I often get asked by resident groups how much their park is worth, i.e., what are they going to have to pay to buy it.
I don’t think there is ‘one’ value for any piece of real estate, such as a mobile home park.
Rather there are several values:
Value #1 – Owner Value, which is what the owner thinks his park is worth. Probably very HIGH.
Value #2 – Investor Value, which is the value that some MHP investor with cash money and other investment options would pay for the park. Probably much LOWER than Value #1.
Value #3 – Lender Value, which is the value the conventional lender (bank, insurance company) will use to determine their loan amount. Probably LOWER than either Value #1 or #2.
Value #4 – Bond Issue Value, which is the value that some bond rating agency and municipal bond insurer are willing to weight against the bond default risk. In the deals currently being done, this value is PRETTY CLOSE to Value #1, for reasons I will explain in another email – Bonds 101
Value #5 – Resident Group Value, which can be any of the following:
A) The “I’ll pay anything to get rid of the owner” Value – usually pretty high, Also Known As (AKA) the value that a non-profit might convince the resident group to support in order for the non-profit to buy the park.
B) The “He ought to give us the park, we have already paid for it” Value – usually pretty low and very unrealistic.
C) The “What can we afford as an HOA” Value – somewhere in the middle and based primarily upon what the resident group can finance.
All these values are based upon essentially the same set of numbers.
The valuation process takes park revenues, adjusts for vacancy, subtracts operating expenses and get Net Operating Income (NOI).
Then, ALL the values above adjust these numbers in different ways and with different assumptions and arrive at different NOIs.
Whatever NOI they end up with, they then use a capitalization rate (cap rate) to determine the value.
The cap rate is pulled out of someone’s ear based upon what they think a comparable park would sell for (or to put it another way, what they think the risk is on the investment.).
Example: If the NOI is $100,000 and the cap rate of this quality of park in this location with this amenities is 10%, the appraiser is basically saying that an investment of this qualify should earn a 10% rate of return. Thus, if you’re getting earnings of $100,000, a 10% cap rate means the park is worth $1,000,000 ($100,000 DIVIDED BY 10%).
Note that the higher the quality of the park, the lower the risk. Thus the more stable the amount an investor would expect to earn and the lower the cap rate.
Parks today (on the West Coast) sell for cap rates from about 5%+ to 10%+. Parks in the past have sold for lower caps (meaning a higher value).
Sometimes investors will buy a park using a low cap rate (high value) because the buyer knows he can probably bust rent control, increase rents and lower maintenance costs in the future. (The “Sam Zell/Equity Lifestyles” method)
Stay tuned for Bonds 101.
Deane Sargent and PMC Financial Services have been helping mobile home park resident groups and cooperatives to organize and find financing to buy their parks for over 20 years.