Every mobile home park must have water, sewer, electricity – and sometimes – gas. But the way these utilities are provided can have a huge impact on whether you would want to buy that deal or not. In this week’s Mobile Home Park Mastery Podcast we’re going to examine the ability of utilities to give any deal a Jekyll & Hyde demeanor, with the ability to turn that attractive investment possibility into a potential nightmare. If you want to know what some of the key deal killers are for mobile home parks, then this podcast will clearly identify them.
It's the obligation of every mobile home park owner to provide utilities to the residents of the mobile home park, but exactly how those utilities are delivered can have a huge impact on whether you want to buy that property or not. This is Frank Rolfe of Mobile Home Park Mastery podcast series, and we're on the second in our three part installment on the impact of slight changes and deal variables. We've themed this as a Jekyll and Hyde because it's amazing how things can change instantly whether you want to buy the mobile home park or not. We're going to talk about utilities.
Now, what are the utilities a park owner has to provide, and then how can we change those variables even slightly, and change the entire outlook on whether you want to invest in that property or not? Let's start off with water. There's two kinds of water, there's city water, and there's well water. Now, city water that's always been going to be Doctor Jekyll because city water is safe, it's clean, it's pure, it's provided by the city. You don't have anything, any responsibility in it whatsoever. City water well, that's just fantastic, but then there's well water. Well water's a little bit more like Mister Hyde because well water can scare off a lot of buyers, a lot of bankers, so how do you get a handle on well water?
The first thing you have to know about well water is well water is the same whether it's drawn out of the ground for your park as if it's drawn out of the ground for a giant city. It's basically water extracted from a deep well, and it's not an issue that doesn't work. Of course, it works. The water's drawn out of the ground, it's chlorinated, and put in a storage tank just like the city does with those big old water towers. The problem is, unlike city water, you have to worry about it because it's your water. If you poison anyone, if anyone gets sick it's all your fault, so basically you have to look at well water much differently than city water.
Now, is it Doctor Jekyll or Mister Hyde? Well, it's always going to have a little bit of Mister Hyde in it because even though these systems work well, and they're based on science if any part of them breaks it's possible your water would not be chlorinated, it's possible the water you would be distributing is not suitable for drinking. It's very rare, I cannot even give you an example of a park owner who ever distributed water that was not fully potable, but it's always something you worry about, so there's always a little bit of Mister Hyde in the water. If the park is city water then that's great, but then if the park is well water not so good, not necessarily a deal killer, but it certainly changes the complexion of the deal.
I'll also add that city water also can sometimes give you a potential NOI boost because you can often sub-meter city water, where mom and pop have been just paying the bill for everyone, you can put in the sub-meter which fosters conservation, and then also gives you that revenue stream back. City water even has an additional plus in that it can be sub-metered, and that fosters conservation and lowers that cost line item to the park.
Now, the next is city sewer versus septic, package plant, and lagoon because all the different ways that sewers deliver can have a huge impact on whether or not you'd want to buy the mobile home park. City sewer's a lot like city water, you don't know where it goes, and you don't even really care because it's just there for your use. You put your sewer in the mainline, it goes to the city, and they treat it, so you're totally out of the loop. Sometimes parks don't have access to city's sewer then they're on what's known as septic.
Now septic is a unique animal, it's a business relationship between the park owner and Mother Nature, and Mother Nature normally makes a really good business partner, but sometimes Mother Nature wants to quit, wants to go get a different job. What you do as the park owner is you take sewage from the mobile home into a tank, and then you have perforated lines that go out from the tank, and they leach into the ground, and that area is called the leach field. It really relies on Mother Nature soaking up those liquids, if Mother Nature stops your septic doesn't work anymore.
Clearly, while city sewer that's definitely a good thing you get a little more Mister Hyde when you go to septic. Now, septic is unusual because you can have a septic that's been working for 50 straight years and there's every reason to believe it will continue on unless the weather pattern is changing. If the area's becoming wetter with more rain it's possible Mother Nature won't want to soak up all the solids anymore, and what happens is now you've got a real issue going. Typically, septic it might be a little Mister Hyde, but you might be okay.
Now, the next type you have is the packaging plant. Now, what is a packaging plant? That's just like the city sewer plant, it's basically a rectangular basin, the sewage comes in one end, and it comes out the other end almost completely pure. However, there's a lot of science that goes with that because, obviously, you don't just drop sewage into your swimming pool and have it come out pure at the other end. There's a lot of things that go on in the packaging plant, and it's very, very expensive.
Packaging plants in America could cost anywhere from $300,000-$1 million to replace, so when you're looking at a packaging plant you'd want to know how is it, and what will it cost to replace? They typically have a life of 40 to 50 years roughly. Again, some cost more than others, but you want to know all of that on the front end to know whether or not your deal has just gone from Doctor Jekyll to Mister Hyde. You've got to make sure that you understand how long that thing will last because the last thing you want to do is buy a mobile home park and have the packaging plant to go out. In some cases the packaging plant might cost more than the entire park itself.
This last one is always Mister Hyde and that's the lagoon. Now, what a lagoon is, it's a cesspool, all the sewage goes into the lagoon, and the liquid evaporates, and it's really gross, and the health departments hate them, and some states are trying to eliminate them. You probably don't ever want to own a park that has one. The only way you can handle one if you have it is if there's a city sewer line nearby that you can ultimately connect to because in most states, and the world's going with all of our focus now on environmental contamination, and health and safety, it's a pretty safe bet that over the next 50 years lagoons will mostly go away. That definitely gives your deal an almost instantaneous Mister Hyde negative appeal, so lagoons that's pretty much a killer.
There's another item in sewage we should talk about, which is the lift station. Now, if you've got a mobile home park, and your mobile home park sits lower than the city's main sewage doesn't flow up, it's not pressurized it only flows down, so you'll have to build a way to pump it up, and that is called a lift station. That's a rectangular item made of concrete that sewage goes ... not rectangular, sorry, cylindrical. The sewage goes into it, and it meets there a pump, and the pump blasts the sewage uphill to the city's main. Now, those things can be fairly expensive, figure on $50-$100,000 for the big ones.
Also, there's some issues you have to know on them. One, what is the condition of the lift station? I've seen lift stations myself where the entire upper structure has fallen in through to disuse, that's incredibly dangerous. Lift stations are supposed to have two working electric pumps in them, and they're also supposed to have alarms in the top, both audible and visual. Typically, a siren, or a bell, and a strobe light is quite common, although sometimes it's just a red light that means warning.
What happens is when those go off, if you don't fix whatever's wrong with your lift station it will overrun with sewage, which is very, very dangerous in every regard, both from contamination to basically health violations, and then being sued by your neighbor. You have to make sure that lift station's in order in good order, so where's Doctor Jekyll and Mister Hyde come in on that? A lift station that's a little bit of Doctor Jekyll it's, typically, okay, but only if it's a modern lift station that's that's well-maintained. If it's not well-maintained, if it does not have two pumps, but only one pump in it then it's getting more like Mister Hyde. In fact, we've seen lift stations that only have the capability of handling four hour windows if the motors go out, and that would not even cover you if the power went out for a brief period of time, so you have to really look at that lift station, decide if it's more Doctor Jekyll, or more Mister Hyde.
Now, let's move on to master metered electricity. Now, you might say, "What the heck does that even mean?" Well, in many of your early mobile home parks particularly back in the 40s through sometimes the 60s the park owner set it up so that every power meter in the entire property, every connection was hot 24 hours a day and that way the mobile home could come in, and plug-in, and be ready to go, no inspections needed. Of course, they built them that way because in the olden days RVs and mobile homes were same thing, they would bring in the RV/mobile home and park it in the lot, and plug it in. Of course, today it doesn't work that way. Mobile homes are much larger, and they use a much more power, typically, 100 to 200 amps of power unlike the old RV days of 50 amps or so.
What happens when you have a master meter in an electric set up is you are responsible for all the electricity that goes to all of your residents. You can guess where all this is heading because, obviously, the Doctor Jekyll way to do it is the power company owns all the lines, and they bill everyone direct, but the more of Mister Hyde is that you own all the power lines, and you have to be bill it back.
Now, can you change Mister Hyde back to Doctor Jekyll again? Yes, it's possible. If you have electricians survey the property and figure out how many amps you pull versus how many amps it's designed to handle you can pretty rapidly see if there's enough allowance, enough tolerance for you to handle the demands of the property and do it well. Also, look at the way it's built. Are the lines well done? Did mom and pop do a professional job of constructing it? Or, like in some parks I've seen, they actually attach the power lines to trees back in the 50s that over the subsequent 50 years have grown to different heights, so the lines, none of them, make any sense at all. I even saw one park where the lines were being held up by the roofs of the homes. Make sure that the master meter power system that you're looking at is professionally built, has enough tolerance to handle all the required amps, that's how you'd convert it back from Mister Hyde back to Jekyll again.
Next, master metered gas. Same thing as the electricity, no different. In a good Doctor Jekyll park the gas company pays for all the lines, they own everything, they have all their meters, they read the meters, and bill the customer direct. In a Mister Hyde park that happens is the park owns all of the gas lines so therefore it is responsible for everything. It's possible for billing back, and yes if there's an explosion, or fire the park owner is the culprit, that's the person who's in charge of the gas system.
Now, master metered gas is one additional wrinkle that scares everyone to death, and rightfully so. If, for example, if you get a leak down the street, and they shut off the gas to the whole street they will not turn your gas back on typically unless you pressure test your entire system. That's very, very unfair to the park owner. This means now, even though you had no problem with your system you have to have a plumber put a meter on, jack up your system with air and see if it will the pressure. All you would need is the slightest leak in any of those homes, or anything on the line, and you can't turn your gas back on, and it's unfair. Never was fair. A lot of people these days they won't even deal with it, they don't want to be exposed to the liability, and the nuisance of master metered gas. If the park has gas yes, it could be Doctor Jekyll, hopefully, it's nice municipal gas, coming from a gas company, but then it becomes more Mister Hyde when it turns out that the park itself is responsible for the gas.
What does it all mean when you put it all together? Well, it means that all parks have to have utilities, so there's no reason that you can't buy a park because it delivers water, sewer, electricity and gas because, typically, you have to do these things. The key is, the deal variable on all of these who is responsible for it? Then additionally, if the park is responsible what is the age, and what is the potential cost of doing it? We've had many a deal under contract that we thought was looking really good, the market was fine, everything was looking exactly in line with what we would want to buy. Then, suddenly out of nowhere comes the Mister Hyde moment when it turns out that mom and pop didn't bother to tell us that the thing is master metered power, or they didn't bother to tell us that it is being served by a packaging plant hidden over in the weeds.
I've known many park owner to call me and say, "Hey, I have this park, and it's not working out good," and I'll say, "Well, tell me about it." I know of one where the guy bought a mobile home park he did not even know that he was not on the city sewer. It later turned out he had a packaging plant hidden in the weeds, he didn't ever see it, he did not know it was there, and he had no idea it would cost half a million dollars to replace it.
Now, the good news is he was able to find a developer that wanted that land, and so he was able to get them to take over his burden, but the bottom line is these are all variables that can make any deal go from Doctor Jekyll to Mister Hyde. Again, Doctor Jekyll nice guy, pleasant to be around, Mister Hyde an absolute monster. Unfortunately, in many mobile home park transactions the slightest change in the variables can trigger those reactions. What's important is you need to know, and hopefully you'll remember these, that in the world of utilities you're looking at Mister Hyde if it's got well water unless you understand how the well works, septic, packaging plant or lagoon on the sewer side, lift stations, master metered power, and master metered gas. All of those could be Mister Hyde moments not necessarily, but you have to be extra good due diligence to make sure you're buying what you thought you were buying.
Hope you enjoyed the second of our three-part installment on Jekyll and Hyde impact of slight changes and deal variables. Be back next week with one more, and that's going to be how the economics of the deal itself can so greatly impact whether you want to go forward and by the park or not? This is Frank Rolfe of Mobile Home Park Mastery podcast series, and we'll talk to you again next week.