I own a park with sewage treatment lagoons and now, after change in city policy, I have the option of connecting to the city’s sewer service.
As this project will involve 2 miles of sewer line, pump stations, much engineering work, this will likely cost $400k.
After all connections have been made, city will maintain this line and pumps. The expenses will be $15.00 per developed lot per month.
Currently, annual expenses for licensing/compliance/ testing $4200 yr.
20 year old 84 lot park/ $215 lot fee. 96% occupancy.
For reasons well explained on this forum, I would prefer city services, but this additional investment and added monthly expense will diminish profitability…do any rule of thumb seem applicable?
Does your lot rent include water and sewer now or do you bill tenants in addition to lot rent? Why not bill the tenants the $15 plus their usage of city water and sewer?
As it currently stands, water/sewer are included in base lot fee. It increases the scope of the project considerably to utilize city water. Billing for water/sewer involves a LOT more compliance issues with the State…so while I can increase lot fees, I can’t bifurcate the sewer bill.
The economics does not add up. The investment will not be recouped in the resale value of the property. Additionally the payback, by saving $4200/month, would take 95 years. Investment wise I would keep the system the way it is or sell and buy a community on city services.
I agree with @Greg, I think it’s great you have an alternative when the time comes, but it would probably be worth waiting for the Lagoon to fully live out it’s life (if you can) before switching over. By the time that happens sewer (and maybe water too!) may be right at the road due to other projects and a lot of that cost was absorbed elsewhere.
I was not clear that you, the owner, would have to pay the $400,000. If that’s the case then no it makes no economic sense at this time. Eliminating the annual expense makes you park worth $50k +/- more and maybe a lower cap rate to a buyer. Still not close to $400,000.
Yes, I pay if the job gets done. The lagoons would function as designed for a long, long time. The issue is that EPA changes the rules, always making the requirements harder to reach with existing systems. EPA then hands down the latest requirements to the state to enforce, and system owners must comply or close their operation, this is the essence of why connection to municipal system is preferable.
One thing that wasn’t suggested, in most states you are allowed to pass on Capital improvements like this to the residents over a number of years. Plus, how much would your insurance drop? Also consider that changing will probably add 2% to your cap rate when you sell.
Not saying I’d do it, just make sure you consider everything in your decision.
Some cities and towns have been offering grants to help offset these costs in order to get rid of the lagoons. It might be worth inquiring about. If the city wants to assist, perhaps a tax rebate is available. This still may not offset the costs enough, but this could change the valuation equation.
The operation of a business boils down to numbers. Investment income properties are only about cost verses income/equity growth. If investing $400,000 shows a significant return/profit/equity growth considering not only the initial investment but also the cost of or lost income from the investment monies ($400,000) over a reasonable period of time then the investment may be worth considering.
At 5% your $400,000 is worth/costing $20,000 / year. With a potential saving of $4500 you are negative $15500 each year. In 10 years your equity in the property would need to increased by $555,000 for your investment to break even. If the property increased in value by more than $555,000 as a direct result of the septic improvements then it may be a consideration.
That in my opinion would be speculation not investing.
In my opinion anything that makes running a park easier is worth something in the cap rate. My two cent opinion is that public sewer is worth at least a drop of 1, and more likely 1.5 in the cap rate. In other words, a park on lagoon valued at 10.5 cap is worth a 9 to 9.5 cap. Public utilities also increase the marketability. Some investors will not go close enough to a lagoon to check the smell (it shouldn’t if maintained properly).
I think everything we have all said is correct, it just comes down to the math as Greg said. Use a cap rate drop of 1.5, plus the cost savings, plus the pass through if you can. Just do the math, figure out the payback time and make a decision.
I did some rough math like this, anyone feel free to scrutinize my math. I do not represent my math to be exact, just an example.
Value on lagoon, 35% expense ratio 80X215X12X.65/.1 for a 10 cap = value of 1.34 mil
Value on sewer, 30% expense ratio 80X215X12X.7/.085 for a 8.5 cap = value of 1.7 mil
That plus passing through the expenses on the capital improvement may make it very interesting, not to mention it likely would sell a lot quicker. Again, NOT saying my figures are the correct ones, just giving an example, re-figure using the correct numbers and let us know please.
Another thing to consider is that you may be exempt from being forced into sewer system regardless of how much EPA rules change. In my State MHPs are exempt from being mandated into City sewer projects. Too costly for park owners. Though I agree with all the other comments this was my only thought.