There’s a new type of deal construction out there called the “stack”. In this Mobile Home Park Mastery podcast we’re going to explore this type of structure and identify its strengths and weaknesses. With “creative dealmaking” the key to buying some communities, this might be an option for your next acquisition.
Episode 410: What's A "Stack" Deal? Transcript
Creativity is a major part, a major ingredient of successfully making deals today. And we're always searching for new ways to structure deals that meet the needs of the seller, yet provide the kind of economic return that makes the transaction compelling for the buyer. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're going to talk about a new type of deal construction that's making the rounds out there. You probably have heard it from some of the brokers, and it's called doing a stack deal. Now, what is a stack deal? Well, it's basically a new way to package seller financing. To me, that's kind of the essential part of it. But in many ways, it does address some of the concerns that some of the sellers have with carrying paper. It kind of offers a new, fresh way to build and structure those kinds of transactions that may make them possible with sellers who don't like the concept of carrying a second. So let's go over what a stack deal is, and I can only really give it to you in the form of an example. Initially, let's assume you're looking at buying a mobile home park for a million dollars.
And the way a stack deal would work, the way you would structure that transaction, is you would pay mom and pop $600,000 cash at closing, using a bank loan with a first lien position. And you, of course, put, let's say, 20% down on that $600,000 cash at closing price with the lender. And then mom and pop sellers carry $400,000 of that as a second, but in a format in which their second is, is not the standard kind of second, because we're all familiar with the second mortgage. It's something that, you know, is a turnoff to many of your sellers because there's no collateral behind it. But in this case, they stay on, is part of the ownership group until they get paid off. So they're kind of in the loop, kind of a decision maker, and they get paid in a first priority over anyone else as part of that agreement for staying in the ownership group. So what do you really have then, if you're the seller? Well, you got 600,000 in your pocket day one, and on that 400,000, you are still in the deal. So the way the ownership structure now works is it's not like you have to chase down, hunt down your carry.
You are part of the group that's actually doing the carry. Now, what are the positives of this kind of a structure where instead of a standard second, where the buyer calls all the shots is in charge of everything, and your second is not really secured. And you're always worried if you'll get paid. How does this work? Like, what's the positive of a stack deal? Well, the first thing is it is a fresh take on a second mortgage. So, you know, we're always into new and different things as humans. We get bored with things and we like things that have been repackaged. Many people don't realize that Marlboro Cigarettes was originally a woman's cigarette from the 1920s. And Marlboro repackaged that while using very masculine characters in the advertising. The Marlboro man, for example. And so they brought it back out as a. As a men's cigarette, usually successful as a men's cigarette. Total failure as a woman's cigarette. So we like the concept of packaging. And so if this makes the concept of a second lien more attractive to the seller, well, then that's a positive. And it also solves a lot of lender issues because if you've got a mobile home park and it's suffering from poor occupancy or it doesn't look very nice, the lender is much more likely to do a deal if you're trying to buy the park at 600,000 than at a million under that example, because they're going to feel like they've got a whole lot more collateral and they'll feel safer with the deal.
It will solve problems, issues that might pop up with an appraisal, that type of thing. Also, it's a hybrid of higher cash and terms. And it's easier to sell mom and pop on the green to it, because in a standard seller carry situation, for example, you might put 20% down. Let's say if you bought it for a million, they'd get $200,000. May be carrying $800,000. This case, they're getting 600,000 in this example and carrying 400. That's a whole lot more money in their pocket from day one. And that may make it a whole lot more compelling and easier for them to accept the concept of sell or carry. And of course, another positive is it's just yet another tool in your arsenal. You might need it, you might not. You might never even look at doing a stack deal. But it doesn't hurt to carry it around in your memory bank as an option to throw out to mom and pop. But now, what are some of the negatives of the stack deal? Well, first off, remember, this concept is relatively new. I don't know how many deals have been made under the structure. So I'm sure there's lots of problems that no one is aware of yet because there hasn't been any case law or issues on deals that have gone bad.
But here would be some initial negative thoughts. Number one, you know, how much control is a seller really going to have in your ownership entity? Because you don't really know mom and pop that well and you may have trouble having them as part of that decision making team. You probably really don't want a partner to tell you how to run things, particularly mom and pop, because they didn't do a very good job to begin with, which is apparent in many of these parks based on the condition of the property. Number two is, you know, can the seller sue you if they don't like what you do? What are the risks of litigation by having them staying on in the ownership entity Even if they don't have majority vote, could they still come back to haunt you in some matter because they don't like what you've been doing with the property, even if you've done an excellent job with it? Also, you know, it might scare some lenders because there are lenders out there who don't like second mortgages. And that's probably what this would be kind of viewed as. This is to me the same as under the SAFE act when you, when you used to do the old rent to owns, they just considered it disguised mortgage.
I could see a lender saying, well wait, this is just a disguised second mortgage. So as a result, we're not doing this deal because it's not the bread and butter thing that we are typically used to. And of course you've got the age old problem that having mom and pop in the loop with you with their frame of reference of how the park business works. And they're often antiquated ideas and their issues such as trying to maintain very low rents and not put a whole lot of capex back in. You may be on very opposing teams as far as where you see things going and you would not want them to throw up any kind of blockades or derail you or perhaps go to the manager behind your back and say, oh yeah, well, you know, I know the guy said to do this or do that, but I really don't want you to do that. I think the biggest issue to me is it's just not had a lot of testing yet. And the problem you have when you're a pioneer is that you can often go on and do wonderful things. But if you look at old Western movies, pioneers often get ambushed and killed because they're out there in the wilderness and they're not 100% sure what's going to happen or what's around the next bend.
So the bottom line on the stack deal is it's new, it's different, it might work in some circumstances. I could see how it might be a successful concept in some deal constructions, particularly situations where you've got issues, operational issues that are scary to lenders, where things have a little more hair on it, where mom and pop and the buyer need to both get inclusively creative to get the deal over the goal line. Because there's no question that many sellers have been classically trained not to carry second mortgages. Their attorneys often tell them, now, don't get involved in that deal unless you're in a first lien position. So you have the property as collateral. And this might just work to get them over the goal line because now something which they thought they had a handle on has been changed. It gives them something new to think about. And in some cases, that might be the little catalyst that makes the deal possible. This is Frank Rolf with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.