Webster’s Dictionary defines a “hurdle” as “an obstacle or difficulty”. We’ve all seen runners in races going over hurdles of various heights – some successfully and others not. So what are the “Top 7 Deal Killing Hurdles” that mobile home park buyers have to navigate to successfully invest in affordable housing? In this week’s Mobile Home Park Mastery Podcast we’re beginning a series to review each hurdle, why it is so significant, and some ideas to get over it as a buyer and operator.
Episode 145: The Top 7 Deal Killing Hurdles - Part I Transcript
Virtually every mobile home park buyer at one point or another will run into some kind of hurdle that threatens his ability to buy the mobile home park. This is Frank Rolfe with the Mobile Home Park Mastery podcast series. We're going to be talking about the top seven deal-killing hurdles. Now, what is a hurdle? Does a hurdle mean a roadblock that stops you? The whole point of a hurdle, if you look at the definition of a hurdle, it's an obstacle or difficulty, but the point is you can try and get over it. So what we're going to be talking about here are the top seven ones that are the most difficult to get over, why they're so difficult and then what the steps are to get over them.
So let's start off with number seven, private utilities. Now, what are private utilities? Private utilities typically would be defined as well water or some type of sewer other than city sewer. There's basically three options. There's septic there's what's called packaging plant where the sewage goes into a general vat where it's treated like a typical city sewer department does, and then there's also a thing called lagoon. So what makes those things an obstacle? Well, it's one thing to worry with your mobile home park about collecting money, rules enforcement, making sure your common areas are nice and filling vacant lots and homes if you have any, but none of us really want to be concerned about being a utility company, and when you have private utilities, you are effectively the utility company.
If you have well water, then just like the municipal water department worries about the quality and the consistency of the water they deliver, you have the same fears. You wonder if your well will go dry. You wonder if your well's treatment system will break one day, same with the sewage. If you have a packaging plant, you worry the packaging plant will stop functioning. If you have a lagoon, you worry that the lagoon will top, it will actually run over the top or that the state or city may mandate you have to end that. So how do you get over the hurdles of private utilities?
Well, this all comes down to making sure that you've properly vetted, properly done the diligence on it to make sure you have a very good handle on its current status, what its useful life is remaining and how much it will cost to replace. Let's assume you're looking at a park that has a water well, for example. The water well, though your well company tells you is on its last legs, well it will probably cost you 10 to $20,000 to rework that water well and make it work again, so you'd have to load that into your budget. Perhaps 10 or $20,000 will not work. Maybe when you add that into the budget, your economics on the deal doesn't work anymore.
Possibly you get worried because they tell you that, "Well, your well right now is working, but the water table is really dipping down due to the drought, and for all we know, your well may go dry soon." Again, these kinds of concerns, you can't just blow them off. You have got to quantify them. You have to come up with a plan A, a plan B, a plan C for any possible eventuality and know how to pay for it. So when you're looking at private utilities, and we have some in our portfolio, it's not a deal-killer, but it is a deal hurdle. All you have to do, though, to realize whether it is a deal-killer or not is you've got to quantify to the dollar what it's going to cost you to replace or fix that system, what the likelihood of it needing replacement is as far as how many years then how you're going to pay for that.
You'd not be a smart buyer, for example, if you bought a packaging plant that you're told has only a few years left to go. They normally have about a 50-year life. Let's assume your packaging plant was built in 1970 and they tell you, "It may blow at any moment, and if it does, it will cost you $500,000 to fix". If you don't have a plan to pay that $500,000, if you don't have a plan of what to do the day it breaks as far as keeping the sewage working in your park, then you can't buy that park. That's a hurdle that you've not figured out a way to get over, but for most buyers with private utilities, you can achieve a quantification of how high that hurdle is, but that's all part of what you do in the due diligence process.
Let's go to number six, master metered electric. Well, it's kind of like a private utility, but it's a little different. You're not providing the utility. You're not creating the electricity, right? The electricity is coming to you from the power company. They have one big meter at the front of the park, and then it bills you, and then you have little meters at each resident and then they have to pay you based on their allocated amount of electricity used. So what's wrong with that system? Well, what's wrong with the system is you own all the lights, you own all the meters. You're responsible to make sure that the power is working. You're responsible to bill it and collect it, and that's a lot of work and effort people don't want to do.
You typically can't make any money, you're not allowed to make a profit with your master metered electric system, so basically it's a liability. You're spending money to keep that thing in operation and you can't recoup it from the customer. So how do you get over that hurdle? How do you get over the master metered electric hurdle? Well, the good news on the electric one is it's basically just raw math. Your park is built to handle so many amps. There's so many amps of power that can flow through all those lines on all those poles in your mobile home park if you have a master metered electric or underground, if it's an underground master metered electric system. So we know how many amps it can handle, so now you simply have to add up how many amps each home is using.
There's a gauge that they can do, that they can actually put on your light, or they can tell you at any moment how many amps macro total it's pulling, and as long as the amount that it's pulling has some degree of fluff over the total amount it's designed for, then that may be okay. You'll still have to always be mindful of that, periodically check it, and also make sure that if you add any additional homes to that system that you know have many amps those pull, so you're always on top of how many amps you're pulling, but it's something that you can get a handle on. Once again, it's a hurdle. It's not necessarily a deal-killer, but it is a deal hurdle and it can be a deal-killer in certain instances, but you have to get a finite handle of where your system stands.
Is your system capable of handling that amount of amps or is it not? Additionally, what will it cost? As the equipment wears out logically over time, what will it cost to replace those lines and poles, and will the city allow you to replace those lines and poles? We've seen some real doozies over the years on master metered electric. We saw a system once that mom and pop were so massively overdoing the system that the lines caught on fire in the air, and yes, that's a park that I owned. My first part, Glen Haven, the guy had basically made Glen Haven in a manner where it would not kick off when the amps exceeded the amount the lines were handling.
So whether that was accidental or deliberate, what it meant is, it had no basic circuit breaker. One day, it became so overloaded that the actual wires themselves up in the air caught fire, burned, and fell on the ground. Not a very good happening in your mobile home parks. So again, master metered electric, you can get a handle on it, but that definitely comes in as number six on our deal-killing hurdles you have to overcome.
Number five, master metered gas, similar to master metered electric in some ways because you don't create the natural gas. It basically goes to a central point at the front of your park where there's a big old meter, and then you are responsible for gas delivery to all of your customers and figuring out how much they use and billing it back. That's something most park owners want to be is a gas company, but master metered gas has a few complications we need to discuss that have nothing to do with master metered electric. The first one is master metered electric for the most part, though the utility itself is flowed through something that wears well when exposed to the elements, whether in the ground or out of the ground, but master metered gas traditionally is an old metal pipe and that old metal pipe, over time it corrodes, it can rust, and it can blow little holes in it.
When it blows little holes in it, you are leaking gas into the land, into the atmosphere, and we all know what that can do. It could lead to a fire or explosion. So problem number one with master metered gas is unlike master metered electric, there's a lot greater element of risk because you have to know how those pipes are built and you're responsible if something goes wrong with them. You might have to relay the whole system, and that can be very, very expensive. Another problem you have with master metered gas is simply the delivery system itself, and the fact that if anyone severs the delivery of your gas, if the gas company turns off your gas system for any reason, they will not turn you back on until such time as you pressure test the system.
So what does that mean? It means that you go ahead and disconnect from natural gas. You put air pressure throughout the pipes of your park with a meter on it, and you see if the meter shows that you can hold the air pressure. If that meter declines even the most tiniest bit, they will not turn your gas back on. So unlike electric where that doesn't occur, in gas if your neighbor does something wrong, if some guy putting in a sign down the street, hits the gas line and shuts the gas off, they will not turn you back on, even though you didn't do it, until you pressure test. It also means you'll have to run around to every home and try and relight the pilot light, it's a gigantic mass where under master metered electric when you turn it back on, there's no pilot lights to light or problems in that manner.
So master metered gas is another big hurdle. Now, how do you get over that hurdle? Well, master metered gas, unlike master metered electric, has two alternatives. With electric, there's no alternative, but with gas you can go to propane, which means putting a propane tank in each home, or you can go to an all-electric park. Now, both are very expensive. Both are not a fast solution. To put it in propane tanks, the typical propane company can only install one or two tanks a day. If you have an 80-space park and they're not willing to work on weekends, then you're only going to be accomplished 20 homes a month. You can see the complications there, so you have to be very careful on how fast the propane can be put in, and in some cities they won't allow you to even use propane tanks, so you're going to have to not, find the next plan B, plan C on that.
The other option on master metered gas that failed is you can convert to all electric. If you are on city electricity, not master metered electricity, that means you would have to replace every gas-powered appliance in the home, which could be the furnace, the oven, and the hot water heater, and you'll also have to make sure that the home itself is wired sufficiently to handle that additional electricity. So again, master metered gas, far worse than master metered electric, and so it's a far taller hurdle you have to jump over.
Next, phase one fails. We're going to count this as number four on our top seven deal-killing hurdles. What does it mean? Well, you have to do a phase one environmental report every time that you buy a mobile home park without exception, because you never know what terrible thing mom and pop may have done or a neighbor did to make your property polluted, and if it's polluted, it's going to cost you a whole lot of money to clean up. Typically, mobile home parks are not high dollar enough to withstand big environmental fails. We simply can't afford to put a two or four million dollar remediation plan in effect in a park that we're buying for a million dollars.
So unlike a hospital, which might cost 400 million to build, they could do that kind of thing. They could hit some kind of phase one issue, and they could jump over that hurdle by writing a big check and adding it under the total cost of the hospital. Park owners traditionally cannot, but yet we've had cases where we got over the hurdle. Now, normally to get over the hurdle, what happens is you find that what caused the phase one to fail was actually improper. A lot of times, over the years, park owners fire park managers, and then the park manager's opinion of how to best hurt his former employer, they'll often call up the environmental agency, make a false claim against the park.
The most popular, which is that the park owner has been burying trash, knowing that would trigger what's called an unofficial landfill which would be a giant environmental problem, but often it never happened. We had a park once that failed the phase one because the EPA showed that there was an unofficial landfill on the property that had never been remediated. We thought it was bologna. The guy who did the phase one thought it was too so he said, "Let's go ahead and do a little quarry and testing, and see if there really is buried trash," and lo and behold, there was not. EPA then took that off the record and the phase one passed with flying colors.
But if you have environmental contamination, again typically park owners can handle it. Now, if you really love the park and you're buying it really cheap and you fail your environmental, it's possible you can do a phase two, which tells you how bad it is, and then also do a study of what it would cost to fix it and maybe, just maybe, you can pay for it. There are some things out there that are not that expensive. A buried gas tank can often be only maybe 20 or $40,000, and you may be able to factor that into the price of the park, but there are a lot of phase one fails that are simply beyond the realm of your pocket book.
If there was dry cleaning fluid, for example, utilized, those cleanups can often be in the millions of dollars, but to get over that phase one fail, the key is you've got to figure out, is it worth the effort? If the phase one fail is based on nothing but the testimony of some former employee, I would say you might be able to go ahead and take that onto a little more testing and see if you can find that it is technically wrong. However, talk to your environmental engineer and find out exactly what you're talking as far as money and ability to fix, and if it looks like it's going to be a huge amount of money, a huge amount of time, it's not going to work for you. And I will also add, it also won't work for you to be able to buy it as far as your lender is concerned because a lender is not going to loan money on a park with a phase one that has failed.
So this is Frank Rolfe with the Mobile Home Park Mastery podcast series here. We go in the top seven deal-killing hurdles that takes you to items number seven through four. We'll be back again shortly to give you items three all the way to our grand winner, number one, highest, most difficult deal-killing hurdle to get over.