All Forum Posts by: Jack Martin

@Mike S. as an alternative or "backup" to a 1031 exchange, you can likely solve the tax deferral issue with an investment that includes cost segregation and bonus depreciation. If you are not able to execute on the timing for the 1031 exchange or find suitable replacement property, you are not dead in the water. Especially since it is early in the calendar year. 

We have had investors get stuck when their exchange property fell through at the last minute and have been able to solve the tax deferral with bonus depreciation. Often referred to as "the lazy man's 1031" the bonus depreciation strategy allows you the full calendar year, so if the exchange you are contemplating falls apart for any reason, keep that in mind.

All the best, 

Jack

@Ken Press As @J Scott mentioned above, be careful not to allow the "tax tail" to wag the dog. When you find a deal that makes sense without the tax benefits, that's a deal worth pursuing. Let the tax benefits be a bonus and allow the fundamentals of the real estate as an investment to drive your decision. 

All the best,

Jack

Also a bit of advice as you contemplate a passive investment. The most critical variable in your experience as a passive investor will be the PEOPLE you are investing in, not just the asset class or the deal you are investing in. As you connect with sponsors that resonate with you, make sure to steer toward those with adequate experience across all aspects of their business AND have taken steps to ensure you get a great experience. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has an attractive pro forma to find out later they can't be trusted. 

The best way to ferret out trust is to look for sponsors who use professional 3rd party administration and provide the accounting services for the investment. Essentially, the administrator's role is to be the neutral party "referee" whose job is to ensure accuracy and transparency so the sponsor cannot pull the wool over your eyes. 

Also, one of the most often overlooked components of a passive investment is the reporting. When you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested: Does the sponsor have a communication plan? How often will you receive reporting? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? Historically, have the reporting and distributions been on time?

Your overall experience with passive investment involves much more than the yield you could achieve. If you take the time to gain clarity on those items, you should get a pretty good handle on what your experience is going to be like.

The purpose of investing passively is to leverage the sponsor's time, expertise, and ability to source great deals, but if the experience is going to cause you to lose sleep at night, any return you might make may not be worth it.

All the best,

Jack

@Justin Waller If you are doing a smaller deal, the best loan will be seller financing. If the seller won't carry, then your best bet is a local/regional bank or a credit union. You will want to confirm they have lent on mobile home parks in the past and have a continued appetite for them. If they have not, don't waste your time. Also, is important to understand that a $200k loan takes the same amount of work as a $2MM loan, so if you are working on a lower priced deal you may come across some banks who like MHP's yet they may not show serious interest in a small loan.

You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through your state's manufactured housing association, or by simply asking other parks owners in your area. Otherwise you can do it the old fashioned way and simply obtain list of the smaller banks in your area/region and call them. 

If you are buying a larger park then there are more options for you:

Life Companies - Life co debt will typically have better terms than banks, but will come with tougher qualification criteria. You can access life co debt through a commercial loan broker, but again, take the time to find the broker who specializes in MHP debt. If the broker doesn't have a deep level of experience placing debt on mobile home parks, you could be in for a lot of brain damage and promises that are not met. Network through MHP attorneys and MH/RV park brokers or owners to find the right loan broker.

Agency (Freddie/Fannie) - If the park and the buyer qualify, this can be the best debt, but the qualifications are even more restrictive. Just like Life co's, you can access agency debt through a commercial loan broker, so take the time to find the right broker with the most MHP experience.

Conduit (CMBS) - Conduit can be more flexible than agency or life co, particularly with respect to the park and terms. Again, you can access conduit loans through a commercial broker.

(In addition to those sources, there are a few others that are less common, such as HUD and SBA)

Your track record of experience with the asset class will have impact on whether a loan is considered, and whether you can negotiate the terms of the loan, so be prepared to demonstrate your experience, or the team you have built around you who has the experience.

Typically, smaller deals under 50 spaces will be best suited for banks or credit unions. Once you find the right banks, there will be more flexibility with respect to qualification of the deal and you as the buyer, particularly if you lack track record.

Larger deals will open the door to agency, conduit, and life companies, all of which tend to come with better or more flexible terms, but with a higher degree of buyer experience and park requirements. For example, some lenders will require you already own and operate a similar asset in the same market wherein you are buying the subject property. Some will have a minimum number of spaces and pavement requirements in the park. Some will have restrictions as to total occupancy and percentage of POHs, while others are more flexible. Many of these loans can be non-recourse or limited recourse, but there will likely be liquidity and net worth requirements of the borrower. Some loans will come with defeasance or yield maintenance, while others will have step down prepayment penalties.

A good loan broker who specialized in MHP debt can guide you with respect to the right choice for you as the buyer, which type of lender will be best suited for the park, where the terms will be the most favorable, and where the hurdles will likely be. Having that relationship will help you get the best terms for the deal and avoid wasting time on a loan that is low probability.

All the best,

Jack

@Shannon Erickson PM me and we can discuss. We are a MHP sponsor/operator and as long as you qualify, what you described is essentially correct. 

@Jim Hwang as mentioned by @Don Spafford above, investing in property that can produce a high amount of bonus depreciation can also work to defer gains. Often referred to as the "lazy man's 1031" it allows an entire calendar year to reallocate so there's much more flexibility. As a mobile home park operator, we've had many investors come to us with failed 1031 exchanges to take advantage of the high bonus depreciation that is present. Even with a failed 1031, that strategy can be a solution. 

All the best,

Jack

@Matt Kab I have a relationship with a DST broker whom we really like. We use his expertise for a different reason but feel free to PM me and I will share his info.

Also, for those on this thread who are seeking to defer tax in 2023, consider the value of syndications who are utilizing cost segregation and bonus depreciation. Even with the reduction in bonus depreciation this year, with the right debt on the right asset class, that's still a competitive option. 

All the best, 

Jack

@Elizabeth Park depending on the size of your park, you may want to consider Speed Read sub-metering. We install those on our parks and it creates amazing efficiencies due to their connectivity to property management software and bluetooth capabilities. What was once a full day job at our larger parks is now a 20 minute process and the water usage is automatically populated to each resident's bill in the software.  

All the best,

Jack

@Shaun Troyer to highlight the basics of DD, we like to break those up into 4 areas: financials, initial walkthrough, compliance, and paid inspections/services. If you are seeking to keep the initial out of pocket expenses low, begin with the items that require just your time, but not money. Get familiar with the financials to determine if the value of the park is in line with the seller's price expectations, do an initial walkthrough so you know what you really have, then spend time on the compliance to make sure there are no deal killers. After that, you will need to spend money on the inspections, surveys, environmental, etc.

Financials - Review of the financials can be tricky, particularly if the current owner has not kept the books correctly, or if they are trying to hide something. But the goal here is to underwrite how you would expect the park to operate and see if that lines up with what the seller is demonstrating. This is where you can begin to see where there are operational inefficiencies, cost overruns, or areas where income can be improved. If you haven't underwritten a lot of deals, you will probably miss things that experienced operators would catch. My advice is to look at lots of deals and underwrite them all. There are so many variables with MHPs that the more deals you see, the more obvious it will be when you find a good deal. 

Initial Walkthrough - Confirm the number of spaces, the general condition of the utilities at each space, the status of the home on each space (POH, TOH, vacant, RV, etc.) and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc). We also like to sit down with the current manager and go through everything related to how they are running the park (collecting rent, problem tenants, sales of homes, marketing efforts, recurring maintenance items, problem areas in the park infrastructure, etc).

Compliance - this includes everything related to city, county, and state compliance to continue to run the property as a park. That includes zoning, (including a zoning letter to confirm legal use) building, permits, sales tax, licensing, etc. In addition to that, we like to check with the police, fire, insurance, sex offender status, and anything that might affect the operations of the park. The goal is to avoid surprises, understand what challenges may be present, and what impact the results of inspections may have on our future operations of the park.

Inspections - If all of the above checks out, now it's time to start spending money on paid services. Inspections should include electrical, plumbing, and septic/sewer contractors (to address the underground infrastructure) but also can include pool, home inspections, asphalt, and more, depending on the park. The one item to pay attention to is to always try to work with contractors who are familiar with mobile home parks. That is not always easy but trust me, it is worth making 50 calls to find the right contractors who work in MHPs and understand them. When you meet with the contractors, have them help you understand what you have, what will be required to maintain what you have, and what you should be budgeting for future capital improvements. A survey and phase 1 will be required if you are getting debt and it's always smart to get those done either way just for peace of mind, so make sure to budget for those as well.

Congruent with the items above, we are also putting together our strategy and budget for the park, performing our rent survey, and performing our market demand study.

All the best,

Jack

@Ryan Kraemer Generally, outside of seller financing, the common types of debt available for MHPs are:

Local & Regional Banks or Credit Unions - You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through your state's manufactured housing association or other parks owners in your area like @Rachel H.noted above, or simply obtain list of the smaller banks in your area/region and call them to see if they have lent on parks in the past. If they have not, don't waste your time. Also, is important to note that a $200k loan takes the same amount of work as a $20MM loan, so if you are working on a lower priced deal you may come across some banks who like MHP's yet they may not show serious interest in a small loan.

Life Companies - Life co debt will typically have better terms than banks, but will come with tougher qualification criteria. You can access life co debt through a commercial loan broker, but again, take the time to find the broker who specializes in MHP debt. If the broker doesn't have a deep level of experience placing debt on mobile home parks, you could be in for a lot of brain damage and promises that are not met. Network through MHP attorneys and MH/RV park brokers or owners to find the right loan broker.

Agency (Freddie/Fannie) - If the park and the buyer qualify, this can be the best debt, but the qualifications are even more restrictive. Just like Life co's, you can access agency debt through a commercial loan broker, so take the time to find the right broker with the most MHP experience.

Conduit (CMBS) - Conduit can be more flexible than agency or life co, particularly with respect to the park and terms. Again, you can access conduit loans through a commercial broker.

(In addition to those sources, there are a few others that are less common, such as HUD and SBA)

Your track record of experience with the asset class will have impact on whether a loan is considered, and whether you can negotiate the terms of the loan, so be prepared to demonstrate your experience, or the team you have built around you who has the experience.

Typically, smaller deals under 50 spaces will be best suited for banks or credit unions. Once you find the right banks, there will be more flexibility with respect to qualification of the deal and you as the buyer, particularly if you lack track record.

Larger deals will open the door to agency, conduit, and life companies, all of which tend to come with better or more flexible terms, but with a higher degree of buyer experience and park requirements. For example, some lenders will require you already own and operate a similar asset in the same market wherein you are buying the subject property. Some will have a minimum number of spaces and pavement requirements in the park. Some will have restrictions as to total occupancy and percentage of POHs, while others are more flexible. Many of these loans can be non-recourse or limited recourse, but there will likely be liquidity and net worth requirements of the borrower. Some loans will come with defeasance or yield maintenance, while others will have step down prepayment penalties.

A good loan broker who specialized in MHP debt can guide you with respect to the right choice for you as the buyer, which type of lender will be best suited for the park, where the terms will be the most favorable, and where the hurdles will likely be. Having that relationship will help you get the best terms for the deal and avoid wasting time on a loan that is low probability.

With respect terms, right now in November of 2022 you should expect 50-65% leverage and rates in the 6%-7%, depending on the park and your track record. 

All the best,

Jack