Does the lot rent gap or the expense ratio sell the sector to a first-time LP?

Question

I've been reading two different pitch decks for park funds and they lead with completely different things.

The first one spends four pages on lot rents being $340 in the target markets against apartment rents that are three or four times that in the same counties. The whole argument is that there's room to raise rent for years before a resident has a cheaper option, because moving a home costs thousands of dollars they don't have.

The second deck barely mentions rent levels. It leads with expense ratios, 35 to 45 percent for parks against 50 to 65 percent for apartments, and minimal capex because you own dirt and pipes instead of roofs and appliances. Their argument is that the cash flow holds up in any rent environment because there isn't much to spend money on.

For someone who has never owned anything and is trying to understand what actually drives returns here, these feel like different businesses. The rent gap story means the returns depend on pushing rents on people who can't leave, which is exactly the thing that draws local news coverage and city council attention. The expense story means the returns are more about operating the same asset cheaply, which sounds duller and maybe safer.

I don't know which one is the real engine. Curious how the room reads it, and I'd rather hear the disagreement than a tidy answer.

mikeoconnell7 · Answer

They're both real, they just fail differently. The expense ratio is a fact about the asset. You can't operate the roof you don't own. That number holds whether you're a good operator or a bad one, which is why the second deck can lead with it and sound calm.

The rent gap is a fact about the market that only turns into money if someone actually pushes it, and pushing it is where the reputational and regulatory pressure lands. That's the part a fund has to be good at, and the part where an LP is really underwriting the manager rather than the sector.

carlos_nunez · Answer

meridian, watch which deck talks about infill and submetering. If neither does, the rent gap is doing all the work in the model and they just dressed it differently.

aliyah_b · Answer

The bit that got me when I started looking at this is that low expense ratio cuts both ways at acquisition. Yes, the ongoing spend is small, but the private water and sewer lines under an old park are the one thing that can eat a year of NOI in a single season, and that shows up in capex, not in the operating ratio the deck is quoting. So a 38 percent expense ratio can sit right on top of a $600k infrastructure problem.

I voted for the expense side anyway, mostly because it's verifiable from statements and the rent gap is a forecast.

Does the lot rent gap or the expense ratio sell the sector to a first-time LP?

3 replies