Hi all, I’m looking at an approx 100-site 55+ park for sale in SoCal that is a 5% cap rate, fully leased, and subject to local rent control. Is the rent control a non-starter or no?
I would have the ability to raise rents to market upon turnover (vacancy decontrol), of which there are a few a year (long term tenants probably dying is my guess), but can’t raise rents on an existing tenant. About 25% of the lots are at $800/mo, while market is $1900/mo. My sense is the city gets involved on code compliance, meetings with tenants etc. There is even a tenant representative and I think they have their own attorney too to represent them.
I live in the LA area, so want to buy something locally I can manage and learn the business. Rent control is par for the course here in SoCal, and there have been other offers on the property, so people are apparently getting comfortable with it. Parks in this size range and my target geography (SD to Ventura County) do not come to market often, so I would like to make this work if I can.
I think I saw this park hit the market recently. I am also in the San Diego/So Cal market.
Rent control is a double-edged sword; on one hand, you will never have a vacancy, on the other hand, the rents will be limited forever. Also, the rent control ordinance can only get worse.
I prefer to avoid Rent Control parks. However, some rent control ordinances are “Fake Rent Control”. IE CPI plus 5% with a 10% Cap. No vacancy control, or a 10% automatic bump upon turnover.
While other rent control ordinances are “We are slowly going out of business, " i.e., Vacancy Control, and the maximum increase is 65% of CPI, and you have to spend $3,000 per year ensuring you are complying with the ordinance.
One of my contacts has a park where it actually costs him more to pay his attorney to run the calculations and ensure they comply with the ordinance to raise the rent than he nets from the rent increase. That’s a terrible spot to be in.
This one is a going-out-of-business-style Rent Control Ordinance.
Thanks SD Guy! Super helpful. Do you own any rent-controlled parks in SoCal, or have you decided to stay away completely? Also, these ordinances always mention a “fair and just return” for the owner, is that basically BS?
I presently do not own any rent-controlled MHP parks, but as I get older, my tastes have changed from an absolute “heck no” to a “geez, it’s always going to be full”. Besides, we are likely to be subject to Rent Control in the near future anyhow. AB768 and AB1543 are coming down the pike.
I like to think of my MHP portfolio like a mutual fund. A little bit of this, a little bit of that, etc. This includes loans: some parks have higher LTV loans than others, with staggered due dates and varying terms. IE from a 10-year I/O deal, to a 5/5 arm, to a free and clear park. Adding a Rent Control park could be part of that strategy, someday, unless the State mandates it.
I have not had any experience with “fair and just return” fight, but I imagine it would be a pretty expensive legal bill to get an extra few bucks in rent approved. With the exception of increased property taxes, we all know the government wouldn’t want to put a hold on that. lol…
5% is tight particularly if the park is in need of substantial capital repairs. I would think your decision would be situationally dependent on the park you are looking at and it’s condition- but you certainly know that. I am a ‘mom and pop’ with just a few parks under 5% rent control and it is challenging but manageable. I think ‘fair and just return’ is real but in terms of BS due to the bad actors in our industry we lost the narrative and are now on the heavy side of the BS scale of governance.
The vacancy decontrol is definitely the saving grace in these types of deals. If you’re planning to manage it yourself and stay local to the LA area, that long-term upside on turnover can really help offset the initial 5% cap. Just make sure you have a good system for tracking those compliance costs so they don’t eat into your margins.