Mobile Home Park Mastery: Episode 115

The Quarter-Billion Dollar Park Era Is Here

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There is not a single $250 million dollar self-storage facility in the U.S. There’s also not a $250 million house or parking lot or many other real estate sectors. So what does it mean that the Plaza Del Ray in Sunnyvale, California has sold for $237 million? Quite a lot, actually. That’s the topic of the discussion on this week’s Mobile Home Park Mastery Podcast. Hear how a sale like that will have a huge impact on the credibility of the “trailer park” going forward.

Episode Transcript

Imagine a chain of dollar bills, end to end, that goes around the middle of the Earth, all 24,000 miles of it, far $237 million would stretch. That's how much the most expensive mobile home parks in America has just sold for.

This is Frank Rolfe for the Mobile Home Park Mastery podcast series. And today we're going to investigate the meaning of the sale of Plaza del Rey in Sunnyvale, California and its groundbreaking sticker price of a quarter of a billion dollars.

Hometown America has recently purchased Plaza del Rey for $237,400,000. It's an 800-space mobile home park in Sunnyvale, California. And the purchaser is buying a mobile home park for a $297,000-per-space price. Now this is the same park apparently that the Carlye Group, another large United States private equity group, bought the park for $150,000,000 about four years ago. So it produced a 58% gain in value in just four years between the two deals, mostly as a result of rent increases.

But let's discuss this deal from multiple perspectives. Let's start off with the market itself. Sunnyvale, California has a population of 150,000 people roughly, and it's in the heart of Silicon Valley, which is the technology capital of the United States. And Silicon Valley and Sunnyvale, California have extreme housing problems. Let's just check out the median price. The median home price in Sunnyvale is $1,667,000. Now compare that to the US norm, which is right around 200,000, and Sunnyvale is eight times more expensive. So you could buy, in most every other market in United States, you could buy eight houses for the price of just one in Sunnyvale.

And the apartment rents are equally ridiculous. The three-bedroom apartment rent in Sunnyvale is $4,075 per month. And that's roughly three times more than the US average, which is about $1,300 on a three-bedroom apartment rent. And the vacant housing rate is less than 5%. That's versus the US average of 12.2. So this is one of the tightest, one of the most expensive housing markets by far in the United States.

So now let's look at the customer's perspective on all this. The homes in Plaza del Rey sell for roughly $250,000 each. They're pretty much all double-wide mobile homes, and they sell for about a quarter of a million dollars. Meanwhile, the lot rent in the park is around $2,000 per month, which does not include utilities.

So that means the monthly cost to the resident living in Plaza del Rey is the following. If they go out and borrow 100% on their mobile home of $250,000, at conventional mortgage rates, at a 30-year amortization, their monthly payment is 1,150. And you add to that the lot rent of $2,000, and you'll find the folks living in Plaza del Rey are paying about 3,150 a month. And that's far less than a comparable apartment, which, as we mentioned a second ago, is $4,075 per month in Sunnyvale.

And what do you have when you live in the mobile home park? Well, in this particular mobile home park, which is an all-double-wide community, you've got no neighbors knocking on your floors and ceiling. You have your own yard, you can park by your front door, and you have a sense of community, things that the apartments even at $4,000 per month can simply not provide. So folks living in Plaza del Rey are paying, for Sunnyvale, what would appear an insanely low price. Bear in mind, to buy a regular stick-built home on its own lot, the same style of living as the people have in Plaza del Rey would cost you $1,600,000-plus to purchase. So there's no question that people living in Plaza del Rey are paying the lowest amount for what they get in the entire city.

Now let's look at it from the sake of the park owner. The lot rent is about $2,000 per month with the residents paying their own utilities. So based on the purchase price, at the cap rate of about four and a half percent, that's lower than most people use when they buy a mobile home park. But it's still well within current standards on trophy properties that are purchased by public REITs and private REITs, and that still has the ability to grow.

Now, of course, California recently enacted even tighter rent control. So there's no way that the owner will be able to increase rents anywhere near the pace that the Carlye Group did. So that's off the table. They won't be able to raise the rent that significantly. But nevertheless, they will be able to raise them enough that overtime that 4.5% cap rate will grow. And they were able to finance the park for well below 4.5%, probably roughly a point at least lower. So really if you look at the spreads between the cap rate and the interest rate, it's still comparable to a lot of similar apartment deals.

So then what is the real meaning of this action, this quarter of a billion dollar mobile home park? Well, the first thing is it brings a lot of awareness to the mobile home park industry. Obviously for decades people have not taken it seriously. Considered kind of a strange investment. And this takes it to the next level. It's very hard to now say that mobile home parks don't have a lot of value, that they're just kind of odd, off the beaten path, not fairly in with the other asset classes of real estate investment, because here you have a mobile home park selling for a price that is similar to a large office building.

Number two, it gives mobile home parks more credibility in the financial sector. Now that a mobile home park has been able to break the quarter billion dollar level, what it means is it's going to get us on the radar screen of most every bank out there that issues loans, who will then say, "Wow, I had no idea that these things could sell for that much money. And I had no idea these things were really such a mainstream part of real estate."

It also demonstrates the financial power of raising rents. This property went up roughly $80 million in value through nothing but rent raises. And if you have 800 lots and you raise the rent $100 per month, that increases the value by roughly $21 million at a 4.5% cap rate, which is what was paid. So basically what Carlye had to do was just significantly raise the rent each year for the four- to five-year period that they owned it in order to hit that $80 million mark. That's what fueled it.

So another thing it does is it basically gives those who hate mobile home parks one more opportunity to create the false narrative that's all about rich landlords beating up on the poor, instead of admitting that the current rents are still a very great deal for the residents and superior to all other housing options in Sunnyvale. This is not really a story that reflects the idea of people taking advantage of those who can't move their mobile homes and all these false narratives that the media loves to talk about. But instead, it's just simply a story of a very, very large mobile home park that offers a terrific housing value, that people really like, that they can very much afford, and that keeps the occupancy extremely high.

And the fact that the rents are obviously lower than the market would allow, significantly lower, which allow the owner to raise the rents closer to market values while still offering a terrific value and maintaining a 100% occupancy, that will give you more deals like this in the future. Is this a new story we'll see all the time going forward? And the answer is no, you won't. Because to achieve a $250 million mobile home park, you have to have some special things.

Number one, you have to have a very, very large mobile home park, in this case, 800 lots. And 800 lots takes you to just about the largest of mobile home parks. There's only a handful of mobile home parks larger in the United States. But I don't think you'll find any other mobile home parks that large located in California or any place where you can get lot rents as high as $2,000 or more.

The only other mobile home parks I know that hit rents that high are also located in California markets. Of course the two mobile home parks in Malibu score that high. There's a park or two in Huntington Beach that comes close. There's another mobile home park in Laguna Beach that's roughly in that specter. But it's not a rent you see every day because the average lot rent of the United States in fact is about $280 a month, which is almost a 10th of that price. So this is not a new story you'll see repeated a lot.

However, it does show the park values of the future. Because a combination of higher rent and lower cap rates will one day drive even average parks with $500 rents to values of $60,000 per lot or more, making even a 150-space mobile home park close to $10 million in value. In fact, that's already happened in many American markets. You've already got 15-, 20-million-dollar parks in such cities as Dallas and Denver and other areas. But will you see a park that is a quarter of a billion dollars again in the near future? The answer is probably not. But yet it is a sign of the future.

So for those who hate mobile home parks, those who hate mobile home park owners, those who think the mobile home park industry is nothing but a continual narrative of people taking advantage of those who can't afford traditional forms of housing, well, I guess you can use this story as an example of this false narrative. But that's not the truth. The truth is, all the story represents is someone who paid a fairly aggressive price, but a reasonable price, for a mobile home park in one of America's most expensive housing markets, and a mobile home park that delivers day in, day out, the best value in the market that it serves. Because that's all the story really represents.

So we salute those who put the deal together, the mom and pop who built that 800 space, who had the vision to build that 800-space mobile home park half a century ago. And we also salute an industry that provides the only form of affordable housing in a market with a median home price of $1,660,000 and gives people detached housing with their own yard and a sense of community when nobody else can figure out a way to do it. So the era of the quarter of billion dollar mobile home park is now upon us all, and I see nothing wrong with that.

This is Frank Rolfe for Mobile Home Park Mastery podcast series. We'll talk to you again soon.