OK, all other things being equal, how much of a better cap rate would you want for a park that has a well/treatment plant rather than city utils?
e.g. suppose the park would sell at a 9cap with city utils, what would you want to buy the same park with a well and treatment plant?
At least a 15 cap for me, assuming WWTP is in immaculate condition and lots of life left after having eleventy billion inspectors. And I still have panic attacks when I read this:
I followed your link and read that thread, that is rather chilling.
Maybe a treatment plant makes sense only for a large park, like maybe 200 units?
If everything else about the deal is good, 1)determine the replacement cost, 2)estimate the remaining life, (have a professional help you with this) 3) underwrite replacement reserves 4) have a plan to finance the repairs if they are necessary sooner than expected and offer accordingly. Also, investigate the likelihood of being able to tie into the city at a future date but do not rely on that option, but if it is imminent the deal may be a real gem that people write off solely based on private utilities.
If you are adjusting the cap rate, only do so because of the effect on the liquidity of the park, maybe 50-100bps depending on the location and other intangibles. Otherwise, the annual reserves for replacement should be sufficient enough to justify your pricing.
I think one of the biggest apples to oranges cap rate comparisons is to compare cap rates of city utility park verses package plant/lagoon. The problem is capital expenses are listed below NOI. Here is an example. Two parks both have 150,000 NOI.
However park with park with package plant has 600k of additional infrastructure. Lets assume it was brand new with 30 year life (most package plant on the market have 0 to 10 years left in them). Yearly capex reserves is $20,000 higher so really to have an apples to apples comparison you should say city utility park noi 150k, private utility park noi $130k. However this is never the way thing are listed they both are listed at 150NOI then a cap rate is applied. If you fall for the cap rate mirage you just over paid by 14%.
Then there is the risk of increased regulations, and the fact that the current owner doesnt have a licensed operator and is running the plant on a shoe string budged and the actual operating cost should be lot higher than what is listed by the owner.
The risk of increased regulations demands a higher cap rate. New regulations are coming and it will cost in terms of plant upgrades and operating costs.
Just my two cents
Very smart way to look at it. Thanks!