Experience with Master Lease, other creative options

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I have a community in contract in a mid-sized tertiary metro market, located in a dense commercial section of the city, that seemingly has a lot of upside if I can create the right structure. Here’s a little detail on the park…The sellers inherited this park recently. They don’t have a lot of experience or knowledge about what has happened in the past, other than knowing it has not been managed well recently. This park is county appraised at over a million dollars with the land alone appraised at 700k. There are roughly 120 lots, 52 owner occupied with 40 of them current on rent. Averages $165 lot rent (about $40-60 low for market), city utilities that are sub-metered. What I’ve discovered in due diligence is really poor expense control. They paid $30k each of the last two years for grass cutting for example and are losing somewhere in the neighborhood of $2k/mo in water (underground leaks likely and seller is willing to pay to replace all water lines based on what has been found). Basically, the park is break even at best with current management practices over the past 2-4 yrs. My original offer based on the agents listing info before diligence was in the $700k range, but it is clear I can’t pay that based on what I’ve uncovered. The agent has told me the sellers realize the price is ‘evolving’ based on what we’ve found, but of course they want me to come back with the new number. So, I am hoping for some feedback from the group.

  1. Any thoughts on a new cash price?
  2. As I’m guessing an offer based on current circumstances will not be sufficient, and lending will be difficult, I’ve thought about a Master Lease proposal, but don’t have any experience with this. Does anyone have any thoughts and potentially a contract template I could look at?
  3. Any other creative ideas out there that would enable me to capitalize on the potential upside of this turnaround?

Thanks to everyone in advance for your thoughts and/or ideas!

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RickB,

First things first:

What is the current NOI?
What is YOUR projected NOI?
How much will that process cost?
How long will that take?
What else could you do in the meantime on another MHP? (HABU)

Now onto your post —

The numbers don’t work at $700k.
Not even close.

BTW - the county numbers are solely for taxing purposes, and have little to do with the actual market value.

Even creative financing won’t solve the problem of a ludicrous price.

Unless…

The seller is wanting out of the management side so bad that they are willing to give major concessions to a turn-around entrepreneur – like you.

A master lease CAN solve many of the problems in this situation, the owners must give up total control so you can make the changes necessary.

What’s in it for you?

Well – what do you want? Cash flow seems to be the only benefit worth it because, at the price you mention, unless I missed something, there is ZERO equity.

Let the seller dream of equity while you work and establish the reason most of us get into this asset class – cash flow.

A master lease with an option at the same monthly amount they are netting now might wet their appetite for getting out of management. Now the issue becomes what option price will they ok?

Who knows. But whether you close on the option or not is almost a moot point. You are getting into this for the cash flow. If you are able to exercise your option, you’d only do so at a value that buys you equity. Not to pay full price just to say you bought it.

A formula could work here.

You could state in your option that you may exercise your right to purchase under the following conditions:

Purchase price to be at XX cap rate based on the previous 2 years of actual NOI.
Seller to carry the note for XX years at XX interest rate. Buyer to put XX down.

Bottom line: a low master lease figure and a higher option price may entice them to give you the right to control the property.

Make sure your lease gives you enough time to execute your plan. 1 to 3 years just isn’t enough. In fact, if you can get 10+ years, you have defacto ownership. But not legal ownership.

For an actual contract template, well that’s practicing law without a license.

Keep us posted,

Mike

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