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Lenders Still Stifle RV Park/Campground Sales

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November 13, 2012 by   - () Leave a Comment

Russell Baehre hopes the campground real estate market will pick after this month’s presidential election.

“I think after the election there will be a lot of people actively pursuing properties,” he said.

Baehre, who has worked as a Kerrville, Texas-based campground real estate broker for over 25 years, said sales always slow down before a presidential election.

And while the recession and tightening credit have slowed the pace of campground sales in recent years, campgrounds, RV parks and resorts are generating interest from investors because of their profitability.

“Our returns are better than other investments,” Baehre said, adding that cash buyers of $1 million parks could see returns of 10% or more on their investment each year, which is much higher than they could get from banks, CDs and other investment vehicles given today’s low interest rates.

“That’s $100,000 in income versus maybe $10,000 on CDs,” Baehre said.

Baehre added that campground occupancies are growing in many areas, fueled not only by travelers, but also by people who live and work in their RVs full time, including oil industry workers, doctors, nurses, accountants and other consultants.

The challenge, however, is convincing banks to lend money on campgrounds, RV parks and resorts.

John Grant, president of Park Brokerage, Inc. in San Diego, Calif., said most of his transactions involve seller financing.

“Unless the seller is in a position to carry the financing, the property often cannot be sold,” Grant said. “You have people who want to sell and people who want to buy. But it’s hard to find transactions that will work.”

And while the U.S. Small Business Administration is a worthwhile source for small business loans, the SBA will not provide financing for parks that generate more than 50% of their income from seasonal, monthly or annual renters, Grant said.

“At least 51% of your income has to be from transient guests,” he said. “Snowbird resorts rarely, if ever, qualify for SBA financing. Urban RV parks with year-round tenancy don’t quality, either.”

Grant said buyers of campgrounds that derive more than half of their income from transient guests may qualify for SBA loans, however, provided they can put about 25% down.

Some banks will also provide loans on parks in certain geographic areas, but in Grant’s experience they typically offer loans over shorter periods of time, like 15- or 20-year amortization periods with short five-year terms.

“This makes it harder for the deals to pencil because they have much higher monthly loan payments,” he said.

Tom Ossell of Orion Resort and Campground Sales in Bayport, Minn., has been selling campgrounds since 1973. In his experience, most of today’s campground sales involve either seller financing or SBA loans.

But he says the sluggish pace of private park sales reflects more than the limited availability of bank financing.

“(Today’s) buyers are so conservative,” he said. “In the old days, you looked at the physical attributes of the park and the market and the rate structure and what you could do to enhance it and there was a lot more optimism in the market on the buyer’s side.”

Ossell, who co-owns Timberline RV Resort in Sturgeon Lake, Minn., as well as Northern Lights Resort Outfitting in Kabetogama, Minn., said some sellers also have unrealistic expectations about the amount of money they can get for their parks, particularly if they haven’t continually made improvements to their businesses.

“A lot of the old owners judge value solely by the campground’s physical appearance. They have so much money into the buildings, but they forget they haven’t remodeled the bathroom in 20 years. They haven’t worked on their first impressions, their website, their stationery, their image when you drive into the place.

“A lot of them haven’t upgraded their utilities for bigger rigs. They still have 20- and 30- amp services. Sometimes they can’t go to 50 amps because they don’t have big enough wire in the ground.

“Many of them are not up on the computers. They don’t have websites that are adaptable for the small personal notebooks and iPhones. They are not as up on the technology for the kind of world we live in. They’ve maintained their properties, but as they get toward the end of their career, they don’t keep reinvesting in their properties. They put the money in their pocket.”

But this approach can backfire, Ossell said, if it winds up forcing park operators to lower their selling price.

“I think most of the properties for sale have some kind of deficiency,” Ossell said, adding that the campground buyer has to come in not only with enough money to purchase the property, but enough to cure whatever deficiencies have to be addressed to maximize the park’s earnings potential.

Steven L. Weinberg of The Brokerage Real Estate in Grand Junction, Colo., agrees that there is a direct relationship between the efforts of park operators to maximize the value of their businesses and their ultimate selling price.

Investments like park models and other revenue sources can serve as profit centers that can help improve campground income. “Park operators should continue making improvements if selling at the highest possible price is one of their goals,” Weinberg said.

Park operators need to have good records in place to document their income from every aspect of their business.

“Lenders do not understand the dynamics of the RV industry versus say, a mobile home, that has monthly tenants. In this context, it’s hard for a lender to believe that as one guest leaves another will be right behind him. That’s part of the education process,” Weinberg said, adding, “Lenders need to learn that RV parks are vibrant and cater to a recreating class of people with disposable income.”

However, if park operators fail to keep good books and records to document their income and expenses, it is much harder to prove their revenue potential, not only to potential buyers, but to appraisers and lenders as well.

Weinberg added that park operators who fail to document all of their cash receipts lose money in the long run because that’s income that cannot be used to substantiate their selling price.

Longtime park owners should also avoid closing their parks earlier than they usually do for vacations or other personal reasons, Weinberg said. Shoulder season business is difficult to build, he said, and if, for whatever reason, a park closes two or three weeks earlier than normal it could lose campers who may find someplace else to camp.

All of these are important considerations, brokers say, because everything a park owner does can affect the value of the business, its selling price and, ultimately, a lender’s willingness to finance a sale.

“The banks don’t care about the physical value any more. They put very little concern on that. What they look at is the economic value,” Ossell said.

He added that some sellers are subsidizing their parks’ selling prices by carrying below market terms. “Five percent on $1 million is the same interest as 10% on $500,000,” he said.

Ossell also said he knows of banks that will make 20-year loans on campground transactions. But he said they want to be able to readjust the interest rates on the loans every three years, based on current market conditions.

“They don’t want to be locked into a low interest rate for a long time,” he said.

Weinberg, for his part, said it’s important for park owners not to be too discouraged by today’s tighter credit environment.

“Markets don’t go away,” he said. “They just change and you adapt to them.”

For brokers, that means not throwing up your hands and being content with the status quo. “I really think that the few brokers in this industry have an obligation to educate lenders and their respective buyers and sellers so that everyone can have a greater understanding of how you pass the baton from one owner to the next,” he said.

“For me,” Weinberg added, “It’s exciting to be able to facilitate a transaction. They may not be easy, but it’s not impossible. A broker is probably the best emissary to educate specific lenders and to develop them as a resource within a specific locale.”

Of course, the extent to which a broker is able to facilitate a campground sale or purchase will also reflect the amount of experience he or she has in the campground business.

Darrell Hess, a Waynesville, N.C.-based real estate broker who is licensed in 10 states and has been involved in more than 275 campground and RV park sales during the past three decades, said there is a growing problem with unlicensed brokers promoting RV and campground sales over the Internet.

Hess, who frequently hosts seminars for prospective campground buyers, also questioned how operators of such websites can assist buyers or sellers of campgrounds when they are not licensed. “I am licensed in 10 states,” he said. “Each of those states requires that anyone who provides brokerage services be licensed.”

Hess said park owners and prospective buyers should also spend some time checking out the brokers of interest to them to make sure they are licensed as real estate brokers in the state where the campground or RV park to be bought or sold is located.

 

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