Utility infrastructure reps in a nine park portfolio PSA are doing almost no work

Question

Take a purchase agreement on a nine park aggregation, about 1,100 pads, seller a family operator consolidating out. The utility reps are where a buyer should stop and read slowly. The seller reps that water and sewer systems are "in good working order and in compliance with applicable requirements as of the date hereof," surviving closing for nine months, with a cap on all reps at 1.5 percent of purchase price. Four of the nine parks are on private wells and package treatment plants. A package plant failure runs far past a 1.5 percent cap. It means a state environmental order, a mandated connection to municipal service, and an assessment spread over the pads. Numbers like $8,000 to $15,000 a pad get quoted for forced municipal conversion. On a 140 pad park that is north of a million dollars against a rep cap of maybe $600k on a $40M deal. So what actually gets negotiated at portfolio scale? A carve out from the cap for environmental and utility items? A separate escrow? Or does everyone price it into the cap rate and move on?

karen_whitfield · Answer

The thing I'd want before arguing about the cap is a compliance history from the state environmental agency on all four plants, going back as far as they'll give it. Notices of violation, effluent exceedances, consent orders. A plant that's been on a watch list for years isn't a rep problem, it's a repricing problem, and you find that out from the regulator rather than from the seller's file. Family operators are often genuinely unaware what's in that record because the letters went to an address from two owners ago.

ryanmck27 · Answer

Separate escrow with a longer tail is what I'd push for. Nine months is short for anything that shows up on an annual inspection cycle.

raj_mehta14 · Answer

Most of this holds together, but the assessment part needs pinning down. When the state forces a hookup to municipal water and sewer, the cost usually lands on the property owner as a capital improvement, so the park pays and then raises lot rent to recover it over time. Spreading it over the pads only means something different if the plan is to bill residents directly, and that is exactly the kind of increase that gets a park in the newspaper. Which may be the real exposure here rather than the rep cap.

Utility infrastructure reps in a nine park portfolio PSA are doing almost no work

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