Utility infrastructure reps in a 9-park portfolio PSA are doing almost no work

Question

Working through a purchase agreement on a nine-park aggregation, about 1,100 pads, seller is a family operator consolidating out. The utility reps are where I'm stuck. The seller reps that water and sewer systems are "in good working order and in compliance with applicable requirements as of the date hereof," survives closing for nine months, cap on all reps at 1.5% of purchase price. Four of the nine parks are on private wells and package treatment plants.

A package plant failure is not a 1.5% event. It's a state environmental order, a mandated connection to municipal service, and an assessment spread over the pads. I've seen numbers like $8,000 to $15,000 a pad quoted for forced municipal conversion. On a 140-pad park that's north of a million dollars against a rep cap of maybe $600k on a $40M deal.

So what actually gets negotiated here at portfolio scale? A carve-out from the cap for environmental and utility items? A separate escrow? Or does everyone just 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

I'm following most of this but not the assessment part. If the state forces a hookup to city water and sewer, I thought the cost lands on the property owner as an improvement, so the park pays and then raises lot rent to recover it over time. Where does spreading it "over the pads" come in, do you mean you bill residents directly? That seems like exactly the kind of increase that gets a park in the newspaper. Which is maybe your real problem rather than the rep cap.

Utility infrastructure reps in a 9-park portfolio PSA are doing almost no work

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