From Wikipedia: Arbitrage - In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.
One reason we are attracted to MH parks is that to the trained eye they offer predictable cash flows.
A QUALITY park could be defined as:
A lot lease community (limited park owned homes), with a solid infrastructure (decent streets, city utilities, inexpensive to maintain amenities, etc), in a solid market (home owners want to and can afford the rent space), virtually leased up to capacity with free and clear homes (older “paid for” homes are superior to new homes with big loans on them), whereby the homes are owned by homeowners who have stable and predictable income sources (multiple industries creating a stable job market. Or, in the case of a 55+ park; pensions, retirement portfolios, social security income, etc.). Most of us would agree that the more of these ingredients the higher the QUALITY of the mobile home parks cash flow.
So, it is not much news to say that a quality cash flow park tends to qualify for a quality loans. If your park is missing any of the above it will be reflected in the amount, rate, and terms offered in the form of debt (if you can get any decent financing at all). We need predictable DEBT as much as predictable RENT.
Look at your own parks. What’s the biggest line item on your P&L statement? And, when you bought your park, what line was the last one to get attention in the buying process?
For too many people the answer is DEBT SERVICE.
Many of my friends and clients get all caught up with infrastructure and demographics when rule the #1 rule in arbitrage is to find and procure quality DEBT.
Let assume a small land lease park that grosses 100K per year and $70K - or 70% - makes its way to the owners pocket before debt service (EBITDA). We all like to talk about 10 caps which would make this example a 700K park. Assuming 75% financing we are looking for a $525K loan. Taking Jefferson’s rate and terms we have will have an annual debt service of: $56K per year.
$56K represents 56% of the GROSS and 80% of EBITDA!!!
$$$$Please read this statement over and over again - Your line item for DEBT is likely twice as important to making a good deal then all the other expenses combined.$$$$
So my point- when buying and operating a park you have to answer this question. How and with what terms will I finance this cash flow for a predictable amount of time? See what I’m getting at - TERM is more important then the amount, amortization, and rate because as Jefferson points out - he has to re-qualify to buy his own park every year in order to stay in business. That is a job, not an investment. (Jefferson, you know I’m not picking on you personally - this is what it is!)
So what to do?
I like the credit union potential solution that Jim brings up (for Jefferson’s predicament). My clients on the $14M portfolio chased debt financing for over a year in order to close only a portion of their deal (although the rest should come together shortly). Credit unions and portfolio credit union brokers where one of the sources they courted. Credit unions are like small banks, they are geography sensitive, their appetites will vary from park to park, market to market.
When rental quality is compromised, Seller financing at the time of the sale is really where the answer lies - especially for these 1-2 star parks, rural areas, dirt roads, private utilities, parked owned homes, month to month leasing arrangements, high vacancies, mobile home rentals (the list of problems to manage and overcome can go on and on). With lower quality RENT comes the job of educating sellers as to why they will need to hold paper (including mortgages, notes, trust deeds, land contracts, NNN leases/options, etc.). Some times this requires a two, or three, or four step approach - contract all cash subject to DD and acceptable financing. Show the seller why the banks won’t dance at a reasonable amount of risk/return for you or any other prudent buyer. Show the seller why they might have to finance in order to sell, especially after getting their hopes up high and then letting a banker crush their spirit and deal. Don’t waste your time on this dance unless the seller is virtually free and clear our has a sizable equity to become banker for you - if they already owe 1M on that 700K park you are simply wasting everyones time.
One thought for Jefferson - you may want to procure a private lender now and pay a higher rate in order to get lower costs and better overall terms. Remember to follow SEC rules/regs and if you need help please feel free to call me - I like raising money. Of course this route depends on how much you like or dislike having the job of procuring yearly debt service and how comfortable you feel with your current financier (and your intestinal fortitude towards these changing times).
Final thoughts for those buying. I hear people stuck on 10 caps or better, looking at parks with park owned homes and high vacancy rates on lots, all of us looking for that ultimate infill home-run. This situation personally scares the “H E double toothpicks” out of me. I feel the real game is in simply finding a quality RENT receivable, contingent on quality DEBT (and if possible with below market rents and the potential for prudent expense reductions like sub-metering water/sewer to stimulate instant cash flow and appreciation). I’d rather have that QUALITY 8 capper with free and clear homes, rents that are $30-100 under market because of poor contracting methods (cpi leases for one), and a 50% expenses (because the family was milking the company), with some tasty non-recourse seller financing (say 5-6%), interest only, and a 10 year call. This deal will beat the 12 capper with a bunch of park owned homes and high vacancies, a seller requiring bank financing that comes with a short term “call schedule”, and a broker touting all that “upside potential”.
I’ll take the 8 capper - lot’s of quality and lots of collateral…
PS - the 8 capper above is a 300+ unit park we purchased 2005. We’ve had one eviction in 4 years and that home sold after a 7K rehab for 40,000 cash. The tenant owed 6 months rent (1,800). With $1M down the seller gave us superior terms to anything a bank would offer. The up front fees where $0 - I paid my attorney to draft the note/mortgage and we had our Trustee sign with no recourse except the pledge of the RE as collateral. I don’t say this to brag - just sometimes you get what you pay for - QUALITY (cash flow and debt) really does matter.