Ep. 77 | Five Keys Items To Consider When Looking At Water and Sewer Systems

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On this episode of The Mobile Home Park Lawyer, Ferd discusses five key items to consider when looking at water and sewer systems. Ferd speaks about different types of systems and gives us some tips to help protect our investments.

 

HIGHLIGHTS:

0:00 – Intro
0:31 – Ferd states that city water direct build is the most ideal system to have
0:47 – Ferd ranks other water systems from best to worst 
3:17 – Ferd talks about sewer systems
4:29 – If the connection to a city line is higher in elevation than your park, you’re going to have to put in a lift station which is expensive
5:45 – Ferd discusses lagoon sewer systems, the different types and why they’re undesirable
6:34 – Five key things to consider when looking at water and sewer systems, 1: What’s the material of the line system?
10:09 – 2: Who’s responsible for the maintenance?
13:23 – 3: How can I push the water sewer expense back to the tenants?
15:17 – Ferd talks about why you should bill backwater sewer
19:57 – 4: For private systems is it logistically or financially feasible to hook into city services? This is particularly important if you have a lagoon system.
21:35 – 5: How will private utility systems impact the value of your park? Will it increase your cap rate when you go to refinance?
23:11 – Brokers are the best resource to seek advice from when dealing with this fifth key item
24:24 – You need to get smart on water and sewer systems if you’re going to run an MHP

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation, Ferd Niemann here again today with another episode of The Mobile Home Park Lawyer Podcast. On today’s episode, I’m going to cover water and sewer systems. Specifically, I’m going to cover five key items to consider when evaluating your water and sewer systems for your mobile home park. We’ll cover the types of systems, but then a couple of key points that can help protect your investment. Help make you better at due diligence and just help better prepare you for long-term mobile home park operation.

So first off, let’s just go over what the types of systems are. The ideal best water system is going to be your city water, but it’s going to be city water direct build, meaning the city builds the tenant and the tenant pays directly. You’re not in the middle of it.

The next best would be, you know, city water with sub-metered. Typically, this is where value-add strategies come into play where, you know, you buy a park, mom and pop have been eating it on water for decades. You come in and you install sub-meters and there’s different types of sub-meters. We’ll get into that.

And the next best water system is probably quasi-government water. And it’s basically a government entity, but it’s not a city or county. Typically it’s some sort of like try township or sometimes they’re even privately owned, but they’re quasi-government in that they are regulated by, Missouri’s regulated by the public service commission for example, and different water. And sometimes DNR regulates, the department of natural resources, sometimes there’s state EPA, or sometimes it really a combination of these. I don’t like that as much as city water because they tend to increase the rates faster because they’re not elected. And there’s a private profit motive. I actually knew a guy who made millions owning the water system in Branson, Missouri, and you know, good for him. But if it was my mobile home park water provider, he kind of had me over a barrel and now there’s some regulation, like I said, with the government approval, kind of like a utility company, like an electric and gas company, they don’t get to just pick their rates, but they have limited competition if you will. So it’s not really a true capitalist water system.

So that’s quasi-government water. Obviously sub-metered is not as good as directly. But I think both those are probably better than well water, which is your third water system. I mean, well water has some pros. One of the pros is the water’s free. You know, it’s not free. You got chlorine, you got, you know, supervision, you’ve got testing, you’ve got reporting. You own a lot of the infrastructure there’s tanks. If you’ve never had well water, some people have scared of it from just drinking it. It sometimes has a discoloration like a yellow or a Brown. Sometimes there’s a different taste. I mean, it’s pretty natural right out of the earth. It doesn’t have, in some respect, it is safer to drink, but it’s also not typically has as much cleaning and purification if you will. It’s generally considered to be inferior from a mobile home park owner-operator standpoint. It’s also more work, frankly. It impacts the value of the park, which I’ll cover in the key points here in a minute.

Next up is the sewer system. The best sewer is city sewer. You know, I say direct-billed, but it’s typically built with the water bill and it’s not really sub-metered. So it’s not really, water there’s rec bill in there. Sub-Metered typically sewer is either a flat charge or oftentimes it is a charge that corresponds directly with water usage. Because in theory, if I, you know, open 10 gallons of water down the tap, all 10 is going down the drain. Obviously, it’s not exact. It doesn’t, if I go pee in theory, it does. But if I go pee at McDonald’s later in today, it doesn’t go to the drain. So it’s not an exact science, but that’s typical. That’s ideal at least city sewer.

There’s also sometimes there’s, it could be a quasi-government sewer, but really it would just be regulated. But really it is your private sewer. I mean, in your private sewer there’s a wastewater treatment plant, which is basically your little packaging plant. You’re basically your own little sewer, city sewer system. It’s just, you know, your city. And sometimes there’s a lift station cause you know, sewer does not run uphill. It’s not pressurized. So sewer runs downhill. Well, if the connection to a major wastewater line, such as the city line is higher in elevation than your park, you are going to have to put in the lift station and those could cost a quick 10 grand, but then by the time you get through some of the other processes with it and steps, it could cost you considerably more.

Wastewater treatment plant, it would, they work. It could be expensive, several hundred thousand dollars if we have to replace them. So definitely not for the faint of heart, you should definitely want to get those inspected by a third-party professional during your due diligence. The next third type of sewage system is your septic, basically, the waste goes into a big tank to put a concrete tank and then it goes out into leach fields and it kind of mother nature helps it aerate and it’s underground. But it kind of evaporates and disintegrates into the earth through some lateral lines. And septic’s not that scary. I mean, if it’s failed, I recently bought a park with a septic that had failed. So we actually got the seller to upgrade during our due diligence. So that worked out well for us. But septic systems are used, you know, in a lot of rural areas. I mean even McMansion neighborhoods out in the country where city sewers too far away. So I’m not quite as afraid of septic.

The fourth sewer system that’s clearly the least desirable is the lagoon system. There are different types of logins. I think there’s like a half a dozen or more types of lagoons. I mean, some of them are like a three-stage lagoon. I’ve owned that before, kind of a bubbler lagoon that has moving water. And then there’s some natural spray lagoons and just other types of lagoons systems. Again, this is a little nastier, cause the waste is above the earth kind of in a pond or sprayed onto the earth, almost like irrigation. And it’s, you know, it has to be tested regularly. There’s an expense to that. There’s some downside from a regulatory standpoint and downside from a risk of potential future government regulation.

But that’ll be a nice kind of segue into five key things. And there’s some sub-points here, but, you know, cut five key items to consider for water sewer. The first, you know, not that these are necessarily in priority order, but you know, what’s the material of the line system. The line of the system, I mean on the water, it’s probably galvanized or PVC, galvanized metal pipe, which is older. You know, PVC is ideal. There’s now pecs, which is even more ideal, which is kind of like a flexible pipe. Really makes it easy for putting shark bites on there in order to stop water leaks or to put shut-off valves on, or just, it’s almost like a hose where you can bend it. It’s harder to bend than a typical hose, but I’ve done it. You can do it. And that makes it easier to, rather than shut off the water to the whole park, you can shut off the water to individual locations. Well, frankly by hand.

I mean, of course, I recommend getting a plumber, but come on, let’s be honest. Who’s going to hire a plumber when, you know, the average handyman can put a shut-off valve on fairly easily. For sewers, you know, the main systems and back in the day, there’s a lot of clay. So a lot of clay tile pipes are still out there. Clay is pretty good. As far as overall durability, but it’s not that great overall. I mean, it’s better than the other ones we’ll cover, which are cast iron. In Orangeburg, I’m under due diligence with The Department of Orangeburg right now in Iowa. And I’m not that jazzed about it, the Orangeburg, but I guess you’re supposed to get it today. I didn’t get my report, but the key thing if you’re going to go with Orangeburg is you’d want to get a third-party test, probably cost you about a thousand bucks to scope the lines and then they can identify if there’s holes. Orangeburg kind of collapses over time, cast iron can kind of bubble up or create almost ovals in them. Because it just bends and wears and tears over time.

But Clay, I’d say clay is superior to both of those. The downside again is because it’s not as fit and tight as some other plumbing lines and sewer lines, it allows for tree roots to go find moisture and they find moisture in the lines and then they eventually fill the line. So you’re going to be, Roto-Rooter is going to be your friend. We actually bought a couple of these. They’re kind of like Roto-Rooter machines on steroids, a couple of times you have jetters there’s Roto-Rooters with the blade on it. And there’s another, it was kind of like a cable, almost like a snake. And then we got this new machine. I can’t remember what it’s called, I probably should look that up, but I’m kind of going on the fly here. But they’re like three grand. But those things just rip through, they are kind of dangerous, you have to be very careful. They just rip through sewer lines and can cut up trees and stuff. And we just figured it was cheaper to buy those, to kind of put them geographically four hours or six hours apart. So we got them if we needed to, because it’s so much cheaper than hiring a plumber on a weekend for $400 an hour. That machine has paid for itself already. So we’ve already bought another one recently. If you really care what it’s called, you can send me an email and I can get it to you. My dad bought them. So I don’t even, I don’t know what it’s called. I forget. And I’ve never used it. I just know you lose an arm.

And the fourth is sewer line, which is far superior is PBC. Typically, you know, schedule 40, I don’t know there might be some schedule 80 out there, I think 80 is black, which is superior, but more expensive and less common. And there’s, you can have a different dearth of the line. I mean, typically like a four-inch line for the feeder lines, your rear main coming into the city from the city will be more like eight-inch or maybe six. Anyway, that’s one of the key considerations of what’s the material.

The second key consideration during your due diligence is who’s responsible for maintenance. Obviously can be a big one. We like to do preventative maintenance things like camera lines for problems during due diligence, make sure there’s heat tape and meter jackets. Meter jackets are basically glorified Styrofoam coolers that go around a meter. So they don’t freeze. We like to put toilet stoppers, little valves, replacement valves and stoppers inside the toilets. We’ve been doing this, man I don’t know how many we put in there. Hundreds of these things for our tenants, even in tenant homes for free, because it doesn’t do me any good to have my tenant spend all their disposable cash for the water company. So we help them out.

We’d like to install shutoff valves at each lot. That way if there’s is a leak. You can just shut off that one home as opposed to the whole park. And it helps. I know some people who shut off the whole park every time there’s a problem. That’s a huge pain and you can also waste a lot of water if your fire hydrants need to be emptied, but also, I envisioned a little old lady, you know, shampooing her eyes and you turn the water off and she can’t see, and you didn’t give her notice. And she falls out of her tub, you know, breaks her hip. And now you’re getting sued as opposed to putting notices on everybody’s door and knocking on every door saying, you know, tomorrow noon to four, the water’s going to be off. Obviously, there’s some emergency situations, but I don’t really think water’s that much of an emergency. It’s not like it’s gas or electric. So even when we had frozen pipes this year, we’d shut the water off to the whole park to fix a mainline break. We waited until tomorrow, you know, and we had just sucked it up and I’m going to lose some money today on water, but I’m going to get my ducks in a row. My liability protection, my team.

So, that was preventative maintenance. It’s not that expensive. Frankly, the big expense is for repairs. Who’s going to make the line repair. Who’s going to repipe. That’s massive. If you have leaks, you can do things like leak detection. We’ve had mixed results with that. The problem with a lot of leak detection, even with the pros is water tends to leak down. I always was taught originally walk around and look for puddles. That’s where leaks are. And that works when it works. And we just had a key find in one of our laborers in the field that like, hey, this is a leak. And that saved us a lot of money, so good for him. Good for us. He got a bonus for it, but a lot of times you can’t see it. Cause it goes down. We had one park that it was a huge problem, I think probably, I don’t know, $10,000 we probably spent diagnosing and finding the problem and used several different leak detection companies where we found one that was competent, and they have like a stethoscope type machine. They go around and listen to all the lines and listen to the earth and they had trouble finding it and we had to excavate. Man couldn’t excavate by hand because the approximately holes are six foot by six foot by six foot holes and like several of them. So it was it was a lot of work, but repair of maintenance lines which is massive, massive risk. So that’s really going to go back to what’s the materials.

All right, next, this is a big one. How can I push the water sewer expense back to the tenants? This is one of the, you know, blocking and tackling strategies for maximizing NOI, maximizing value of the mobile home park and we do it every time, frankly. We sub-meter, that’s how you do it. How do you push it back? You sub-meter. In some states, there are restrictions on sub-metering. I’m not, well, I’d say there are actually are a few of them. I’ve not operated in a state where it’s illegal to sub-metter, but I believe there are a few, somewhere I have a checklist that I can pull together, but it’s dated, but there are some that have made it illegal to bill back.

The other question is, you know, can I bill back an admin fee? You know, if you go with a different, there is different ways to bill back. You can bill back, well, let me say that, like when you sub-meter, there’s really two types of meter. There’s a type of meter that are read manually. You know, you’ve got your park reader, manager going around, sticking their head under the trailer, looking at the reading and then calculating it from last month and then coming up with some ratio or some allotment to individually build them based on the actual usage. And the second type of meter is an automatic reader. It’s read by a computer in some headquarters operation where they send you a regular report. Metron for example, has reports like every five minutes. And the cool thing about the reports now is in addition to telling you where leaks are, they can tell you the temperature change. So they can sense when heat tape has failed. So it’s 31 degrees, you better get after it. And that way you can avoid some major problems. So we’re in the process of switching some of our portfolio into under those automatic read with temperature control Metron meters. So check back for future episodes on how that’s worked. We’ve been using their manual read which, you know, there’s no fee. So that was ideal versus a regular monthly fee. But in most states you can bill back the admin fee. So that’s kind of the way to go.

And just in general, I think it goes without saying, but I’ll say it. Why are we billing back water and sewer? Well, frankly, because it’s like the largest expense, sometimes property taxes, sometimes management, but water and sewer is one of the largest expenses in a mobile home park operation, and if you bill back to the tenants, what do you know? They all of a sudden care about how much water they’re using and then get conservation.

I bought a park here in Kansas City about three or so years ago and we sub-metered it right away and you have to by the way, it is legal also to look at the timeline. So, you know, in Missouri 60 days for rent increase, well, billing backwater sewer is basically a rent increase. It’s adding an expense. So some statutes in some States spell that out as an indirect rent increase, some don’t.

But I think it’s saleable and colorable than it is an increase in rent indirectly because it’s an expense. So I wouldn’t do it on day one. We give a notice over here, new leases, and do it along the rent increase after day 60 or day 30, day 90 for some States. Important to look at that on a state-by-state basis. But there’s one here in Kansas City, we thought we must have had a broken meter because the first month of the bill, this household is three or four guys there. And he’s single guys, no family, no kids. And they worked, they were construction guys going out of town a lot. So they weren’t around that much. And they used 59,000 gallons, the first month. It was like a $2,500 water bill. Their home was worth like $40,000. And I was like, no way. And I called Metron and they’re like, your machine’s broken, it can’t be broken. And they bet me the farm on it. And what do you know? It wasn’t broken. And what it was is these guys, they had four main breaks underneath their home. And they had a toilet that was overflowing, the tank of the toilet was overflowing so much so continuously that the water ran under the floor and it rotted away the floor, the vinyl, and the plywood. And there was a ring around the toilet that was barely hanging along on the joist and they lived like that. And I kid you not the water bill in that park went from $11,000 a month to $3,000 a month, six months later. And we went from 20 occupied to 40 occupied homes. That’s how drastic sub-metering the water can be. Literally added $8,000 of savings per month to my park. Unbelievable.

So a huge fan of sub-metering. So key questions there, you know, is it legal? Who can shut off the water service? The answer is you can’t, that’s a self-help eviction. It’s a big no-no, but the benefit is of having the city be direct bill is they can shut off the water. One they’re the ones collecting. But two, they shut off the water service. And sometimes you can get the city to do that. Even if you have sub-meters, I’m getting close to getting the city to do that for me right now for one of my clients. And that’d be awesome. Cause then it gives, it makes the enforcement mechanism a lot better.

And then another question with sub-metering is can you push the expense back for private systems? I think that’s going to be gray, anything in general, you’re allowed to you know, look at each specific state, but in general, you’re allowed to recoup your maintenance costs for things like your testing, you know, for your well or your lagoon, your chlorine for your well, you’re an environmental engineer, you’re reporting any sort of regular maintenance. Now I’ve seen some guys, I’ve seen some offering memorandums and proformas lately where some sellers are currently billing back for reserves, infrastructure reserves. I mean, I’m talking like tens of thousands of dollars a year and they’re just adding it in as a make-believe admin fee.

I think that’s aggressive. I think it’s frankly illegal and, in many respects, unethical if it’s not disclosed. But basically, you should not make money on your water sewer. Sometimes mom and pop would be like, oh yeah, it’s great lot rent is $200, but I also add on $60 for the water and sewer. It’s great. And I tell them, the water is only like $30. So I just say, it’s just a profit center. Like that’s asking for trouble, that’s asking for a class action because you are now making a profit on something that’s a regulated industry like a utility provider. It’s too easy to make money in this line and in this business, I wouldn’t jack that if I were you.

So anyway, that’s number three, how can I push water and sewer expenses back to the tenants? Number four for private systems, is it logic logistically or financially feasible to hook into city services? This is especially important if you’ve got a lagoon, I’ve seen wastewater treatments fail. I’ve seen septic’s fail, but they can typically be rebuilt a little or at least reasonably inexpensively, but it’s going to be a massive problem.

I know a guy who’s a broker here in Missouri. He’s literally lost two parks because The Department of Natural rRsources came in and said, you got to fix ABC or you’re out. And it was the expense to fix. So the failing lagoon was greater than the value of the park. So he just let the park go and he just had land. And I got $10,000 of land now. And I’ve also looked at some parks where the sellers put in $50,000 remediation and updated systems. And then that solves the problem. But the key is you got to look at that. I almost bought a park in my hometown one time, a nice park, but it was on lagoon and kind of a bubbler system. And I did the math, and I called some engineers, and it was a $500,000 problem if I had to hook up to city sewer, you know, and I just, I sleep pretty good and it wasn’t really worth it. You’d get a couple of one or two bad days like that, you really mess up all the good deals before you. So you at least got to understand your risk, and there’s a whole risk-reward analysis. You know, Frank Ralph talks about it a lot. In this industry, I think he gets a lot from Sam Zell and I’m a real big fan of that concept of continual risk-reward analysis.

And the fifth key item to consider for water and sewer is, how will private utility systems impact the value of my park? I.e. is this going to increase my cap rate when I go to the refinance or sell? And I think the answer is absolutely it will. And I know some people will say, no, it depends on the market. And it’s just probably true to some degree. I mean, obviously a 200 space park, all tenant-owned homes in Dallas, Fort Worth, people are going to still pay a premium even it is got a well. In this example, we’ll never know, right? Because you don’t get the luxury of hypotheticals very much. But if you look at enough sample size, you can see trends in the market where even functioning private utility systems trade or sell at a higher cap rate, IE a lower valuation.

So it doesn’t mean you can’t do them. It doesn’t mean you shouldn’t do them. I’ve tackled most of these systems, about to tackle Orangeburg. I’m driving there on Saturday to look at it and going to get the report and stuff. That would probably be the only one I have not really touched with and worked within some capacity, either from a management or ownership operation. But you got to know what you’re getting into. And if you don’t understand this, you can ask bankers, it’s hard to get, the bankers aren’t that smart in large part in these matters, you can ask appraisers, it’s kind of hard to access to an appraiser that’s niche in this field. Brokers are probably going to be your best contacts here. Call the broker and say, look, I’ve done this before. I’m buying this park. And the one with the failed treatment plant, this was a park in Pittsburgh, Kansas. You know, and I gave him the stats and it’s got private sewer, is it an eight cap? He does public sewer, it is an 8 cap, private sewer, it’s 8.5, 8.75. Last couple of brokers same thing. I started to get a trend analysis if you will, of 50 to 100 bips of paying, it’s 50 basis points, which is a 0.5 increase in the cap rate of paying per private utility system and up to a hundred bips for lagoon. So in general, I think you got to, if you are buying get a discount of at least 50 bips per private utility relative to public utilities of similar size, character quality in a similar market.

So that’s all for today, lots to learn, lots to evaluate, lots of risks, frankly.

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