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Ep. 79 | Five Key Risks Associated With Private Electric Systems

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On this episode of The Mobile Home Park Lawyer, Ferd discusses five key risks associated with private electric systems. Ferd shares his advice on how to protect yourself from each of these risks and highlights what to consider when analyzing these risks for MHPs.

 

HIGHLIGHTS:

0:00 – Intro
0:28 – Ferd explains that master-metered electric is similar to sub-metered water and explains how it works
1:05 – To bill back on use you need to have individual meters built on
1:32 – You can’t make a profit from electricity
2:11 – Ferd discloses the five risks for electricity as safety/liability, conversion, regulation, maintenance, and impact on evaluation
3:34 – Ferd speaks about safety/liability and protecting yourself with insurance
4:10 – Ferd discusses conversions forced by the government
4:55 – Ferd shares a horror story where there was a rainstorm that caused a tree to fall and hit the live main powerlines on a single-family rental home he owned
7:38 – Ferd speaks on regulation and how this differs depending on the system you use and how you bill back your tenants
8:27 – Ferd discusses the fourth key risk, maintenance
9:31 – Always pick the MHP that has a government electricity system over a private utility system. There are more expenses with private systems and this will likely increase your capitalization rate, which will decrease your evaluation

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Here again today with another episode. Today, we’re going to dive into some more utility questions in particular today, master metered electric. I’m going to cover five key areas, key risks to include in your analysis with master metered electric.

And for those of you who don’t know master meter electric, it’s just like, you know, sub-metered water and basically, or at least bulk-billed water. And it’s that if there are 10 mobile homes on your lot, and they each use a hundred dollars of electricity per month, you’re going to get a bill for a thousand dollars. It’s your job to pay the thousand dollars. And you can just include it in rent as is kind of common with a lot of RV parks, or you could sub-meter each unit and you could say, Oh, it’s a hundred each. I mean, or you could do a, you know, sub-meter via like RUBS system, ratio unit billing system. Or you could actually bill back on actual usage in which case you need to get individual meters put on. And that’s more of a problem because you’re kind of in the middle of it, as opposed to the governmental entity, the utility provider, sometimes it’s a city, sometimes it’s quasi-government and sometimes even private, but regulated by the government and fairly heavily regulated versus that entity just billing directly.

So obviously it’s desirable to not be in the electricity game. You can’t make a profit on it. There’s risks, there’s a liability, there’s headache, a lot of undesirable characteristics. But that’s the way some of these old properties are. So recently I was asked a question by a client, you know, basically saying, look, I’m looking at buying a master meter park. Is this a terrible idea or not? What are my concerns? And you know, how would you value it relative to a typically metered electrical system where it’s direct to build each of the tenants?

So I wrote down, you know, five or so key risks, and I’m going to cover them here today. These risks are safety/liability. Number one, number two is the conversion of the system. Number three is regulation. Number four is maintenance. And number five is impact on evaluation.

So number one, I mean, obviously this is a non-traditional setup and I mean, utility companies have been moving away from this more and more for decades. So why? Well, I mean, safety things can go wrong with a master meter system or with a particular one system. Something goes wrong and you don’t want, it could impact unit two. And sometimes there’s a master switch. Sometimes there’s master switches that are not locked or inaccessible to others. So ultimately if somebody gets hurt because of this and you own the system, you own them electrical system, at least a supply lines. Are you going to get sued? You know, are you going to be at fault? I think it’s unlikely you’re really at fault. In many instances you know, assuming it was, you know, government system to some degree or something you had no wrongdoing, but if you get sued, in my mind you lose. Everybody loses in a lawsuit except for probably the lawyers. So just getting involved in a lawsuit is a mess. I try to avoid things that get me lawsuits. You know, as far as can you protect yourself with insurance. I mean, you want to ask your insurance provider. In many instances you’re, you’re covered by insurance from a liability perspective, but some insurance companies may refuse coverage under certain circumstances.

You know, if the utility lines are in A public or B, you know, they fail. You know, similar to some recent frozen pipe issues some of us had. Then many insurance companies are going to just refuse coverage. Does anybody really read the entire policy and read the exceptions and think of those and negotiate them? Not really, it’s pretty tough to do. So, ultimately there is a safety concern and there’s a potential liability concern associated with it. So that’s the key risk number one.

Key risk number two is conversion as forced by the government. I talked about this on a prior episode about lagoon sewer systems being forcibly required to hook up to city services. Well, what about electric? I’ve never owned master meter electric. So I can’t say that I’ve felt the pain of this, but what if the city tries to make you convert who’s going to pay for it? What’s the process look like? What if it’s financially impractical? Like for example, if you have a mobile home park worth $500,000 and the cost of the conversion is a million dollars, well, they make an exception and somebody will say, Oh, well, you’re grandfathered in. And that’s probably true. And they’re probably unlikely to force you to convert, but I’ll tell you a horror story I had from back when I did single-family rentals. I remember like it was yesterday, it was on July 3rd and my insurance company, it was a small family office and five or six people in there. And they all decided to take the 4th of July week off and go down into the Lake of the Ozarks. Well, good for them bad for me. Because we had a horrible rainstorm here in Kansas City on July 3rd and a massive tree, hit by lightning or by wind or something and it fell and it broke and it took off half my house and this is a rental house and it took off, it hit the power lines and there were live power lines, main lines all over the place. It was a big safety hazard.

Luckily, the utility provider came out and turned off the juice, but it happened to rip the lines down. It ripped down the river, which is a metal pole going vertically adjacent and attached to your house to provide, to basically connect your house to the electrical line.

Okay. No big deal. Right? We got the roof fixed, you know, tarped off. And reroof the whole house as a result of this, but we’ve got the structure fixed and it was time to turn the juice back on. And the utility company said, okay, all you need to do is install a new riser. I was like, okay, new electric risers, it’s not that expensive. Well, I’ve got to call a licensed electrician for this as I’ll get into, but then he said, okay, you know, a couple of hundred bucks. Oh wait, in order to install a new riser, you have to have a new meter can be installed by a licensed electrician. Okay. Well, in order to get a new meter can to function properly, had to upgrade my panel box to 200 amp.

It was like 50 and there was another portion of the house that was the old knob and tube wiring. In order to get the new panel box, I had to pull a permit. Well, it’s the 3rd of July, which means it’s the 4th of July, which means all the bureaucrats are off. Then it was Saturday, Sunday, and didn’t know anyone in the skeleton crew the following week. So I had trouble getting a permit. Well, now I have to have the utility company inspect my electrician’s work. So then I got the city inspect to work. Then have the utility company come and turn on the juice to then get utilities to put my name again somehow. All in, a single tree cost me two and a half weeks without power. And my residents were not very pleased by that. So I had to give them some rebates on rent. And it cost me over $5,000, literally just because my system was outdated and out of code compliance. So that was grandfathered in, but upon some sort of natural storm or damage, I now have $5,000 4th of July present. So that wasn’t very cool. So I’m a little nervous about government conversion in general.

Risk number three, regulation you know, depending on the system you use and how you bill back tenants, you know, assuming you bill back to usage, you know, cause you don’t just eat the cost. You have to look into the regulations. Are you going to be a “regulated utility?” Well, unlike water and sewer bill back, power is inherently dangerous. And in Missouri where I live utilities are regulated by the public service commission. And that’s not a small deal. You got to go in front of them for rate increases. You don’t want to be regulated. I don’t think from a rate increase perspective, you don’t want to be responsible. I don’t know what kind of additional insurance that requires, but I assume it’s considerable. So overall, just be aware of potential regulation due to these sort of utility systems.

The fourth key risk is maintenance. I think it’s, you know, this is going to depend on a number of factors, including any contracts or easements that you can get in your title work. You know, and it’s going to depend on the location and the ownership rights of systems and then ultimately have you, or a predecessor, an interest, overuse the system, or exacerbated the system. You know, for example, have you, you know, running additional wires to additional mobile homes that were not part of visual plans. Are you running overhead wires? Are they high enough? Are you running underground wires? What did that entail? Is it in conduit, you know, back in the day, I mean, I’ve got a park in Nebraska where electrical lines were somehow not even ran in conduit, they’re just in the dirt. Well, good luck putting a shovel on the round on that one or worse yet putting an auger in there to drill some concrete piers. It’s a dangerous job. So maintenance is an issue as well.

The fifth key risk is what’s the impact on your sale. I don’t know about you, but if all else being equal, I’m going to pick the mobile home park that has government or requires a government utility electric system over a private utility system every day of the week. There’s going to be an additional regulatory burden, maintenance burden perhaps staffing burden, or just protection. There’s going to be more expenses frankly, on a private system, but more importantly, the level of risk or the undesirability in the marketplace from both a future buyer and a future lender perspective likely increase your capitalization rate, which will decrease your valuation.

So I think best, these are more rare frankly than private water and sewer. So it’s going to be harder to get deep dive into how many basis points or how much pain there is from a private electrical system. And similar, you know, a lot of this stuff is private gas system. I would ask brokers and say, what do you got in the way comps? And it’s going to be, it’s probably hard to find great comps, but they’re probably out there. I would estimate there’s at least a 50 basis point, pain point on the private electric system. But I would bet it’s closer to a hundred basis points, a full point.

Personally, for me, I wouldn’t want to take on extra risk for less than that. But if it was a good deal and the risk-reward ratio and cost-benefit analysis made it prudent to initially proceed, I would just make sure that “get smart” on the utility system during my due diligence. And that would mean at a minimum hiring a third party electrician to diagnose the system and talking to the utility provider and likely talking to the city and likely other mobile parks and what they have and if they were forced to convert and talking to my state MHA, I’ve never actually put a bid in on one of these parks. So this was just off the cuff, I hadn’t even thought about all the things I wanted to, you know, all the rocks I’m going to turn over above and beyond my normal procedures. But it will be significant. And I have to recognize that the next guy may do something similar and may not be as hyped about the steel. So I probably got to soften my pricing expectations from a refinance and a sale in the future, which will impact my pro forma and just kind of cash flow analysis and all that stuff. Reversion value, all that stuff for purposes of my financial modeling.

So again several key risks, safety, conversion, regulation, maintenance, and the impact on my valuation and sale. Till next time Ferd Niemann is signing off, have fun. Good night, God bless.

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