This RV park fund deck rests entirely on one growth line

Reviewing a deck for a 3.5M raise, two parks in one recreational market, 190 sites combined. Structure is an 8 percent preferred return, 70/30 split above it, five year hold, 2 percent acquisition fee and a 2 percent asset management fee on invested capital.

The projections show year one ADR of 61 growing to 77 by year five. That is 6 percent a year compounded on rate alone, with occupancy also climbing from 54 to 63 percent. Together those two lines produce almost all of the projected value creation, because the exit is modeled at a cap rate 25 basis points tighter than entry.

The capital plan is 640k, mostly pedestal upgrades from 30 amp to 50 amp on 70 sites and a new bathhouse at one park. Sponsor says the amp upgrade justifies the rate increase because bigger rigs will not book a 30 amp site.

What I cannot verify is whether 6 percent annual rate growth is a market fact or a spreadsheet input. I have asked for the comparable set they used and got back a list of four parks with rack rates from their websites, which is current pricing, not a growth history.

My question for the room is what I should demand before I write a check, and whether anyone has a way to test a rate growth assumption in a market where nobody publishes historical ADR. I have three weeks before the soft close.

Answer

2nataliehsuSO1BPRO7

You can test it without any published ADR. Rack rates from four websites are useless, but those same parks almost all take reservations online, and their booking calendars are public. Pull availability for a peak weekend and a midweek in September at each of them, right now, and again in three weeks. If the peak weekend is gone across all four and midweek in shoulder is wide open, the market has pricing power in a narrow window and none outside it, which is a very different story than 6 percent across the board.

The other free test is asking the sponsor for the seller's actual rate sheet from three years ago and comparing it to today's. Owners keep old rate cards, brochures, and printed sheets in a drawer. If the seller raised rates 2 percent a year for three years, the sponsor needs to explain what changes to make it 6.

And on the amp upgrade, the argument is partly right. Larger rigs do need 50 amp service. But the rate premium for 50 amp in most parks I have seen quoted is a few dollars a night, not a fifth of the rate. Ask the sponsor to show the premium as a dollar figure per site per night and multiply it out yourself. If 70 upgraded sites at 4 dollars a night over a 150 night season is 42,000 a year, the 640k capital plan has a long payback and the rate curve is doing the work instead.

3 replies

0dpatel_reCS4A

Plumb's calendar scrape is good and I would add one thing on the exit. A 25 basis point tightening at exit on a seasonal, operationally heavy asset is an assumption you are being asked to fund without compensation. Rerun their model at entry cap flat and again at 50 wider, holding their revenue lines constant. If the deal only clears the 8 pref in the tightening case, the pref is decorative.

Also check the fee base. 2 percent asset management on invested capital rather than on revenue or on NOI means the sponsor gets paid the same whether the parks perform or not, and on 3.5M that is 70k a year regardless. Combined with the 2 percent acquisition fee that is 140k out the door in year one before a single site is rented. None of that is unusual, and none of it is a reason to pass by itself. It does mean the sponsor's downside is thin, so you want to see meaningful co investment. Ask how much of their own money is in and whether it is on the same terms as yours or behind the fees.

0devon_pierce Get yoursPRO5

Ask what happens if the two parks miss year two. Who funds the shortfall and does it dilute you? That answer usually reveals more than the growth line.