Any thoughts or advice is appreciated. Thanks!
Brian in Columbus
Re: Hybrid MH Park Deal - Good Deal or Bad Deal? - Posted by JHyre in Ohio
Posted by JHyre in Ohio on January 21, 2009 at 12:37:09:
It has the potential to be a good deal - certain details will matter, such as present lot rents, market rents, pending capital improvements, etc. In terms of structuring the deal, LLC with you having a “profits-only interest” is the way to go, otherwise you are immediately taxable on your share of the capital, IRS Revenue Procedure 93-27 is the authority that guides the details of the drafting in cases like this one. Likely you’d also want the ability to manage without interference and the ability to buy him out completely, likely on an embedded installment plan. Not for the faint of heart, but for the money involved, it’s a must to get the agreement right.
John Hyre
Re: Hybrid MH Park Deal - Good Deal or Bad Deal? - Posted by Don-NY
Posted by Don-NY on January 19, 2009 at 16:11:26:
I’m not sure I follow you? Are you buying 50% ownership of this entire complex or 50% of the equity. @202k net the property is worth roughly 2,020,000 as a MH park give or take a couple hundred grand. The other entities I really don’t know how to value. There is an outstanding debt of 2 mil so is there any equity to purchase? How are you going to pay the 400,000 if paid yearly that is 40 grand a year. The income expense ratio is very high on the expense side 61%! The guy did not get 3 “vacation homes” by giving others great deals. Maybe I’m all wet but as it looks now the numbers say not.
Re: Hybrid MH Park Deal - Good Deal or Bad Deal? - Posted by Brian in Columbus
Posted by Brian in Columbus on January 21, 2009 at 13:27:53:
Thanks for the insight John. The plan was for me to ultimately buy him out after working with him as a “partner” for 12-18 months. The park is well maintained with little deferred maintenance and has good management in place. The opportunity lies in the vacancy. Rents are below market and we plan on raising them $10 a space as soon as we finalize the deal. In addition, I plan to fill the vacancies with used homes with my investor’s capital.
After a little more research, I have determined that (according to one of the area investment brokers who specializes in parks) the CAP rates range from 9-11% right now. Based on the NOI of $202K the total purchase price might be a little high, but with the other components (storage units & Apts) it’s hard to figure out the real value. I’m not sure if I should break them out individually and the re-package or what. Thanks again for your thoughts.
Re: Hybrid MH Park Deal - Good Deal or Bad Deal? - Posted by Brian in Columbus
Posted by Brian in Columbus on January 19, 2009 at 17:40:02:
Thanks Don. I would be buying 50% ownership of the park, golf course, storage units and the MH dealership. I probably need to re-evaluate the payment plan numbers to make the numbers work as well. The whole package was appraised at close to $3.6 million in May 2008. What’s really hurting the deal (like you suggested) is the high expense side and the note terms. We plan to fill the vacancies and re-finance when the time is right. Any ideas on how to re-structure this deal to make it better (other than simply cutting expenses)? Lease option, etc. Just looking for some additional ideas.
I appreciate your candor and response!!
Brian