Risks of on-site sewage treatment plant?

Hi to all experienced park owners…

I BELIEVE I found a really compelling opportunity (60 pad park with legit 10-cap on lot income possible)… but the rub is an on-site sewage treatment plant. In terms of parts, agent said there are 2 “motor with blowers” (each probably cost $10k) and seller recently replaced one. It doesn’t appear Frank shy’s away from them… but others like Jefferson Lilly (Parkstreet Partners) has on his site that he won’t buy a park unless it has city water and sewer (from what I saw on the “sell you park” link). Does anyone have any suggestions on how to gauge the risk on this factor? All else equal, everything else seems to check out though.

When calculating your cap rate factor in the cost of having to replace all capitol items over their projected life expectancy. Sewage equipment on a 8-10 year schedule. As long as you consider the life expectancy of capitol items such as roads, pumps, septic tanks etc. it is simple math.
I have 4 lift pumps and have had to replace two of them in the past 7 years.

That definitely makes sense- thanks Greg

@frankrolfe or @Jefferson, Did you guys happen to have any thoughts on the matter? I didn’t want to bail on a good idea just because of the “sewage plant” inexperience… certainly there are smaller parks out there wrapped with city streets and on city water/sewer, but I’ve combed through about 100 listings in the last 6mos, done a good bit of due diligence on maybe 20 (built cash flow models, etc.) and made offers on three, but didn’t stick (agents or sellers went radio silent)- this fourth one I didn’t want to pass up just because I wasn’t familiar with that type of sewage system yet (plan to attend boot-camp soon).

Just like Greg said, you’ll need to build in realistic numbers to account for the savings required to handle the large capital expenses over time. Without knowing anything about the deal, I would recommend roughly $10,000 or more per year. If you do this, and you still like the deal, then tie it up as quickly as possible.

In diligence, you’ll want to start with all of the free things pertaining to that system. Talk to the person who did the inspections and the maintenance. Figure out the permitting process and talk to the city about any issues they’ve had with it in the past. If it still looks good, start getting some third party inspectors out there to have a look at the system. Have them give you an idea what may need to be replaced (Up front Capital Items) and what may need to be replaced in the future and roughly when (Repair savings). Once that is done, re-run your numbers and see if it still makes sense. If not, re-negotiate on the basis that the property is not in the condition it was represented to be in.

I would also look at getting the seller to finance this. The park may be too small for non-recourse debt. Personally, I don’t mind private water/sewer. However, my risk appetite is not large enough to ever sign a recourse note on these types of properties.

Thanks Charles, I really appreciate it

We have owned and operated parks with sewer plants. We would personal never own another one since EPA is constantly upgrading the regulation on the outflow and the cost of operation is very high as per electricity, new motors, testing, and sludge removal for a start. It is very difficult to gauge you real cost with changing regulations on sewer plants although we are presently operating parks with septic tanks and we know our exact cost for ten years hence.

of course- I can that side as well… thank you, very helpful

I operate numerous public drinking water and waste water systems. It is my main business. As others have stated the two issues with private utilities is accurately understanding and budgeting for the cap ex associated with the infrastructure and the moving hurdle of regulatory compliance. Either can kill you. The epa/deq likes to turn the screws down on you at each permit renewal. Questions to ask: When will the current permit expire? Are there any violations currently?

Dont believe the agent that two blowers are all there is to the sewer plant. Blowers mean airation is there a airation basin, chlorination…?

Life span of waste water equipment is all over the map 8yrs to 20plus.

You really need a professional to give you a detailed inventory, replacement, and life span of each component to know your yearly cap ex costs.

The cost of cap ex is like an elevator, most park owners jump off right before the elevator hit the ground.

Im more than willing to help you try to get a handle on cap ex but you need a detailed inventory of the equipment in system. Do they have a maintenance and operations manual? Map of system, copy of the deq permit?

Phillip Merrill

As I have said in the past, we have several parks with private utilities. Yes they are more work but they still generate a lot of cash and have turned out to be very good investments. Bear in mind that even with public utilities, if you are submetering, you have a lot of risk. All systems have leaks and they can be difficult to track down (especially with plastic pipe that has no tracer wire.) Public water and sewer rates are going up as well. The best scenario is to get a park that has direct billing to the resident (not master metered).

Do you mean packaging plants? We don’t own anything with a sewage treatment or packaging plant.

Packaging plants can cost upwards of $10,000/pad when they need to be replaced. (e.g. $700,000 for a 70-space park). We are just not going to take that risk. We do own a property with a few small lift stations, if that is what you are talking about, and they indeed will ‘only’ cost about $4,000 - $7,000 to replace when they go bad.

You just don’t want to get yourself into a situation where you’ve purchased something, and then it goes bad and you don’t have the cash to make the repairs (and paid a price assuming you’d never have to do repairs).

For a first-timer, I can’t stress enough how important it will be for you to stay away from any/all private utilities.

Good luck,

-jl-