As hoards of seniors moved out or parks within a very short period of time, this caused considerable financial distress for park managers as they saw some of their oldest residents abandon their home sites. They saw desirable tenants and homes being taken out of the park along with a major portion of their cash flow, only to be replaced with less desirable tenants with troublesome kids and dogs.
As you might imagine, this also created a lot of social and financial distress in the parks. As cash flows plummeted, so did capitalized values of parks. Entrepreneurs who approached park management with proposals to master lease blocks of spaces — and in some instances entire Parks — were welcomed with open arms.
Some even were able to acquire long term Options to purchase based upon historical cash flows from hysterical park owners. Of course, having a Roth IRA buy an Option on a park can produce remarkable profits totally free of taxes; forever. Let me give you an example:
Suppose you were able to Master Lease a 100 space park with current vacancies approaching 15%. Let's say that you could lease the entire park including the vacant spaces for $250 gross rents per space per month when retail space rents were a flat $400 per month (this is a lot more than space rental in the rural South and Midwest, but less than parks in metropolitan areas might charge in the West and East).
The park owner would still be responsible for taxes, insurance, and debt service; but you’d take on all maintenance, rent-up, costs of vacancies and collections. Under this scheme, you’d have to pay $25,000 per month to the owner, but you’d be getting 85% of 100 spaces times $400 per month in gross rents, or $34,000 out of which you’d have to pay for operating expenses.
In this example we'll assume that you had negotiated an Option to purchase the park at a price half way between today's value based upon the current net income of two thirds of the annual gross rents times ten, or ($2,720,000) and the value in 5 years based upon a 10% cap rate. That means that the price would be based upon the NET rents of the park divided by 10.
As a rule, in owner-managed smaller parks on city utilities, you can count on spending about one third of your gross income on expenses. With the owner absorbing taxes, insurance, and debt service, let’s say that your net operating income would be about 75% of gross rents.
Through dint of hard, smart work, let's suppose that you were able to fill up the park (most parks are FULL in prime locations) to 100% and to increase net operating cash flows by 30% over the next five years by reducing expenses. Let's see how much you'd make for all your hard work.
First of all, renting the extra 15 spaces up would bring you $400 X 15 = $6,000 per month X 12 months, or an additional $72,000 per year for 5 years or $360,000. Meanwhile, the remaining 85 spaces would be producing about $408,000 per year. Added together, this would amount to annual gross income of $480,000. Seventy five percent of this remaining after operating expenses would be $360,000 out of which you would be paying the owner $300,000. So you’d be making about $60,000 per year for your management effort.
If you increased revenues over that same period an average of 6% per year, or 30% over the full five years, your land rents would rise to $520 per space. That comes to $52,000 per month or $624,000 per year. Net would be about $468,000 less $300,000 to the owner. Now, you’re being paid $168,000 for management.
More importantly, it means that with a 10% cap rate (high for private buyers but less than R.E.I.T.s have been paying), ignoring the lease arrangement between you and the owner, and assuming the net revenue would be two thirds of the gross rents, a rational market would value the park at ten times two thirds of $624,000; or $416,000 X 10 = $4,160,000.
Your Option would be would worth half of the difference in value between the original valuation of $2,720,000 and the new valuation of $4,160,000, or $719,933. Plus you would be receiving $168,000 per year in operating profit without any financial investment other than your hard work. From the owner’s viewpoint, he should be ecstatic at getting his park sold and getting $719,933 extra profit with no work at all. Maybe we should spend a little time talking about Mobile Home Park opportunities.
