1031 Money Coming In - Best way to find $6M - $8M park


#1

We own decent sized park in a good market in California. I think the time is approaching to 1031 this park into a larger asset. I expect a sale of our current park would yield ~$2 million of cash after paying broker commission and existing debt so would likely be looking for a $6 million - $8 million park or portfolio of parks.

My question to the community is what advice people have on locating another MHP to deploy the capital and what strategies they would suggest given this will be a 1031 exit? What are the best channels to locate a park of this size? Does anyone have advice on 1031 exchanges in the MHP industry in general?

We would like to move out of CA and into a market with better cap rates and correspondingly healthier cash flow. We are a family who prefer to invest somewhat passively. We are heavily involved in acquisition underwriting and due diligence up front but prefer to have professional offsite management run the park after closing. We have an offsite company run our CA park currently and have had a positive experience.

Looking for all the standard asks - public utilities, minimal park owned homes, good metro, some upside on rents. Willing to pay above average commissions and have bankable credit.

Thanks in advance for any advice!


#2

I would be interested in purchasing your California park, please contact me if you would like to discuss the possibility of a transaction.


#3

My advice would be to reconsider that $2mm of cash will not buy $6-$8mm portfolio. Maybe $4mm portfolio. You cannot get high leverage on large purchases because they often come with POH. And larger purchases are more expensive relative to their cash flow, which drives the LTV down as well.

1031 is great but the timing constraints are considerable. Don’t let the tax tail wag the deal dog. On the other hand, better 1031 than not-1031.


#4

Brandon, thanks for the response and I really appreciate the advice. I had not considered that we would not be able to take advantage of same leverage ratios at that price point. What are the main drivers that make large purchases more expensive relative to cash flow? Are you talking DD and financing costs or more about cap rates on larger deals?


#5

Both, but cap rate compression will be the primary driver


#6

Thanks mhp. I don’t fully understand the cap rate compression comment. I understand that larger parks generally trade at lower cap rates than smaller parks. I also thought that there are more lenders out there chasing these larger deals and therefore one would have access to cheaper debt so you can pay a lower cap rate and still maintain a 3 point spread. I also was expecting one can get a longer amortization on larger stabilized parks to help juice the annual cash flow.

Do banks typically have more stringent DSC ratios on larger loans or just want an investor to have more skin in the game? Does recourse vs. non-recourse impact the LTV? I ran some simple math on a smaller deal 9 cap financed at 6% and a larger deal at 7.5 cap financed at 4.5% and the impact on DSC ratio was like 5bps.

Any additional insight you can provide would be greatly appreciated and please correct any flaws in my above statements. I do not know a lot about bigger deals. I’d like to make sure I’ve got the basic underwriting assumptions down so this would be tremendously helpful.


#7

It all comes down to the DSCR. Since larger parks trade at lower (compressed) cap rates, hitting the typical 1.25x becomes harder. That said, given strong institutional (non-recourse) demand from lenders in this market, certain things may be offered which help to hit numbers - i.e. 30 year am and 1-3 years of interest only. Non-recourse guys are around T+240 to 250 here which puts you in the 4.7 to 4.8 range, and will generally max out at 75 LTV, and often will end up at 70.

I don’t often see the smaller banks / recourse lenders go out 30 years, or ever offer any interest only options, and rates are usually a bit wider. That said, if you shop the community bank deals around hard enough, you can get some insane terms (low 4s, seller 2nds, 20-25 year terms with 5-10 year locks, etc). Recourse vs. non-recourse can occasionally be negotiated on the community bank side but I’ve yet to seen it done and wouldn’t want to crush my numbers with 40+ down anyhow.


#8

Mark,

Saw this entry obviously. We are almost in the exact position as you. We have been looking hard, sitting on about $2mm.

Not in a 1031 situation as we are just paying our taxes instead of rushing into anything. If you happen to come upon something pretty big, and need a partner of about the same size, let me know. We thought we had one locked up but the Seller kept changing the deal, and then put another offer out recently that was verbally accepted, but then nothing done on.it. We have 2 other parks, but need to find another bigger one. Very interested in large, nice park.

We also have experience in storage units, restaurants, offices. But MHP’s is whee we have committed to be as of 10 years ago.

Thanks!
John


#9

In the park business over 30 years and thought finding another MHP would be easy (doing a 1031) --two years later no new parks but placed at least 5 under contract and during DD walked away. So we invested in row crop land and receive 5% return with no management work and once a year at planting receive the whole amount. The land values have increased 7% per year for the last 10 years. Sold one farm and voided any tax payments for gains to government and still looking a for an excellent park that will be still desirable to buyers in 12 years when we sell it!!!


#10

Mark

Thanks for reaching out. I had replied to your email from MHP Forum, but it went to Brandon, and he told me I needed to respond on this forum.

My email is johncshieldsjr@yahoo.com;
My cell phone is 352-239-9850.

We are very interested in acquiring a large park. We have been in real estate a long time and in mobile home parks for about 12 years. Please give me a shout.

Happy Thanksgiving,
John


#11

Mark13,

While I’m not a tax advisor/CPA/tax attorney and I don’t know your basis or tax liability, you may consider paying the full freight this round and getting into passive lending on MHPs.

You are already a somewhat passive investor
You know the asset class
You’ll have the capital to move quickly to fund others’ deals
It’s a back door to ownership
There is a never ending need for capital in the small MHP space

And one more thing —

NO MORE MANAGEMENT!
NO MORE MANAGEMENT!
NO MORE MANAGEMENT!

We are a small group of private lenders and we see a growing need for capital in this space.

We are working to correct the problem!

Keep us posted,

Mike

PS - I’ve posted about 1031 timing issues all over this forum.