In this webinar, Sam Hales presents a portfolio of mobile home parks in the Kansas City area.

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Webinar Highlights

• Background of Saratoga’s history as a developer of mobile home communities.
• Review of the seven mobile home properties in the Kansas City area, including both OZ and non-OZ properties.
• Timeline for improvements and distributions from operations.
• Review of each of the parks included in the portfolio, including plans for expansions and upgrades.
• Projections for cash flows and deal terms.
• Live Q&A with OZ Pitch Day attendees.

Featured On This Webinar

• Investing in Manufactured Housing

Industry Spotlight: Saratoga Group

Saratoga Group is a Top 50 owner of Mobile Home Communities. Saratoga Group has experienced explosive growth from their first community in 2017 to over 5,000 pads and 72 communities today.

Learn More About Saratoga Group

• Visit SaratogaGroup.com

Webinar Transcript

Jimmy: Sam is presenting his Kansas City Mobile Home Opportunity Zone Portfolio, spanning two states, it looks like, both Kansas and Missouri, the broader Kansas City metropolitan area.

Sam: Jimmy, thanks so much. Sam Hales, CEO, founder at Saratoga Group. And really all we do at Saratoga Group, or all we’ve done for the last six years, is invest in mobile home communities. I would encourage anybody that doesn’t really know about mobile home communities as an investment sector, if you Google that, maybe Google Greenstreet Partners, you’ll find that not only has this been basically the best performing asset class in real estate for a long time, but it’s projected to continue to outperform because of the imbalance in supply and demand for affordable housing.

So Kansas City. This is our disclaimer. You can read this at your leisure, but basically not selling securities today. This is our team. This is our leadership team. And what I can say about this team, a lot of experience here, but basically, everyone on this team is all-in on providing dignified, affordable housing in every community that we operate in. We’re in 17 different states. We have over 100 communities. And we have about 6,400 pads. Each pad is where a mobile home will go. Estimated conservative value is about $360 million of that portfolio.

So this opportunity in Kansas City, it’s actually a portfolio of seven communities. And it just so happened that three of them were in an Opportunity Zone, four of them were not. And because of the huge tax advantages of the OZ, we decided to bifurcate the portfolio, offer separately for the three in the OZ and the four not in the OZ. These were all aggregated by another operator over the past few years and because of partnership issues, they’ve decided to sell. I can tell you that this same portfolio was in escrow back in October, November, for 35% more than we’re now paying. So we’re excited about the price. We’re excited about the portfolio.

As Jimmy mentioned, this spans both sides of the river there in Kansas City. And so, let me just kinda show you what we have and what we’re buying. So in blue are the two communities we already own in Kansas City. So we’ve been there about a year and a half. Really the metro Kansas City is a Midwestern city but it continues to experience steady population growth and number of companies that have come in there just continues to be, at least regionally, a very good place for investment, real estate investment as well as net migration. But once we own this portfolio, 233 lots that are not in the Opportunity Zone, 221 that are, that’ll put us at about 600 pads in Kansas City. And one thing that we have not underwritten in our pro forma is that as we get that kind of scale and efficiency, we expect and we’ve experienced that our operating expenses will decrease. So for example, our biggest market that we own is Greenville, North Carolina. We have about 1,200 pads there and we’re now operating an expense ratio of about 30%. We’ve underwritten about 45 to 50 for the next five years in this portfolio. So if we can get close to what we’ve done in Greenville, it will be much better than what we projected.

This is obviously an Opportunity Zone investment, so it will be a 10-year hold. We actually are long-term holders. Out of the portfolio we’ve had, we’ve sold one community. That was simply because it was in California. Other than that, we really look for ways to incrementally add value over time and continue to grow operating income and continue to grow distributions.

Essentially what’s unique about what we’re offering today, unlike everything else that’s been shared in the real estate side, this is not a ground-up development. There’s current occupants. There’s current income. In fact, we’re buying this at a blended cap rate, a little bit over 80% going in. So it’s really, in terms of a risk profile, much less risky than a ground-up construction project. So really what we’re looking at doing is we’re gonna be able to start distributions after one full quarter of ownership and operation, and then it’s how do we continue to incrementally add income and add operating cash both to the portfolio, to investors. So the biggest way that that’s gonna happen, and this is showing the occupancy across these three properties, is we’re gonna add units. We’re gonna add residents. That is, it is incremental and it’s also non-trivial. But unlike again, if we’re doing a total ground-up or even a total redevelopment on an apartment building, you have to kick everybody out or you started from the ground, you don’t have any residents. In this case, the residents that are there are so happy to see new streets going in, new driveways in a home that they’ve lived in maybe for 15 years, a new playground going in, new signage. So we’re upgrading everything that’s already in place.

Four Seasons is one of the communities. This is in Warrensburg, Missouri. Warrensburg is on the southeast side of the Kansas City metro. It’s basically half full. So there’s a lot of infill that’s gonna be required here and we’re looking at a pace of about 10 homes a year. So it’ll take really about six years to fill up this community based on those projections. And we’re gonna see an increase in rent the first year, going from 350 to 400. We own in this market already. The community that we had on the market, we’re at 450. And so, it’ll take us probably three years to get to market on the rest. We try not to be egregious with rent increases, but just kind of relatively modest rent increases.

And this is also gonna take a relatively big capex budget. So we’re looking at about 1.6 million for this project. A lot of that’s gonna be new streets and driveways. You can kinda see a photo here. Those streets are pretty beat up. Driveways also need to be redone. And then, a big chunk of the rest of the capital here is gonna be used for bringing in new homes. We’ll have the homes themselves financed, but as far as setting the homes, installing decks and then doing all the hookups to water, sewer, electrical, that sort of thing, we’re coming out of pocket for that.

Then we have Lincoln Park. This is in Ottawa, Kansas. Ottawa is on the southwest side of Kansas City. And this is almost completely fully. You’ll see 98% occupancy. So that means there’s one empty lot here.

But the other thing is this one comes with a few park-owned homes, meaning these are homes that we’re gonna own as the new owners of the property, and then we’re just renting out the homes. That’s not ideal. We prefer to have people own their own home. So there’s gonna be a transition with this community as we turn those park-owned homes into resident-owned homes. As part of that, some of these homes are relatively old, like 1980s vintage. And so, some of those are gonna probably end up getting pulled out and we’re gonna bring in some new homes as part of the strategy at Lincoln Park.

Majestic Hills is in Excelsior Springs. This is a great submarket on the northeast side of Kansas City. And it’s kind of in between the other two that we just talked about. It’s about 69% occupied, so there’s still quite a bit of infill to do and there’s definitely quite a bit of road work. So none of the homes here have driveways, so we’re gonna pour new concrete driveways for all the homes. And then, we’re gonna need to redo the roads here as well. And then, of course, another chunk is the homes, getting the homes brought in and set up.

So here’s a projection on the cash flow related to the $100,000 investment into this opportunity. I’ll just point out really quickly, we see kind of the increase of distributions for the first three years. We raise enough capital to kind of fund the homes in the first three years, and then starting in year four, we started using some operational capital to fund homes. I know I’m about to run out of time here, so I don’t want to cut into Jimmy’s time too much. Let me just share this Sources & Uses with you quickly. What you’ll notice is a big chunk of equity, right? So in terms of leverage, we’re talking about $3.7 million on a loan and $6 million in equity. So we’re really looking to, again, we don’t need to bring on a lot of leverage to make this work for investors. The loan that we’re gonna have is a very attractive loan in this environment. 7.15% fixed for five years, first two years of interest only.

So I hope you will consider investment into the Kansas City portfolio. Please reach out to us, [email protected]. There’s our office number. If you’re an investor with us, you can scan a QR code. It’ll bring you to a data room. But if you just email us, we can also provide the offer materials. Thanks so much.

Jimmy: Great. Well, Sam, thanks for joining us today. Let’s get to a couple of questions. One question is when do these properties typically start cash flowing after you come in and you renovate them? And when can investors expect to start receiving some cash distributions?

Sam: So yeah, we do quarterly cash distributions and the first distribution will start after one full quarter of ownership. So I mean, can we say right away? Well, not quite, right? It’ll take a few months. But basically, these are cash flowing assets that are cash flowing now.

Jimmy: Yeah. That’s pretty impressive. This is actually, Sam, your deal differs pretty substantially from a lot of the ground-up deals that we heard from earlier today, where those investors are taking a lot more risk with ground-up construction and it might take two, three years to get those assets built, stabilized and cash flowing. Yours are cash flowing maybe not exactly on day one, but pretty soon thereafter. That’s fairly impressive. Do you do any, excuse me, do you do any new developments or is it always you’re going into existing properties and cleaning them up, putting in some infrastructure?

Sam: Yeah. Well, and that’s a great question. So we’ve actually built our own construction company. We have a project going right now. We’re doing a 50-lot expansion outside of Omaha, Nebraska. We have another project in an Opportunity Zone in San Antonio and we’re doing like 850-pad expansion there. So yes, we’ll do full development, but our bread and butter is basically taking something that’s there and just renovating and improving it. Everybody stays in place, right? That’s why we can deliver that cash flow while we’re actually doing a project.

Jimmy: We just got a question in about the cash flow and I don’t think this pertains specifically to your Saratoga Group Mobile Home Park OZ Fund, but can pertain to any Opportunity Zone fund. What is the tax treatment of the cash flow? It’s just income, I think, right?

Sam: It is. Yeah. It’s just income. So the cash flow is taxable as ordinary income. And then, when we have the refi events, that’s return of capital and obviously that’s not taxed under those structure.

Jimmy: Now are you doing any depreciation though that might help the investor offset that income?

Sam: Yeah. Absolutely. So we will have a cost seg study done on this as we’ve looked at it from our perspective, we believe that over 50% of the investment on the first K1 will be available as bonus depreciation. So in other words, if you invest $100,000, the K1 should save 50,000 or more in bonus depreciation on year one.

Jimmy: Perfect. And then, one more question we just got in from Julia, and then I’ll let you get outta here, Sam, because we’re gonna wind down the day. But Julia, you got the last question in. Are you rent mobile home lot only or including mobile…I’m not sure what she means by that actually. Do you see her question there? Can you decipher it?

Sam: Let’s see. I don’t see a question.

Jimmy: Are you renting mobile home lots only or including mobile homes? Not quite sure what she meant by that. Sorry. I pre-screened that question. I just saw it come in.

Sam: No, I think I understand. So we are renting some homes, but that’s not our business model. So generally the business model is we just want to rent out the lots. There are some park-owned homes that come with this and over time, we’re gonna be selling those off to the residents. So it’s gonna be a mixture, but most of it is just renting the lots.

Jimmy: Perfect. Sam, you’ve got your info on the screen there. Please do scan that QR code with your smartphone camera, not your point-and-shoot camera like I was trying to do earlier with Greg. Or reach out to Sam and his team, [email protected] or the number on the screen there as well. Sam, hold on just a second. I’m gonna actually just type that out. So it’s [email protected]. Is that right?

Sam: That’s right.

Jimmy: All right.

Sam: Awesome.

Jimmy: So there’s Sam’s email address. That’ll go to Sam and his team and he can get back in touch with you. Sam, thanks so much for joining today and being a presenter on OZ Pitch Day. We really appreciate your time.

Sam: Thanks, Jimmy. Appreciate it.

Jimmy: Thank you.