LossMobile Home Parks / Manufactured Housing

900 hours and $22k of materials into a park JV. Walked out with $9k.

The operating agreement said my membership interest was 25 percent. It did not say what I gave for it. That sentence is the whole loss.

Deal shape: 33-lot park in a small market, 19 tenant-owned homes, 6 park-owned, 8 vacant lots. Purchase $780,000, roughly $260k equity, seller carry on the balance. My partner brought the cash. I brought the trades. The plan was that I'd rehab the 6 park-owned homes, set 8 infill homes, and replace about 900 feet of 2-inch main on the north loop. My labor was valued at $85,000 in an email thread in March. It never made it into the operating agreement. The agreement said units were issued for capital contributions, and capital contribution was defined as cash.

How it played out. I did the work, about 900 hours over 19 months. I fronted $22k in materials on my own account because purchase orders through the entity took ten days and I had crews standing around. Those went in as vendor invoices from my company, which felt fine at the time.

Then two capital calls, $140,000 total, mostly because the main replacement found a second failed section and because infill homes cost more delivered than the budget said. Pro rata, my share was about $35,000. I could fund $18,000. The agreement had straight dilution on any shortfall with no cure period, so my 25 percent went to 6.4 percent.

The entity sold last year. My equity distribution was about $9,000. My vendor invoices got settled at roughly 60 cents on the dollar in the wind-down, so I ate about $9k of the materials too. Call the whole thing 900 hours for negative money.

What I'd do differently, plainly: get the labor value into the operating agreement as issued units at closing, before a single hour of work, and never front materials on my own credit for an entity I don't control the checkbook of. Anything about entity documents needs a lawyer, and mine reviewed the purchase contract and not the operating agreement, which was my choice and a bad one.

Answer

1carlos_nunezActive

@meridian is right that the capex budget was short, but that's not what cost you the 900 hours. The dilution mechanic did. You had a document that defined contribution as cash and a dilution clause with no cure and no floor. Given that, a capital call was always going to convert your labor into someone else's equity, whether the call was $140k or $40k.

There were three ways to have not been in that spot, any one of which would have worked. Units issued at closing for the agreed labor value, so your capital account starts at $85,000 and dilution is measured against it like any other member. Or you bill as a contractor at your normal rate, get paid in cash out of draws, and take a smaller equity slice for actual cash you put in. Or you keep the sweat structure but write in a cure period plus a non-dilutive option, meaning a member who can't fund can take a preferred return loan from the funding member instead of giving up units.

The materials are a separate wound. You became an unsecured trade creditor of an entity you were also an owner of, which is the worst seat in a wind-down. Mechanics lien rights on your own entity's property are messy and vary by state, so that's a lawyer question rather than a forum one, and it needed asking before you bought the first fitting.

The thing I'd take forward from your post: if your contribution is time, the document has to say what the time is worth on the day you sign, because nobody will agree to a number after there's a problem.

8 replies

2stephen_ok9CO2CPRO6

The capital call is where I'd point, and specifically the sizing. $140,000 of calls against $260,000 of original equity on a 33-lot park means the capital budget was off by more than half. Was there any reserve line at closing? If a deal with 8 infill lots and a known galvanized main went in with no contingency, both of you were going to get a call, and the only question was which partner could write the check.

3jessreyes12AU1APRO8

This is the question I'd have been too embarrassed to ask, so I'll ask it here. If the March email said $85,000 of labor for 25 percent, and the total equity was $260,000, wasn't the sweat already worth less than a quarter of the deal on the face of it? $85k of $260k plus $85k is more like 25 percent, ok, I answered myself. But then the cash partner put in $260k and got 75 percent, so the cash was valued the same as the labor per dollar. Was the labor priced at your retail rate or your cost?

3sonia_alvarez Get yoursPRO6

Seller carry plus a main replacement plus 8 infills is three uses of capital competing for the same dollar, and carry paper usually has no draw facility behind it. Did the seller note allow any additional financing for the infrastructure work, or were the capital calls the only source available? That clause often decides these deals before anyone touches a pipe.

0omar_haddadActivePRO11

The second failed section of main is scope creep in its purest form and I'd have bet money on it. Once you open 900 feet of 2-inch galvanized you are going to find more 2-inch galvanized. The move is to camera or pressure test the whole loop and price the entire replacement in the deal, then do it in phases if cash is tight. Pricing one section and calling it the project is how a $60k line becomes $130k.

1monica_tran3SF4CPRO6

The thing I'd underline after five years of running a service business is the $22k on your own account. I stopped doing that for clients, let alone for partners. Ten days for a PO is annoying. Being an unsecured creditor is worse than annoying.

1samantha_ruizAU4APRO6

I disagree slightly with @quarry on emphasis. The clause did the damage, agreed. But the reason you couldn't fund $35,000 is that nobody sized your personal reserve when the deal was built. If a partner's whole contribution is labor, they usually don't have liquidity, and a deal that requires all members to be able to fund calls should not have a labor member at 25 percent in the first place. That's a structuring judgment both of you skipped.

1tonyv88SO4CPRO6

One more piece nobody's touched. Who managed the park while you were setting homes? On the parks I manage, an owner-operator doing the trades work themselves almost always lets collections and lot files slide, and by month twelve there's $9k of arrears and two abandoned homes nobody titled properly. Did the operating side hold up during those 19 months, or did the sale price take a hit for that too?