On this episode of The Mobile Home Park Lawyer, Ferd speaks to Sam Hales of Saratoga Group. Sam explains how you increase your ROI by investing in opportunity zones and much more, enjoy!

 

“The operation is so critical, and we could miss slightly on the asset, but if we operate it well, we’ll make up for it. So, MH is more like running a business than managing real estate.”

 

HIGHLIGHTS:

0:00 – Intro and background on Sam
4:53 – Sam explains the two different approaches he has taken with investments
6:50 – Ferd asks about how he strikes a balance in taking money from investors
9:08 – Sam explains whether he prefers to have a lot of investors or just a few investors with larger amounts of money
12:05 – Sam shares how his fund operates
15:44 – Ferd asks Sam about some of the benefits of purchasing in an opportunity zone
20:20 – The banks look for guarantors
22:32 – Sam says it’s amazing how much interest is in the space right now
26:02 – Sam gives his final tips and tactics

 

FIND | SAM HALES:

Website: www.saratogagroup.com
LinkedIn: www.linkedin.com/in/samhales

 

FULL TRANSCRIPTION:

Ferd Niemann: Welcome back mobile home park nation. Ferd Niemann here again with another episode of the mobile home park lawyer podcast. My guest today, special treat for you guys. He’s a big-time mobile home park owner, operator. He’s also just launched an opportunity zone fund, which is focusing on mobile home parks in opportunity zones. He’s raised capital. He’s got a good team, please welcome Sam Hales of the Saratoga Group. Sam, how are you?

Sam Hales: Ferd man, that introduction. I just felt super important. Super special. Hey, good to be here.

Ferd Niemann: You’re the only guy I know that is doing both a combination of MH, raising the fund, and in the OZ. So definitely want to hear about that today, but also just wanting to get to know you better. We know each other a little bit already, obviously, but want to get to know you a little bit more for our audience, your background, I’m going to ask you all kinds of stuff on the market and everything, but tell us a little bit more, how you got to where you’re at now?

Sam Hales: Awesome. So, I launched Saratoga Group back in 2011 and originally, we were buying single-family homes, mostly in northern California. Kind of a buy-to-rent model. Like a lot of people were doing back then. We actually raised money from China for that fund, which was interesting in many ways. So did that for quite a few years and you, what happens with single-family, It’s like, you kind of, you start getting enough of them and you’ve either really got to go big to scale it. And you’ve got to build all the systems, or you figure out which is what we did, man, that’s a lot of work. I think I want to do something else. And so the Waypoints in Blackstone with Treehouse and I mean, I can appreciate what those guys have built because I know just how difficult it would kind of get those systems together and scale that. So, we did that for a number of years and then we’re just kind of looking for the next thing. I mean, the other thing that happened is home prices went up so much that it was just kind of that buy to rent and kind of that dividend or cash flow yield, the numbers just weren’t making sense anymore. At least in the target markets we had. So, we kind of bounced around for a couple of years. Did some development, did some land entitlements, just very opportunistic office, bought an office building, bought some other kind of commercial, just dabbled in a few things. But really trying to find the next business that we could really focus on. And then finally like end of 2016, early 2017 started finding out about mobile home parks and just man, the lights started go. I mean, I listened to probably 150 podcasts. What we’re doing right now, I really appreciate it because I was the guy who on the weekend when I was, you know, doing a home project or whatever, man, I was just streaming nonstop and I just couldn’t get enough of it. And I appreciate the content that was put out there. So anyway, that kind of the light bulb went on for me. And we started getting into mobile home parks. We now, so we started buying in 2017 and we now have 44 communities. And we’re in 10 different States and we’ve got more in the pipeline, so that’s kind of the journey.

Ferd Niemann: Definitely fast growth that I’m with you man. The single-family stuff I was doing that, not to your scale, I’m sure, but I was doing single-family and I’m like, this is going to be a hustle that you got to keep hustling. And like, it’s like, I’m like, it’d be hard to own a hundred houses by myself. I could own two 50-unit apartment complexes. It seemed like, but those were priced differently. So, the margins were higher on single-family, but I’m like, you start getting a big number. I’m like, man, do you ever want to, I want to own a hundred or a thousand. I’m going to have to own 100 of 1,000. Maybe I should look in something else. And like, you kind of drank the Kool-Aid on the MH and it’s been great. And so, you guys are doing great things. Tell me how you, how did your fund change when you were at Saratoga doing single-family, tonight you’re doing MH, as far as your capital raise with 44 communities, I assume that’s not all your personal savings account. You’ve got a lot of other financial partners on your team. I’m interested to hear how you got that structure.

Sam Hales: Yeah. So, we’ve kind of done two approaches and Ferd, we’ve done maybe the more traditional where we find the assets and then we go raise capital specifically for those assets. You know, in many ways I like that better because there’s definition around, hey, here’s what your, here’s what you’re investing in. And I think investors generally like that better as well. But once we started getting into opportunity zones, there was another kind of nuance there is for the investor where they have a timeline, right? So, they’ve got 180 days after the capital gains event to get the money invested in an OZ fund. So, there are all these timelines that we were balancing. It’s like, there’s no way to do this without a fund. Because once the money comes into the fund, they’ve met their timeline. Then the fund has its own timelines, but then we can kind of space it out with the acquisitions that we’re working on and the budgets for the improvements and all that sort of stuff. So, that’s when we started launching funds at Saratoga Group. And we’re on our third opportunity zone fund now.

Ferd Niemann: Wow, that’s great. So on the funds, when the investor puts their money in, let’s say I put in a million dollars today, do you always have a project in the pipeline where you got a place to put that, or do you have a week, a month, six months where I’ve got essentially cash drag where my money is just sitting there, you know, making zero, maybe you’ve made commitments to pay me some sort of preferred return, but for you guys, you’re in the Hold, how do you balance that? Because I feel like that’s one of the challenges a lot of people face versus you find the asset, you do a private placement memorandum, you raise capital for that one asset, you close it. And you’ve got a budget with a Performa and assumptions and like, look, you’re going to buy this many pads. There’s the occupancy, boom, boom, boom. And it’s, as you said, definite or finite, how do you balance that on the kind of blanket fund, if you will.

Sam Hales: Yeah, you’re right. It’s absolutely a balance. On our last OZ fund, we raised 16 million and you know, there’s two problems for the sponsor. One of them is you get the money too early, you know, it’s like, like you said, there’s a cash drag there. And we do, we pay a prep once the money hits our account. And then the other problem is, we get the money too late, but that’s kind of a worst problem. Cause then you’re like, Oh crap. So, we’re okay with bringing money in a little bit early. We want to have confidence that we have the projects in the pipeline, right. So, we’re not going to take, so for example, this new fund is a target $30 million raise. And, but we’re not going to take all the money before the end of the year, what’s happening because of a number of factors, lot of interest, and kind of placing money before January 1st.

But we can’t, we don’t have enough in the pipeline yet to take more than about 18 million is kind of what we’re targeting before December 31st. And so other folks, you know, probably going to have to push out I mean, and hopefully, right, hopefully we get the 18 million before the end of year. But point being you know, for us, it’s kind of a range. I mean, we could take as little as probably seven just to cover the properties we’re buying before the end of the year in the new fund and then as much as 18. And so, we have some wiggle room there. But it is a balance. Because you don’t want to take it too early. And you don’t want to take it too late.

Ferd Niemann: Got it. No, let’s use 18 million for an example then. I’m sure you guys are only bringing in accredited investors and I know different people have different opinions on, would you rather, I’m asking you, would you rather have 18 one man dollar investors or two $9 million investors or maybe 36, $500,000 investors. Obviously, the more people, the more people call it, they want to talk to you. You’re the boss. More people calling you in your cell phone, but at the same time, the big guy with nine million may, you know, have the keys to your house, you know, if he’s like, you need me, you know, so do you have a preference on that? Or how have you guys tackled that?

Sam Hales: Yeah, it’s a really good question. So, I’ll give you an example, our last, our last fund, our last opportunity zone fundraised 16 million. We have 170 investors. Now that scares the bejesus out of my CFO back then. But at the same time, Ferd you know this about us. You know, we embrace technology, right? So, five years ago we white-labeled the crowd street platform for our business. So, we use that to automate all the reporting, distributions, everything through crowd street. And it doesn’t feel like 170 investors. I mean, you know, we have, people still want some personal touch. And so, for example, later today we’re doing our quarterly investor call for that fund. And you know, there’d probably be 30, 40 people that chime in there. And then we record it and distribute it to everybody. But, anyway, as far as your question, I don’t know that I have a strong preference, but you’re right. If somebody is coming in and they represent a large portion of that fund or even all of that fund, then they’re going to, it’s less about you saying hey, here’s the terms. It’s more than I’m saying hey here’s the terms. So, we’ve had those opportunities a number of times for people that are like, you know, wanting to put money with us, but also wanting to dictate the terms. And we’ve generally chosen not to do that.

Ferd Niemann: Makes sense. And I know you mentioned earlier here that, your love for podcasts and the resources. I know when I started looking at real estate, 12, 13 years ago, I felt like the resources out there were limited, not just podcasts, but I was trying to learn, I had my finance degree, my MBA, but they didn’t teach us the discounted cash flow analysis in graduate school. Like I had to go learn it on my own and learn really not just IRR on Excel, but literally learn the machinations of all these financial metrics. So, I appreciate the data out there as well, and guys like you kind of opened up the tent. So, my next question, you’re not prepared for this, so you can tell me no, but are you willing to open up the tent even more and say, here’s how our model works. You know, we do an 8 pref and a 30/70 promote not, or it depends on the deal or is that, and then like, you’ve got your technology system that’s kind of proprietary. Is that kind of your special sauce and you don’t want to share that with a larger audience or is it pretty much, this is industry standard, quasi plane chambers, better operators, better capital raising. It’s not special sauce as much as operational sauce.

Sam Hales: No, I’m happy to share that. Ferd I really don’t, I appreciate when other people share with me. And so, I just, I feel, I guess they call it the abundance mentality, but we’ve had a lot of people that have shared with us and we’re always happy to share. So, our opportunity zone fund is set up with a seven pref and then, and then it’s a 70/30 split up to a second pref and then it goes 50/50. And I know if somebody has only invested in, let’s say multifamily real estate syndications, they’re going to hear that and be like, man, that’s expensive. If they’ve invested in other MH syndications the price say hey, that sounds like a good deal. You know, at the end of the day, I think, most astute investors understand this. It’s way less about the split you’re getting in is way more about who you’re investing with. You know, the deal’s important for sure. As you know Ferd, I mean, our business is especially what we’re buying. It’s all, you know, roll up the sleeves, jump in and like fix it. And so, the operation is so critical, and you know, we could miss slightly on the asset, I think, but if we operate it well, we’ll make up for it. So, it’s like, you tell people that MH is more like running a business than managing real estate.

Ferd Niemann: I agree. And I didn’t argue that on my tax returns with the CPA, I said, look, I’m buying goodwill. I’m buying going concern. And I’m buying physical land, I’m buying land improvements. Sometimes I’m buying mobile homes or other personal property, but I’m also buying some goodwill. I said, I’ve got a parking, I’m following the tax appeal right now, but it’s 20 acres. Like 20 acres of dirt in this town, 10,000 acres were 200,000 bucks. I paid a Million and four. So, either I overpaid and I’m the dumbest guy around, or I think I bought more than dirt. In fact, this isn’t even Virgin dirt. This has got utilities and concrete and stuff in the way, this is not reusable. So, I’m buying the business from a tax perspective. But really is because it’s not mailbox money. I used to do triple net retail stuff. And you get Walgreens, you know, it’s checks in the mail. This is different. And I think that’s where a lot of investors come in and it’s frustrating to me a little bit because I’m trying to buy in the space. And I see guys that think it’s like, Walgreens, Walgreens is a four cap. This is a six. I’m going to buy this. And I’m like, you shouldn’t pay six. That’s like 8.5. You know, they’ll find it out later. It’s too late. But it would costs me a good opportunity on the buy-side, but maybe they’ll hire me as a lawyer to fix it.

Sam Hales: There you go. Yeah. Play both ends of that. That’s good Ferd.

Ferd Niemann: I’m trying to help, man. I’ve got to feed the kids, right?

Sam Hales: Absolutely.

Ferd Niemann: Let me ask you, you obviously understand opportunity zones quite a bit. I’ve not done a lot of Oz. I had an 18 acres in OZ, we were doing apartments on few years back, but I never, I ended up getting out of that partnership. So, I didn’t really go through the full OZ fund myself. I know what the, I have a pretty good feel for the general tax benefits relative to non-OZ. Can you give our listeners to kind of reader’s digest version of what those benefits are and how they can impact your after-tax yield?

Sam Hales: Yeah, absolutely. And obviously I’m not a tax professional right. But I’ve spent a lot of time around at this point, so I can definitely share what I understand. So, there’s kind of three benefits. The initial one is that you get to defer your capital gains tax. So, when it first rolled out, well actually the timeline hasn’t changed. It’s through the end of 2026 that you get to not pay those capital gains taxes, right? So, you know, let’s say you sold a million dollars of Amazon stock or maybe you sold it for 3 million and your cost basis was two. Anyway, you got a million dollars of capital gains. One thing that’s important to understand, you don’t have to invest, you know, like a 10 31 exchange. That’s what we’re all used to in the real estate world. You got to invest everything, right. You can’t really take anything off the table. In this case, you only have to invest the capital gains. So that example, the 3 million and a million was profit. You just have to invest the profit, the 2 million, you can take off the table and do whatever you want. So, that’s the first thing is that you get to defer paying those capital gains. So, it’s like you know, interest-free loan from the government, so to speak. The second thing, it’s kind of a slight advantage is you get to step up your basis. At this point, through the end of the, see here’s where I may or may not be right on this. I actually think the next step, which is a 10% step up is good through the end of 2021. I’d have to verify that. And then after that, it just goes to 5%. But anyway, so you have to shield a little bit of that, right? You get the interest free loan. That’s the first advantage. Then you get a little bit of shielding. The third one, which is really the main advantage is that whatever profit is inside our opportunity zone fund, when that fund liquidates that’s tax-free. So, if they invest that million dollars and it turns into two…

Ferd Niemann: All two is free.

Sam Hales: Exactly, that’s all.

Ferd Niemann: You have to leave it in for, was it seven years or seven-year and a ten-year kind of burn off of that.

Sam Hales: Yeah. So, you have to keep it in for 10 years to get the full protection there. The seven years had to do with the step up. But 10 years for that tax-free event. And actually we, which is amazing. Of course, again, you understand this and I’m sure most investors do, but it’s always got to be about the fund or the deal or the projects or the operator first. I mean, all of this is great, but if you invest in something, a poor investment obviously, you’re locked up for 10 years and you come out the back end, you lost money. It’s like, well, okay, same write off you’d get if you’d lost money somewhere else. So that doesn’t help you. So, yeah, that’s really the main advantages I think is that third one. And we kind of look at that and say, well, so do you have to sell it at 10 years? And the answer is, no, you actually could continue it and continue to grow that tax-free. And so, our goal is to do well enough for our investors that we get to the end of the 10 years. And we don’t want to sell these, you know, Ferd, once you get these and get them up to operating well and running efficiently, they’re hard to go out and replace, right. I mean, if you sell it, like, what are you going to buy? And so, we feel like if we can do a good job in returning the investors capital to them through the kind of the first 10 years of the fund, and then after that, they continue to get distributions. We don’t want to sell, and we don’t think our investors want to sell either. Because it continues to grow tax-free.

Ferd Niemann: That’s great. That’s definitely a niche you’re combined on a couple of different asset class niches. That’s great. What kind of financing do you guys get on the front end? Are you looking at agency loans? Just like if you’re not in a fund or does the fund to complicate that, that you’re not maybe you are a guarantor, but generally you’re not one person. Like if I go get a deal myself, I’m a guarantor. It’s pretty clear. I’m the decision-maker, but you’ve got you are the CEO, you are a decision maker, but you’ve got a whole flank of people around you. How does that complicate it?

Sam Hales: Ferd If I can get some of these guys here in the office to sign on those loans, I would love to do that. Nobody seems to be willing to do that though. I don’t know what the deal is. Maybe we have not been paying them enough. I don’t know. At the end of the day, the bank, cause what we’re buying, we’re buying value add, right. We’re buying the same stuff I know that you buy in your business because there’s the opportunity to improve it and increase revenue. And so it’s, yeah, they’re looking for a guarantor and even though we have this fund structure, each of the, I don’t want to dive into this too much, but each of the assets we buy has their own single purpose SPE LLC. And then yeah, if it’s recourse debt, which it almost always is, then I get to…

Ferd Niemann: You’re signing the note then. Yeah. Okay. Yeah, I didn’t know if, when you’re getting the portfolio, I know normally if it’s destabilized under 80% occupancy, for example, you’re pretty much in recourse debt land. Then that’s why it’s like, you know, you got to have a big signature to get 5, 10, 15 parks at a time, or you got to have a really good banking relationship or some combination. So, you’re probably buying these with local regional banks. And then ideally towards the end of the fund original term, you’ll refinance with agency loans and take the chips off the table and just ride them into the sunset. Is that kind of the business plan?

Sam Hales: Yeah. And just like, you know, when we buy a single asset or whatever, we don’t want to wait 10 years to do it. We want to…

Ferd Niemann: Soon as you can, 3 years, 10 years. Absolutely. I was just thinking in 10 years, you’re going to hold them for a long time, beyond the 10 years of your OZ fund, but you won’t be on the same note. Obviously, you’re going to want to get those refinanced like anybody, right. As soon as you can. Spit the hook on that note, get the return investor capital, everybody wins. And then agency in the end. So lucrative at least today, relative to local banks, everything seems to be going well in the industry. I feel like the COVID era is making the industry better. And what are your thoughts on macro-level where we’re at as an industry and where we’re going?

Sam Hales: Yeah, I know it’s a good question. I don’t know that I know any more than anybody else, but you know, just based on what I’m seeing. It’s amazing how much interest in the space. I mean, we get calls and I’m sure you’ve experienced this as well, but just every week, you know, people wanting to reaching out, wanting to buy what we have already and definitely pretty competitive when we’re out you know, trying to buy deals. It’s kind of reminds me of this portfolio we closed last week, it was about 900 pads and there’s actually another 200 of them that close. I think I was telling you next week, the one in Iowa. We put those in Escrow a year ago. And there’s just been, I’m not going to get into all the disruptions, but you know, COVID was certainly part of it. And the question that would come up with our investor’s kind of right after COVID hit is like hey, are we going to get some post COVID pricing on this portfolio? Cause I mean, it’s like, you look around like real estate.

Ferd Niemann: Nope, you are going either way.

Sam Hales: I know. And that’s the thing. And they’re like, now we look like geniuses, like putting this thing in escrow before COVID because I don’t know if you saw that, that one report indicating that across the board MH values had gone up like 23% through COVID.

Ferd Niemann: I don’t doubt it.

Sam Hales: So, I don’t know what’s going on exactly. It’s, you know, I mean, I think it’s generally getting pretty expensive certainly for stabilized properties. And that’s where, to me, I mean, we jumped into, we felt like when we jumped in 2017, the only thing that made sense was value add, and I think that’s more true now than ever. For a couple of reasons, one of them is, well, Hey, if you fix that value add, like your exit looks even better than it did. And the other thing, even though cap rates have compressed across the spectrum of MH, if you think about it, if you’re buying generally something that’s half occupied, you know your cap is on your income on the 50%. So, what about those other 50% that aren’t occupied? Well, you’re not paying a premium on those. So, we feel like, yeah, the prices have gone up a little bit on the value add, and there has been cap rate compression, but the exit looks much better than did before. Number one, whether that’s, you know, selling to, to a bigger player or, you know, our preferred exit, which is going to Fannie and Freddie, and so that looks even better. And then you’re, like you said, you’re not, you’re not paying any premium on those unoccupied lots. So that’s how we look at it.

Ferd Niemann: Sounds like good stuff. I mean, I agree. I don’t have any better wisdom than that. What other, before we part, what other tips or taxes do you have for people trying to, you’ve obviously been in the space for a few, like really only a few years, three or four, but you’ve done 10, 15, 20 years of work in three years. What about the guys getting in for their first or second park? How do you, or even, or maybe somebody’s medium size trying to go to the fund level, like you are, do you have any tips or tactics that we haven’t already covered?

Sam Hales: Yeah. You know, I think one thing we’ve found that our investors appreciate, and I think has helped us to grow our network of investors is communication. So, for example, when COVID hit, there was a lot of concern. I mean, we were concerned, right. And as operators are like, man, you know, I hope our folks can pay their rent. Investors being, even that much more removed, they were concerned because, you know, a lot of times if they’ve invested with us in MH, they’ve probably done a retail deal, they’ve done some other things out there. And they’re like, man, we got, you know, everything’s suspended with our retail investment or, you know, or whatever. I mean, they are just concern. And so, we’ve made a decision like, you know what I think our investors want to hear from us a lot. Like they want to hear from us frequently. So, we’re doing the quarterly reports and we do these investor calls and different things, but we made a decision. We’re going to send out an email every week and we’re going to track our delinquencies and we’re going to just kind of real-time hey, you know, closed it yesterday. Here’s what it looks like, here’s what it looks like month over month through the whole year. And so, they can just kind of get that real-time, basically feedback and data to know how our collections are doing. So, I think that’s one thing that the response that I’ve received is that a lot of people feel like they don’t get that much communication from the sponsor. And especially if it’s not good news, right. That they’re not going to hear about it. You know, I’d like to say our collections have been amazing and they’ve been, we’ve done well, but you know, it’s not all smooth and it’s taken a lot of work and it’s taken a lot of extra effort that we didn’t have to put in before. But I think just kind of sharing that information, people seem to appreciate that. And then, you know, that turns it, I mean, here I am, we get a lot of referrals and I’m like, wow, that’s awesome. Especially when I realized that the person that invested with us hasn’t received a penny from us yet, right. In many cases, all they know is hey, it was a good experience onboarding, we’re getting good communication. And it looks like we’re headed in the right direction. And they’re recommending us you know, not all, I mean, some investors certainly have had longer and it’s a different experience. But we’ve gained, we actually had a review yesterday with Crowd Street. We’ve gained something like almost 400, not investors 400 people in our database in the last 12 months. And we probably gained, I’m trying to remember that number, but it’s over a hundred new investors in the last 12 months as well. So yeah, that’d be the communication.

Ferd Niemann: Great. So, I’ve never heard of anybody doing weekly. That’s great. We do monthly. And I thought that was good because I’m an investor in another fund and I get a K1 most of the time on time. And that is it. And I’m like, you guys are breaking all kinds of rules in the operating agreement. If I would have had more time, I’d be more argumentative, but I’m just like, Ugh, it’s just like, it feels like it’s a sunk cost with these guys. It’s like, investors hate that. And then a couple of investors were trying to round up a fight to Sue these guys or takeover. I’m sorry, I like my hair, I don’t want to lose it, you know.

Sam Hales: Yeah, Understood. Understood. Yeah.

Ferd Niemann: Well, this is great. Anything else you want to share? And I want to get your, if you want to share your contact information or anything about your fund, tell us where we can find you.

Sam Hales: Yeah. Awesome Ferd. Hey, by the way, really appreciate you having me on and enjoyed our discussion. So, you can, I’m on LinkedIn. I love LinkedIn. And so, you can find me there. Sam Hales at Saratoga Group on LinkedIn. Our website is www.saratogagroup.com and you can all you’ll find on there, our offerings. Right now, we just have our opportunities zone fund, and you can also go directly to that www.invest.Saratoga group.com. That’s how to reach us.

Ferd Niemann: All right. Sounds good. Appreciate it, Sam. Thank you.

Sam Hales: Okay Ferd, hey, thanks so much.

Ferd Niemann: Bye now.