In a latest article entitled Mobile Home Park Due Diligence Checklist, I detailed the significance of a well-defined and executed due diligence plan. Moreover, I coated the fundamentals of due diligence and supplied a guidelines for the three areas of investigation: monetary, bodily and locale or surroundings. This text supplies a “deeper dive” into monetary due diligence (FDD) which normally is the primary space of focus and arguably, a very powerful. I’ll do that by reviewing every merchandise from our guidelines in a story that discusses what the customer ought to ask from the vendor, why the info is essential and the way it ought to be thought of in constructing a P&L and evaluating the long run efficiency of the funding.
Present Hire Roll – Ask the vendor for a rent-roll that features the area quantity, title of resident, present lease and any further month-to-month costs. As well as, ask the vendor to point if the house is park owned, proprietor occupied or single or multi-section and the full variety of occupants, the move-in date and supply any related notes concerning the resident. Utilizing this information, the customer ought to reconstruct the rent-roll in a spreadsheet which is able to function a place to begin to constructing a projected P&L. Breakout the income by kind and go away empty cells the place extra element is required. Ask for a listing of householders for the non-owner occupied houses to find out if one or two folks personal a number of of the houses. What number of park owned, non-owner occupied and leases are locally? If this whole is 10, 20 or 30% of the houses within the park and the houses are older and of little worth, the customer ought to low cost this income or enhance the anticipated bills to handle and finally, change these houses and tenants. What’s the common variety of occupants per residence? If simply 2, this locations a much smaller burden on the park’s infrastructure than 3-4 occupants per residence. What’s the annual turnover and development? Parks with 10% turnover are extra work than these with 3% and if the development is up, the customer ought to examine and perceive what’s driving the rise. Add up and make sure the variety of areas – don’t assume the area #s are sequential!
3 Years of Revenue & Loss Statements – Ask the vendor to supply a year-to-date P&L by month and statements for two or 3 earlier years. Hopefully the P&Ls breakout income by kind together with area lease, home/lease funds and utilities by kind (electrical, fuel, water, and many others…) Take a couple of minutes to substantiate the mathematics and work by the logic and assumptions within the statements. Does the month-to-month and annual earnings within the P&L align with the info within the rent-roll and if not, the place’s the distinction? Are there any massive modifications within the income and expense by merchandise from interval to interval and if that’s the case, why? Calculate the % of bills vs. whole income and are they about 40%, which is an trade benchmark for MHPs and if not, why?
3 Years Capital Expenditures – Ask the vendor to supply a listing of capital expenditures for the previous 3 years. Many MHP house owners expense all the pieces within the present 12 months whereas others capitalize their enhancements. In case your vendor is the previous, ask what vital upgrades or enhancements they’ve made to the roads, utility techniques, constructions, and many others, and the place these seem within the revenue and loss statements. Ask if the park has bought, set-up and offered any houses and the way these impacted the P&L. In case your vendor is the latter, intently evaluate the record of enhancements to achieve a extra full image of the full price of possession of the property. Ask the vendor what they anticipate in further enhancements over the subsequent a number of years and guarantee these capital or working bills are included within the projected P&L.
3 Years Tax Returns, 12 Months of Financial institution Statements – Supplied by the vendor and the aim of which is to substantiate the accuracy and completeness of the revenue & loss statements. The returns and statements present triangulation factors, which is the method of evaluating information from a number of sources (experiences, visible inspection, conversations, and many others…) to find out if they’re aligned. I’ve seen P&Ls exhibiting $15K in month-to-month income however the whole within the tax return was, nicely, considerably much less!
Accounts Receivable – Ask the vendor to supply present and historic accounts receivable experiences. The purpose right here is to grasp the dimensions and scope of the gathering problem and which tenants are concerned. If 10% or extra of the tenants are a number of months behind and their houses are of little worth, it might be very costly to treatment this case. Not solely will the customer have a lack of rents, they may incur vital authorized charges and finally, have to pay to have the expired houses faraway from the property. Some sellers will try to cover this downside so triangulate the info and if provided, pay little to nothing for the previous accounts receivable.
Listing of Park Owned, Lease to Personal & Leases Houses – Each purchaser has their very own technique to reaching a return on funding and for some, this consists of financing and renting houses. For us, we solely purchase houses to fill an area or guarantee it’s not moved out of the park. We purchase parks the place 90%+ of the houses are proprietor occupied and a excessive “satisfaction of possession” stage exists locally. If we purchase a MHP with park owned houses, we wish them to be included within the sale and switch to the customer at shut. The acquisition worth ought to be adjusted to incorporate the wholesale worth of the houses with a worth discount for any beforehand capitalized lease or home funds (the lender will observe this observe with their underwriting and the customer ought to as nicely!) As for leases (AKA, Lonnie Offers,) they’re grandfathered however we prohibit them in our guidelines and rules. We encourage traders who buy houses to restore and resell with lease/lease to personal financing however don’t allow “straight-up” or covert rental exercise.
Copy of Insurance coverage Insurance policies – The aim of this merchandise is to find out if the park is at present underneath or over insured and if the pricing on the insurance policies is aggressive. Ask the vendor for copies of all insurance policies together with property, legal responsibility, flood, employee’s compensation, and many others… Give the data to a good MHP insurance coverage dealer and allow them to analyze the info and supply a abstract of projected prices, coverages and insurance policies. Test to see if the property is in a flood zone or if another insurance coverage is required to adjust to state or county legal guidelines. If the prices could be diminished, nice and if the park is underneath insured, it’s higher to know now than later!
3 Years Property Tax Payments – The client ought to evaluate the property tax invoice to familiarize themselves with every of the taxes and the way they’re calculated. The purpose is to keep away from some enormous shock enhance in tax that might considerably scale back web working earnings (like a $1K annual evaluation for every sewer connection, ouch!) Go to the county assessor’s workplace and inquire about new, pending or “under-consideration” assessments for water, sewer, colleges or different providers within the subsequent few years. Verify the full taxes due in subsequent years based mostly on the anticipated buy worth of the property.
Spreadsheet Detailing Utility Costs, Calculations and Payments – Ideally, utility providers for the property could be supplied by the native utility district and direct billed to every tenant. On this state of affairs, the utility firm is accountable for the providers as much as the meter or property line and billing and collections. On the different finish of the spectrum, the providers are non-public (nicely and septic) and fuel and electrical energy are grasp metered. On this case, the park owns and has the duty to handle, preserve and supply the providers in addition to invoice and accumulate from the tenant. Ask the vendor for a spreadsheet detailing who owns and pays the utilities together with water, sewer, fuel, electrical, trash, cable, and many others… For all utilities charged to the tenant by the park, ask the vendor to element how the payments are calculated (formulation) and supply meter readings (if relevant) and precise costs and copies of all utility payments for the previous 12 months. There are a number of causes to have a look at this info. First, it’s to assist the customer perceive the monetary legal responsibility of proudly owning a property with non-public and grasp metered utilities. Bodily leaks, previous meters, inefficient billing techniques and poor collections efforts all characterize misplaced income to the MHP proprietor (to not point out the legal responsibility of managing and sustaining the utilities and infrastructure and staying in compliance with the EPA and county and state businesses!) As well as, the affect of those “leaks” spirals up with every passing 12 months and the unending will increase in utility prices. On the plus aspect, if a number of the utility costs are at present paid by the park, passing them by is usually extra acceptable to the tenants than lease will increase. Lastly, take a minute to recalculate the underwriting supplied by the dealer (NOI, CAP charges, bills as a % of earnings and worth) with out the general public utility reimbursements and associated bills.
Present Staffing – Ask the vendor to supply a listing of everybody who works for the park together with the supervisor, upkeep folks, bookkeeper, and many others… As well as, ask the vendor to supply the small print as to how these people are paid, job descriptions, copies of employment contracts, critiques or another related info pertaining to their relationship with the park. The aim of that is to grasp the park’s obligations and decide if the staffing and compensation ranges are above or under common (bought a park a number of years in the past and instantly eradicated an assistant supervisor saving $10K per 12 months!)
Copies of Contracts – Ask the vendor for copies of any contracts that may switch to the customer together with outsourced propane providers, laundry gear, trash, cellphone, billing providers, leases, and many others… The purpose right here is to find out if any of the contracts ought to be terminated with the switch of possession and if there’s a chance to regulate the extent of providers and doubtlessly lower prices (we eradicated an unused dumpster at one park that saved $5K per 12 months!)
Hire Will increase – Ask the vendor to supply a historical past of lease and pass-through will increase together with dates and quantities over the previous 3+ years. The client, in the event that they plan vital income bumps within the first couple of years, ought to take latest will increase (and the native political local weather) into consideration. “An excessive amount of, too quickly” can set all kinds of issues in movement together with petitions, regulatory scrutiny, visits by metropolis or county officers, newspaper articles, lease management initiatives, and many others…
Guidelines, Leases & Native Legal guidelines – Ask the vendor for a replica of the principles and rules, leases and the usual “package deal” given to a potential home-owner together with the appliance, disclosures, move-in paperwork, and many others… As well as, ask the vendor for copies or entry to the tenant information to finish an audit and decide which tenants have signed leases and guidelines on file. The client ought to have interaction an lawyer who focuses on cell residence parks to grasp what’s required (based mostly on the lease, guidelines and locals legal guidelines) to do the next: elevate rents, cross by utility prices, scale back providers, evict a tenant for trigger, evict a tenant with out trigger, change the principles, limit rental houses within the park, enhance the requirements for lot and residential upkeep, limit the age, measurement or kind of cell houses allowed locally, and many others… In different phrases, the customer ought to be sure that no matter plans they need to improve the park, enhance revenues and reduce bills could be applied from a authorized perspective.
Contact Info for all Distributors – Ask the vendor for a whole record of everybody who has supplied skilled providers to the park together with legal professionals, accountants, engineers, insurance coverage brokers, inspectors, appraisers, realtors/brokers, and many others… The client ought to electronic mail or cellphone every of those folks and introduce themselves, clarify they’re contemplating a purchase order of the park and specific a want to proceed the connection after the shut. The client will doubtless meet with a few of these people in the course of the due diligence course of to triangulate information supplied by the vendor or one other supply. A cup of espresso and a “get to know you” dialog would possibly reveal some info of worth to the customer of their analysis of the property.
Projected P&L – It’s time to deliver all the info and evaluation collectively and coalesce this right into a revenue and loss projection. Utilizing the reconstructed rent-roll as a place to begin, challenge area lease earnings for the subsequent 12 months after which over the steadiness of the maintain interval. Make changes for emptiness (particularly within the first 12 months if a “home cleansing” is required) and lease will increase. Add further columns to the rent-roll for home funds/rents, public utilities reimbursements, non-public utility earnings, different pass-through earnings, laundry earnings, and many others… Carry the annual totals into the income part of the projected P&L. On the expense aspect, plug-in the present 12 months actuals as a baseline and make changes for will increase (property taxes) and reduces (administration, upkeep, insurance coverage, and many others…) If there’s a mortgage, calculate whole mortgage funds, breaking out curiosity and principal totals by 12 months. Lastly, calculate the standard monetary metrics together with: debt protection, mortgage to worth, capitalization at buy and resale, gross lease multiplier, money on money, IRR, and many others… Utilizing these spreadsheets and by making changes to the assumptions and variables, the customer can arrive at educated and hopefully, extremely correct projections concerning the future efficiency of the property over the anticipated maintain time.
Wow, that’s a variety of info and definitely rather more than was contained in our Mobile Home Park Due Diligence Checklist article just a few weeks in the past. I’ve a renewed appreciation for the artwork of due diligence! Keep tuned for my subsequent article which focuses on the bodily features of cell residence park due diligence together with utilities, roads, timber, constructions, and many others… When you’ve got a remark or query, please reply under. If this put up might be of worth to somebody you recognize, please Tweet, Like, Share or g+!
Photograph: SalFalko
