In this edition, we're excited to share some highlights from our recent acquisition of a 76-unit Manufactured Housing Community (MHC) in Big Rapids, Michigan. The journey from initial engagement with the seller to closing took approximately 13 months! Rather than an outright purchase, we structured this deal as a Membership Interest Purchase Agreement (MIPA), allowing us to acquire a majority share with full management rights while allowing the seller to mitigate tax implications. The seller remains in the deal as a limited partner, reflecting his confidence in the property's potential with the right operating partner.

How We Found It

In the summer of last year, we were exploring several 'on-market' Michigan MHCs with a local Marcus & Millichap broker when he introduced us to this opportunity. Initially, the seller's asking price was unrealistically high. However, after we met him in person and presented strong market comparison data, we reached a mutually agreeable value.

What We Like About It

Quality - 4 Star Community

This community is a 4-star park, built in 1998, and considered the best MHC in town. From our experience, we know that most MHCs were built before 1990 (a topic for another time). The fact that this community was built more recently really stood out to us, suggesting higher-quality infrastructure, which we have since confirmed to be true. The '4-star' rating is based on the MHC rating system, which evaluates parks on a 1 to 5-star scale, with criteria including amenities, infrastructure, and overall appeal.  5 Star = Suburb feel with curbed and/or winding roads, lower density, majority double and triple wide homes, swimming pool, tennis courts, and clubhouse. And 1 & 2 Star, = Breaking Bad trailer park (gravel roads, pre-HUD homes, etc. 😀 ).  

The property boasts strong infrastructure amenities including highway grade street lighting, curbed paved roads, and paved off-street parking for each home. It features a low-density setup, with just 3.6 homes per acre, allowing for more space, privacy, and subdivision feel. These characteristics make it a standout community in the market, while making it an affordable and desirable living environment.

We’ve included our MHC rating standards below for 3-to-5-star communities (we do not focus on 1 & 2 Star).

Value Add Opportunity

This acquisition presents a significant infill opportunity. Within the 76-pad community, there are currently 23 vacant lots. The low occupancy rate is largely attributed to the seller’s lack of capital to invest in new and used homes, and therefore has been zero efforts to sell homes since ownership began.

Additionally, the property includes an adjacent plot of 40 acres with Manufactured Housing (MH) residential zoning, offering the potential to more than double the community's size. This expansion opportunity aligns with the region's growth prospects, particularly with the planned development of a $2.4 billion electric vehicle (EV) battery plant just one mile away. The plant is expected to significantly boost the economy of the Big Rapids Metropolitan Statistical Area (MSA), which could further enhance the value and appeal of our acquisition. While we have not factored this potential economic windfall into our projections, it represents a promising upside to the deal.

Owner Financed Capex

Remarkably, the existing owner, who will remain involved as a Limited Partner, has agreed to an advantageous financing arrangement. As part of the deal, the seller agreed to refinance the existing loan prior to closing which reduced the upfront equity investment required from GGC. Furthermore, the seller agreed to fund 100% of the CapEx required for infill by using the cash out loan proceeds from the refinance. This reduces the upfront capital required by us and highlights the seller's confidence in the future success of the property.

Our Business Plan –Infilling New Homes

This acquisition isn’t a ‘massive turnaround’ but an opportunity for targeted enhancements. The community is well-managed by a team that has been in place for ~5 years and our plan is to complement them with additional support and capital.

We will invest in purchasing and installing over 20 homes (3-4 at a time) over the next three years, with options already explored with Champion Homes and a local dealer. Additionally, we will implement a lease-to-own structure for some existing Park-Owned Homes (POHs), aiming to improve the exit cap rate and enhance refinancing options.

The Capital Stack

We secured a loan of $2.726 million from a regional bank specializing in Manufactured Housing Communities (MHCs), with an additional earnout of $500,000 contingent on reaching specified occupancy levels from the infill project. The loan terms include a rate locked at the 5-year Treasury yield plus a 3.89% spread, with interest-only payments for the first three years and a 30-year amortization period thereafter.

Our equity portion was funded with $675,000, with the General Partners (GP) contributing ~22% of this amount.

Operational Transition and Next Steps

We have developed our operational roadmap and are now beginning the transition process. Next week, we will be on-site with the management team and will share our operational plan. During this visit, we will also review available double-wide homes with a local dealership and meet with Diamond Home Setting, our partner for infilling homes.

We are excited to get this deal over the finish line and are now heads down with the goal of exceeding our financial expectations.

Stay tuned for future editions where we’ll explore more aspects of real estate investing. We will have new opportunities in the near future so don’t forget to sign up below to stay informed.

Greenside Gazette

Chicagoland Multifamily Heats Up

Greg Fowler's FPA Multifamily has reinforced its position as a leading multifamily buyer in the Chicagoland area by acquiring the 21-story apartment tower at 150 Forest Avenue in Oak Park, which has been rebranded as ReNew Oak Park. Although the sale price for the 270-unit building is not yet public, it is expected to be lower than the $381,000 per unit price paid by the previous owners, Goldman Sachs and Magnolia Capital, in 2018, due to interest rate increases impacting property values. FPA's recent purchase of the Emerson Apartments in Oak Park for $220,000 per unit and the potential $90 million sale price of the newest acquisition suggest a recovering Chicago-area multifamily market.

Source: https://therealdeal.com/chicago/2024/08/06/fpa-multifamily-buys-oak-parks-tallest-tower/?utm_source=newsletter.credaily.com&utm_medium=newsletter&utm_campaign=equity-residential-spends-964m-on-3-5k-apt-units&_bhlid=b08fb356c6fa1a6678f2d606379e4040cb3f1d6a

Birdie Basics

Membership Interest Purchase Agreement (“MIPA”) : A legal contract used when one party (the buyer) agrees to purchase the membership interests or ownership stakes in a limited liability company (LLC) from another party (the seller). This type of agreement is often used in real estate transactions where the property is owned by an LLC, and the buyer intends to acquire the property indirectly by purchasing the membership interests in the LLC rather than the property itself.

Earnout Clause: A loan enhancement that provides additional loan proceeds based on financial performance of the borrower. The enhancement is calculated based on the borrower’s achievement of the specified net income and occupancy rates.

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