I’m looking at a park where the seller just raised the rent and started water bill back in June of this year. The asking price is based on the increased income from these 2 changes. But the profit and loss statement is from 2017 and shows about 33% less income.
Is it typical to value a park based on recent income increases such as this or use the actual financials?
It can really go either way. It’s obviously in your best interest to based on last year’s actuals versus next year’s pro forma. You certainly shouldn’t include a hundred percent of the rent increase in your valuation. There are still concerned such as collections on the newly increased rent and water bill back, not a slam dunk that your collections will be great off the bat.
I think I’ve heard Frank and Dave say that in some cases they’ll include 50% of the improvement in their pro-forma if very little effort is involved on their part.
Keith is right that there’s no guarantee that the collections don’t worsen after the increase.
That being said, your ability to buy it while only paying on old income or a 50%/50% split might depend on if this park is being marketed or not. You would be completely warranted in asking to pay on old income or some combo of old and new, but if you’re one of several groups bidding, someone will likely pay on the proforma income and you’ll be out of a park.
If their collections have historically been good and continued to be good post-increase, you might have to end up paying for it. As a seller, I would expect you to pay on the go-forward income, not the historicals (assuming nothing is fishy). It’s a sellers market…
Hope that helps!
That was my concern - that the increased income is unproven and may not be fully realized. I also wonder if the rental rate would be sustainable for attracting new tenants to fill lots, as the lot rent is right around (maybe above) 50% of the 2bd apartment rent. Thank you for confirming what I was thinking!
How do you get a measure of past collection rates (through what documents)?
The owner should be able to provide you with a Rent Roll from the previous 2-3 years. This will have a list of who paid what each month by Lot #. Through this you should be able to deduce late and non-collections.
@Nick_S, I wouldn’t be as concerned with giving close to full value for the rent increase if it’s a market rate. I definitely would NOT give full value to the water bill back. For a variety of reasons your capture rate is closer to 80-95%.
I am in the process of installing new water lines and meters to start water/sewer bill back and I would definitely expect to sell at a price that reflects all that work and investment.
@Jsmith , as per your post:
Yes, you are correct.
When selling you most certainly should be compensated for submetering with new water lines and new individual water meters.
IF the Mobile Home Park is stable, then the Mobile Home Park should get 100% of both the Water AND Sewer (Sewer IF Public) from each Tenant.
IF the Tenant is not paying for their Water AND Sewer that they use (based on their individual water meter), that Tenant should NOT be a Tenant.
@Jsmith , please let us know how installing your new water lines is going. We would love to hear.
We wish you the very best!
Thanks @Kristin. Digging new water lines in this heat is not going to be a fun or easy job. I am going to have it started after the first of the month and it should take a few weeks or more since it all has to be dug by hand. But new schedule 40 pipes and water meters will be a great help to reduce leaks, allow for bill back on water/sewer and increase my market value when I am ready to sell.
Thanks for all the input everyone. Sounds like there are various opinions on the topic.
@Jsmith, @Kristin, I agree that after sub-metering and billing back water, a higher park value should be expected for the increase in NOI. And as a seller I would like to see the value jump immediately. However, from the buyers perspective, it seems as though there should almost be a seasoning period to demonstrate the actual expense reduction and NOI increase is fully realized (although maybe a few months is enough for this).
We started the water meter installation later than expected so we are just getting into it now. It is going well overall. Just a few leaks hitting old pipes in odd places. But overall… this will be such a huge improvement in maintenance and use in the park. Totally worth it!