Do not want to repeat the title here again. Trying to ascertain the issues which could be expected while buying a park which has 50% of the mobile homes owned by one single investor. All your suggestions welcome.
The investor will have power over you to discount your rents, avoid rent increases with the threat of moving the homes to another park and making you accept undesirables to fill his homes. You will also suffer when trying to get financing.
It’s a HUGE problem. A complete deal killer. There’s no solution to it unless you can work a deal to buy the homes from that investor. It’s probably one of the worst things you can find in a park during due diligence.
Thanks for your guidance Frank and BobinBoca
Would it be possible to sign these types of Lonnie dealers to a long-term lease where the rent increases are scheduled in advance and a first right of refusal on the homes at a pre-set price? I’m sure that a Lonnie with 50% of the homes wouldn’t go for it, but if you could work something like that on a Lonnie with a smaller foothold, that might be somewhat comforting for the banks.
That might help, but the truth is that you can’t lock the home in, no matter what is signed. A typical mobile home park lease does not require the tenant to have the home on the lot, only to pay for the land. We have customers in RVs that pay us rent even when they’re out on the road. So you are never going to be able to 100% make sure the home does not move out. Enforcing first right of refusal clauses is also very difficult. The only thing that keeps customers in their lots is the $5,000 cost to move the home. What messes up the balance of power is that, in a typical park, you are only having to manage the risk of maybe one tenant moving one home out, not the risk of one tenant moving 10 homes or so out. That’s how they can extract blackmail over the park owner – the risk is too great.
In a situation where one individual ownes so may homes in a community the reality is that the owner of the park will in effect have a very active undesirable partner in their business.
You will have very limited control over his tenants. Let me refrase that you will have no control over his tenants as the reality is he is your tenant not the actual occupant of the home.
Any creative structures anyone has used to de-risk this issue over the past couple years? It’s only 5 homes in this case, but of 30 occupied of 40 total lots. Sounds like he’s been a model citizen with no issues in the past. And not your typical lonnie – he’s a wealthy local farmer. That being said, his % is a bit too high for comfort, despite this being a strong market and my ability to dilute him going forward when I fill other lots. Thoughts?
Buy him out? You can get creative here.
We face this issue frequently, and it’s one of the hardest decisions to make in due diligence. You will only be happy if you mitigate your risk by 1) buying out the homes 2) having a plan to replace the homes if they pull them out or 3) being able to replace the home income by a near-term rent raise or utility bill back. We have tried to have the Lonnie sign a long-term lease to lock the homes in position, but the problem is if the Lonnie sells the homes to another buyer and the court rules that this person is not subject to that agreement (not to mention the cost of litigation). Essentially, you have to control the game or you should pass on the deal. We once had a Lonnie call in and say “I need a major rent concession” and we said “no, I don’t think so”. So he said “then I’ll pull the homes out” and we said “that’s fine, that’s what we already have in the budget”. It was the truth. We had budgeted that the Lonnie would pull them out and the economics worked with that eventuality. You won’t be happy unless you can watch them pull those homes out and know you’ll be fine. Retail center owners face the fear all the time of losing the major anchor. The MH model allows you to have near-perfect portfolio balance unless you have a Lonnie who owns multiple homes. I don’t know about you, but I don’t want to live like a retail center developer.
Thanks Frank. Apparently the seller and this guy have known each other forever and are pretty close, which raises some concerns, but I think I could use to my benefit. The bank is open to him holding sub debt. What if I ask seller to hold the $ amount I’m paying per occupied lot X “lonnie” lots (5), contingent on them remaining in park. To the extent any are pulled, loan will be forgiven by original purchase price per occupied lot amount. Know litigation could be messy/expensive but I get a good feeling from both and in this case everyone would be aligned. And my equity check goes down to 10% and recourse amount is also lowered.