Lot rent is $270 and market is $410. How fast do you close that, and what does the paperwork make you promise?

Question

I'm reading the LP agreement on a 78-lot park where in-place lot rent is $270 and the sponsor's own comp set shows $395 to $425 at four parks within twelve miles. The business plan says $410 by month 14. The residency documents attached as an exhibit are month to month on 71 of the 78 lots.

So the increase is mechanically available, subject to whatever notice period applies in that state, and notice periods and any local rent regulation vary state to state and sometimes by city, so that's a question for the sponsor's counsel and not for me.

The argument for going straight to market: the gap is 52 percent, every month you wait is money that never comes back, and the residents who leave over it were going to leave over the next increase anyway. Homes are expensive to move, so most stay. The valuation follows the rent roll immediately and the refinance in year two depends on it.

The argument for stepping it: a park where nine homes move out at once is a park with nine abandoned homes and title problems, and infill costs real money. Big single jumps are also what draws local news coverage and city council attention, and the chapter here is direct about reputational and regulatory sensitivity around lot rent increases on residents who don't have other options. Once a city starts drafting something, the exit multiple changes for everyone in that market.

What I can't get comfortable with is that both cases are defensible on the numbers and the difference shows up in the tail risk, which is exactly what nobody underwrites. Curious where the room lands.

hannah_west29 · Accepted Answer

I voted two steps, and the number that decides it is what the park costs you per vacant lot, not what the increase earns you.

Run it. 78 lots at $270 is $252,700 a year gross potential. At $410 it's $383,800, so the gap is about $131,000 a year. Going straight there in month two captures roughly $110,000 more in year one than a two-step schedule does, using month 14 as the second step date.

Now price the downside. An abandoned home on a lot costs you the abandonment process, which varies by state and is sometimes slow, plus rehab or removal. Removal and disposal on an older singlewide has run $4,000 to $8,000 in the markets I've looked at, and a replacement home delivered and set is $45,000 to $70,000 before anyone lives in it. Say each move-out you cause costs $12,000 all in if you rehab and resell the home, and costs you the lot rent while it sits. Eight extra move-outs from the single jump is $96,000 plus vacancy, which eats nearly all of the $110,000 you gained, and it eats it as capital instead of income, so it hits the refinance harder.

So the whole question reduces to how many extra move-outs the single jump causes versus the step. If it's two or three, go now. If it's eight or more, step it. Nobody knows that number in advance, which is why I want the sponsor to tell me the average home age, the resident income mix, and how many homes on those 71 month-to-month lots are actually saleable if someone walks. A park of 1998 homes with employed residents absorbs a $140 jump. A park of 1974 homes on fixed income does not, and the realistic version of that plan is $340 by month 14 with the rest at turnover.

The regulatory tail you mention isn't in my math because I can't size it. It only moves one direction though, and it moves after the news story, so I'd rather not be the park in the story.

Lot rent is $270 and market is $410. How fast do you close that, and what does the paperwork make you promise?

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