Park near me coming available on WWTP need advice

mobile home university
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Have an owner I’ve been talking to with a park that is very close to my home. It’s 100 spaces with about 75 occupied lots. Was built in 1992 so fairly newer park with all good concrete streets and off street parking. Water and sewer lines should also should not be a problem since built with newer materials.

Rents are at $240-250 and are $30 under market. Asking price is $1.8mm which is a bit rich but I’m meeting with him to go over financials.

I’ve tried to avoid WWTP like the plague but this deal seems to have some merit as the plant was constructed in 1992 and may have many years of life left if it has a 50 year life expectancy. I will know soon if it’s concrete or metal.

I’m confident I can fill remaining spaces over 3 years so there is some decent upside to the deal.

Would like some feedback from experienced investors on 3 specific items:

  1. What is typical expense ratio for a newer park on WWTP?
  2. What cap rate is fair? Should cap rates be higher for parks on WWTP?
  3. What valuation would you offer?

I know Frank says use 30 and 40% as an expense ratio but my other park only runs about 10% to operate(all city direct billed utilities). If I had used a 30% expense ratio I would have never got that deal, and I’m happy to have it.

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  1. My guess would be 50% or higher operating cost for a park with a package plant. Here are some rough numbers operating and maintenance cost $25,000 to $35,000 per year. WWTP operator $1500 to $3000 per month so maybe 30k for operator. Cap ex reserves on wwtp 500k 30 year straight line depreciation (I would highly doubt you will get 50 years from wwtp) is about 16k per year. Dont forget cap ex on sewer mainline, and the rest of the park. Before sewer mainline or any other infrastructure your at 81k per year just for the package plant.

  2. Why would you not want a higher return for the head ache and risk of a package plant?

  3. Cap rate should be 1 to 2 points higher for package plant

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I’ve reviewed the tax returns for the last 3 years and the operating expenses for this park with 74 occupied spaces has run at around $45,000(depreciation of $15k excluded) or 20-23% per year on avg. He pays an operator $50 per month (using his licensing) but he does the maintenance on the WWTP himself.

If I purchased I wouldn’t want to deal with that so would look at hiring the operator to maintain and will need to check on those costs. There is an estimate to run a line and lift station for $100K as city sewer is on the other side of the railroad tracks at the entrance of the park. City and county have to be on board to tap in however.

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Thats the challenge with owner operators they do everything themselves but at least he should be able to tell you how many hour a week he does stuff at the wwtp. The guy loaning him his license is really taking on a lot of liability for $50 a month.

Ask the owner for a copy of the waste water operating permit. This will give you a better idea of what is going on.