On this episode of The Mobile Home Park Lawyer, Ferd is joined Logan Moore. Ferd and Logan discuss useful skills to have within the MHP industry, question’s LP’s should ask, and what to look out for when working with syndicators. Ferd and Logan also walk us through their spreadsheet which gives us an understanding of the MHP industry.
HIGHLIGHTS:
0:00 – Intro
0:57 – Logan gives us an insight into his background and how he got into MHP
3:41 – Ferd asks Logan about how many PPM’s and offer memorandums he has looked at in the last five years
5:06 – Logan speaks about skills that have helped him in the MHP industry and things he had to learn when he joined the industry
11:12 – Questions that LP’s should be asking
21:34 – Ferd and Logan take us through their cash flow analysis tab
29:21 – Logan speaks about the internal rate of return and equity multiple projections
42:40 – “There’s been more fiction written in Excel than in Word”
43:06 – Logan advises you to find out if your operator/syndicator have all their permits in place
44:24 – Logan states that transparency from the syndicator is important – are they willing to answer all your questions?
FIND | LOGAN MOORE:
Email: logan@ThridIVProperties.com
FULL TRANSCRIPTION:
Ferd Niemann: Welcome back mobile home park nation, Ferd Niemann here again today with a another episode of the mobile home park lawyer podcast. Today’s special guest, this guy is a longtime friend of mine, financial wizard. He’s my chief investment officer. Pretty sure this is his first and probably his last podcast experience, guest experience. I’m sure he’s going to love it, but please help me welcome Logan Moore. What’s going on, man.
Logan Moore: Hey, how’s it going? Thanks for bringing me on and yeah, we’ll see how this goes. I may or may not make another appearance.
Ferd Niemann: You set several distinct first for my guests. Your first guests to be the guide of parents of one of my children. You’re the first guest to be 10 feet away from me where I will record this, you are in the next room. There’s probably many other firsts, but anyway, obviously long time, tell the rest of our audience a little bit about your background and kind of how you got into MHP.
Logan Moore: Yeah, so yeah, like Ferd said I’m chief investment officer here at Third IV properties. Been here about six months now and it’s been great and all again that in a second, but in a former life, I worked for a local mutual fund company here in town. Worked for them for about 11 years, spent about four years in accounting and then made the jump over to the investment side of the business. While I was in the accounting department, I sat for my CFA designation chartered financial analyst, two and a half three-year process. So sat through that while I was in accounting. Got it. And then jumped to the investment side, came over as a municipal bond analyst moved up the ranks through there, over seven and a half, eight years started as an analyst. Eventually got more and more responsibility and got promoted up to be assistant portfolio manager. So at the time I left about six months ago, was helping manage a billion dollar high yield municipal bond portfolio, doing a lot of, not for profit real estate investments. So charter schools, senior living facilities, student housing facilities for universities. So spend a lot of time on the debt side analyzing and understanding different real estate investments. So about six months ago, excuse me. You know, Ferd, and I got to talking and obviously we’ve known each other a long time and I’ve kind of watched the mobile home park business, I’ve watched him and Third IV properties grow over the years and got to a point where he said, I need additional help. We’re going to keep growing. This thing’s going to be big. And I said, all right, I’m in. So mobile home parks were compelling for me. Obviously, everybody on this podcast, probably mostly most people on this podcast, you know, about, you know, the supply demand, forces the need for affordable housing you know, all the other benefits. So that makes sense to me. And I also like the idea of getting to go work with one of my best friends and help grow a business and kind of see where this thing can go. So here we are six months later, just churn and burn.
Ferd Niemann: That is right, man. I’m glad to have you, it’s been fun. I know you probably didn’t know how many hours I was going to work you when you got here, but you’re doing it. Both of our wives can be mad at either one of us because we never seem to run out of work. It’s definitely been fun. So Logan, like you said, came through a big mutual fund company, it was a billion with a B assets under management. He was the number two guy on that fund. So lots of good experiences. How many PPMs and offering memorandums you think you looked at in the last five years?
Logan Moore: Oh, in general. I would say I looked at anywhere from two to 10 on a weekly basis. So multiply that times 52 weeks a year, times, seven plus years that I was doing it.
Ferd Niemann: Quite a few, quite a few. So, no, that’s great. I’m glad to have you working on that. So obviously I know your background, how you got to MHP, tell the audience kind of what you’ve learned since you switched to asset classes that you didn’t expect. And then tell us what’s your background or your skills really helping. And I know we’ll get into some financial analysis stuff, to the level here in a couple of minutes, but just for our audience that doesn’t know how you know, because I’m sitting here, I want to build my team and some of our deals, we syndicate, some we don’t. The deals we syndicate particular, it’s a fairly complex process, fairly complex capital stack and flow of funds and different hurdle rates and GPLP splits and preferred returns. And, you know, do we pay off the preferred equity retain it, all that kind of stuff. So obviously your financial background lends you there, but what other stuff can you be able to share kind of on that topic as far as background and, or you know, skills that have helped you or things that you had to learn?
Logan Moore: Yeah, I think yeah, I think certainly not appreciating how simple yet how complicated this business can be. And what I mean by that is, you know, you hear, well, you just rent the lots and sometimes you rent the homes and you do that and make a lot of money and it’s all good, right? But there’s so many day-to-day things operationally that happen in triage that has to happen in dealing with, you know, residents and all that, the operational side of the business just a ton of learning and I still have a ton to go and all that. But one thing I think that’s really helped me with is, you know, from the financial side, when I’m underwriting a deal, or when I’m looking at a deal, having a better understanding of, you know, the practical limitations, it’s, I think pretty easy for us finding get our heads stuck in a spreadsheet, say, oh, well, if I just, you know, raise rents 25 bucks a month per year, and I, you know, fill in these five lots, you know, it’s going to be, like, I just said, we’re going to make all that money, but it’s not the case. And I think when you understand why things work from an operational basis, it helps you when you’re working through different scenarios and you are underwriting to say, what if we can only fill six slots instead of, you know, 12 a year, or what if those electric upgrades cost us, you know, twice as much as we expect. So I think it helps them that, I think one of the biggest advantages that I brought from my past experience to this job is just a variety of projects I looked at as we talked about, you know, anywhere from 2 to 10 different PPMS that I was looking at on a weekly basis and every project was different. And that’s the way with mobile home parks spaces. Every project is a little bit different. So you know, the ability to think through the implications of certain aspects of a project versus another, I think was very helpful. I think you know, just the, I think what I bring to the table is that in depth analysis that being able to understand the complexities of a PPM, being able to understand the complexities of a capital stack are different you know, cash flows or waterfalls or different return metrics. I think there’s a lot of things going on in this industry which we’ll talk about, but there’s just a misunderstanding I think of what kind of returns investors are expecting. So I think having that, you know, that background adds value to our team, especially and that we have, we understand and, you know, underwrite things properly and deliver the best returns and the most accurate returns for our investors.
Ferd Niemann: That all make sense. I want to touch on, you mentioned and some of the operational items and how that helps you. I mean, that’s one thing is, you know, I’m counting on everybody in our team to get out of the field, even just our regular lawyers, right. Get out there and look at the setbacks, look at the zoning code. Understand and look at the fire code for spacing to help us just be more well-rounded budget. You mentioned, okay. We budgeted 12 infill versus six gave part of that’s just, you know, market analysis is, are you going to go to infill 12 homes in a one year, but another park is going to be just practical, geographical, you can say, oh yeah, there’s 12 vacant lots, but six of them are 38 feet long. Oh, I didn’t think about that. That’s too short or this one’s on a hill. This one is on top, this one’s in a flood plain. This one has a gas line in the middle. A combination of those things is what I think makes us valuable. It makes us dangerous for our investors. We’re looking at all these different angles, but and that’s why I’m glad you’re able to learn that. And then, you know, understanding the underlying accounting is obviously important for all the capital transactions and the homes brought in and sold and you can track cost basis and efficient tax prep and cost segregation. All of a sudden, they’ll dive right into all of that. One thing I’d really like to talk about, and you and I have talked about it offline, and you can share your screen here as well is, you know, I think there’s a, most MHP owner-operators have a rudimentary understanding of financial analysis. There are some good operators that are bringing in homes and selling construction management. Good at sub-metering, a lot of the cap ex projects. And generally get it back in asking valuation. But as we’ve done here, gone through considerably more financial analysis, and you have pull up on your screen here, you know, day one budget cap X budget, sources, and uses, a general profit loss, inclusive of infill and absorption. And then just kind of cashflow analysis shows you a bunch of rates of return from a cash on cash or equity multiple internal rate of return. And what part of this call, this topic for us is, I feel like there’s a public disservice going on that there are some syndicators out there that either are deceptive and dishonest or are more likely to just not financially astute to the level they need to be providing accurate financial metrics for their investors in the marketplace. So you’re one of the sharpest financial minds I know. So I thought, why don’t you lead us through and kind of how we underwrite a deal. And then kind of teach us a little bit. So our audience can, if they’re syndicators, they can learn from it and do a better job. And then for their investor to do better more accurate job of risk analysis. And for limited partners just gives them a chance to kick the tires. And I might be interested in your opinion in general is make PPMs and LMS looked at what should the LPs be asking? What kind of questions, you know, for example, like, have you ever been arrested for embezzlement, have you gone bankrupt, those kind of obvious ones, but there’s a lot more under the hood you look at, so that’s a number of questions and a long ramble there as I really, as I always do, as you know, but anyway the floor is yours, teach us to fish.
Logan Moore: Alright, can you see my screen here?
Ferd Niemann: I can.
Logan Moore: So this here is our proforma spreadsheet. Several people on this call have probably seen this. I know Ferd is on, through in the past, just the basic overview of our underwriting. We’ve also made some modifications and some changes and some upgrades if you will, to the spreadsheet. But I think the biggest thing to point out to syndicators, investors and everybody listening is, you know, we get pretty granular on the way we underwrite, and we really try and dig in, understand what the actual costs are going to be and go out and we get bids for line items and we you know, know what it actually going to be through the due diligence process. You know, like most people, we do our calculation. We’re going to bid on a deal, but really in our underwriting, try and get real deep into the weeds and understand everything, makes sure we didn’t miss a cost or, you know, underestimate something that’s going to really cost us later on the deal. So this first tab here, this is our budget, our sources and uses tab. This is really just an overview of what the quote-unquote day one capital expenditure need to be. So I won’t go through every line item here, which you can see on here. We’ve got, you know, dumpsters, how many are we going to need to claim to park on right away. Road repaving, driveways, trimming trees, all our loan costs, legal costs, etc. So that kind of drives how much money we’re going to need to raise up front, whether it’s from investors or ourselves and so on and so forth. Over here, we’ve got our sources of funds. If we are getting a loan on the deal, how much are we getting from investors. And then this template is set up, you know, if we had a subordinate loan, we got a deal we looked at recently where we got our, you know, our main term loan from the bank. And then we were able to convince the seller to carry back a portion of it as well. So we’ve got very little in that deal and it’s a great deal for us. Not for our investors, because we’re not syndicating.
Ferd Niemann: You don’t really need to syndicate when you get 98% leverage and acquisitions on a, 30% over the purchase price.
Logan Moore: Yeah. Yeah. So that deal is going to turn out well, but nevertheless, right there could be a scenario. So this is, again, this is kind of our template, but here’s your sources and then here’s your uses. We go over here to our profit loss tab, you know, probably like a lot of syndicators we project out, you know, many years we do 10 years standard. Some syndicators don’t, seen spreadsheets that don’t we’ll look at one later. But we try and go through every year and say, okay, what’s our true operating costs. And then we, like I said earlier, we get bids for everything that we need to bid on somethings we just know, right accounting, you know, it’s going to cost us 2500 every year to CPA do the books for us. But we go through it, we project out all the revenues, all the expenses. So again, lot rent, home rent, spreadsheet set up.
Ferd Niemann: Scroll down Logan and show that up, Like the rent numbers are tied to lease up and fill absorption.
Logan Moore: So our spreadsheet is set up so that we’ve got lot rent, number of lots, home rent, number of homes. These would be park owned homes and then RV rent. We don’t typically buy parks with RVs, but we were looking at one recently that did. So this is a recent addition to take into account any RV rent we would have. But this is set up and it links to show you up here, it links to our revenue line items. So we can change this on the fly, and we can look at different scenarios very quickly to understand what is the deal going to look like if we raise rents 25 bucks a year, what are twenty-five bucks a month, every year? What if we do it 30 bucks? What if we do it 20, right, what if we can only fill 12 lots or 6 lots, first 12 lots, right. So ours is set up this way so we can do that very quickly. We’ve also got different cap rate scenarios down here. So we can see in year one, what the park would be worth on its own. We can see what it would be worth you know, if we had homes that were being rented and we kept the homes, you know, we can change our variables here as well. This drive through the year one formula.
Ferd Niemann: Let me jump in there for a second a little bit, because I want to talk about that where you say cap the homes. I mean, in general, as I mentioned before, we’re not going to cap the homes, but just as a second looks and what’s the value of the non-lot income. And a lot of times P and L and we’ll sell them, we’ll show the existing park owned home inventory as additional net sales proceeds or the discount cash flow analysis tab to show if we sell those homes. And then the timing of those sales and your year one, year two, year three, but in general, you know, there’s more expenses if you cap the homes increase the expense ratio almost to 50 to 60%. And if you scroll up show the expense ratio on, I don’t know what the practice was, but the NOI or an expense ratio on year one was 34.352, which is pretty, pretty good, pretty standard. I’d like to see 30 to 40 closer to 30 and tenant pays for water. So in the early years, we probably have more gas reimbursement for site visits during stabilization, more management in the early years. And then over time as top-line goes up and expenses don’t go up, you know, the same, you know, both Revenue expenses got 5%, that would be a bigger spread, right? Cause there’s a bigger top number, that expense number. So over time, these example expense ratio, it gets down below 30%, which obviously is good. Key items in here that I’m looking at that I think you want to make sure you do a good job on is property tax projections. And I’ve got a whole podcast on that topic. Cause people mess that up a lot. And then I think people, the key here when I was doing retail development, a couple of contractors were bidding this job. And I liked this quote, the guy said, the thing that will ruin your budget is not a misprice, it’s a missed price, meaning the thing you forgot to include. So that’s why we’ve got, you know, 20 rows here of regular expenses, as opposed you sometimes see in an OEM like, you know, general administrative or you just see like miscellaneous or like four categories, this like insurance taxes, miscellaneous, it’s like what, you know, you need more detail in order to look at it with better set of eyes, frankly.
Logan Moore: Yeah, absolutely. And I think to your point, right, like that’s these lines here, 34 through 36, right. Where we’re breaking out things specifically for this part, well testing this park treatment plant had wells, so we took that into account, right. We had RV pad sites. So, you know, we were figuring out what the electric cost was on that because we were paying that verse, park was paying that verse the tenants paying it for the mobile home. So I think that’s a great point that we really dig down into it and try and go line by line and figure out what is relevant to this park and what is not as opposed to back in the 30 to 40%, which I think generally hold true that 30 to 40%, but we’ve also looked at parks that you know, park in Iowa recently that the real budget came up to, you know, probably 50, 60%. So you’re back in the envelope calculation in that scenario. Or we would have bought a bad deal would have cost you later.
Ferd Niemann: Yeah, I mean, on that point, I mean, I remember that Iowa park, you know, it’s important that we have the breakout, like we weren’t going to be local, so I wasn’t going to be out there testing the water. But something that the seller was, we had to get bids. It was a combination of septic. It was like a unique system that the state never seen before, but there was an expense to that to hire a professional here to do it. There was an expense to that, that we needed to put in the budget, right. It was well, same sort of thing. So that’s important. Another thing that, I’ve had parks go over 40%, but for early years during infill, you know, you got to do, you need a good full-time manager, if you are going to bring 50 houses, I think you probably need a, you know, a manager that’s going to be making 30 to 50,000, not a park greeter, that’s making $300 a month free lot rent. If you’re going to expect that kind of work and you may have that kind of success. You can have commission structures and stuff too. And we’ve done that on some of our deals where we, we won’t see it in the PNL top-line expense would be, that’d be kind of a contingent expense based on contingent occupancy, it’s kind of built it into the base of the home. So lots of ways to slice and dice here. Show me your discounted cash flow analysis. This is important. This is probably the most important to have syndicators, to be for limited partners to understand what am I going to get? You know, if I put a hundred thousand dollars in this deal, what’s my return look like, what kinds of return? And then I’d like you to show us those metrics that you talked about previously and how people were messing them up all the time.
Ferd Niemann: Right, Right. Yeah. So this is our cash flow analysis tab. So this is all fed based on the profit loss budget that we put together, the day one cap X budget, and the amount of equity we raise. If you see here, we’ll just walk through this one a little more closely. In the first year we’ve got the amount of equity that we raised, right? 450,000 on this deal. Here we’ve got what I’ll call a toggle, so we can toggle on and off if we’re going to return preferred equity to investors at refi or the initial equity investment refinance, right. We’ve looked at different deals where we’ve said every five will probably pay it back. So let’s see what that looks like. Then we’ve also said, what does it look like if we don’t pay it back when you hold it and, you know, continue paying, how does that impact return? So that’s what this does here. Scroll down and we got net operating income, asset management fees, which we don’t take on this deal, debt service, debt service coverage, the bank really likes to see this line. So that they know you’re going to pay them first and they’re going to get paid in full, subordinate loan debt service. If we wanted to see what our DSCR was with that subordinate loan on here, we can see that. And then once you pay all those, what your cashflow from operations, and then one of the first metrics we’ll look at, what’s your cash on cash ROI on a purely operational basis. So this doesn’t take into account that we may sell homes, which will generate extra cash. We may do, you know, a number of other things which will generate extra cash for refinance, you know, whatever. Sometimes if this is below generally, we look at, what this tool used to say, how does this compare to our pref? In this case, we’ve got 9% cash on cash from operations. So park does operate well, we can pay our pref and we’re fine. Sometimes this may not be above eight, right? It may be a heavy infill project which we’re going to need a lot of cap X from the start. We don’t have as much profits. So and then we’ve got you know, figure out another way to get that pref talk to our investors about accruing it, but not paying it in year one or, you know, maybe we come up with source funds somewhere else. But that’s one of the first metrics we look at. Scroll down here, we’ve got, as I mentioned, home sales, discount cash that we would get from selling any park-owned homes. And generally, we’re going to sell them on contract for deed, four-year contract for deed. So we’ve got it broken out here. Over five years really, assuming has in year one, three or four years in the last half in year five. Then we’ve got here the refinance. So, you know, when we get the parks to stabilized value, refinance it, pay off the old debt. Here’s where we can determine do, we give the investors back their equity investment and stop paying the pref, or do we keep them in, keep all their equity in and just keep paying the pref and pay the splits a little differently. Keep scrolling down here, pay off all those things, how much you have left for distribution after you pay the pref.
Ferd Niemann: I’ve had other episodes on syndication, but just to clarify for people, the pref is, preferred return that the limited partner investors get before the syndicator gets a piece. If, and when the prep is met, meaning there’s enough cash that’s actually paid, not approved. Then there’s a split. That’s the first hurdle. Then there’s a split. And this one, it looks like hurdle wanted to 7% pref. And then after that, the split is really 50/50. The GP gets 50%, the LP gets 50, we later get into if there’s, it’s another hurdle If and when we get to investors a 15% return, split may move. And that’s always negotiable once we set out in the offering memorandum or private placement memorandum for each deal in particular, but just wanted to clarify a few definitions therefore, those I’m aware of them.
Logan Moore: Yeah, absolutely. So actually I should also clarify this. This cash flow is after the profit. I mean the return of the initial equity, this section here is where you get into the actual prep paid out based on the information purchase provided. So you pay the pref off, here’s how much cash you have left. That’s when we start getting into our hurdle. So in this deal as Ferd mentioned, take a split 50/50. So the investors get 7% and they get a hundred percent of cashflow is paid until they get their 7%. And then the excess cash flow above and beyond that in this scenario pays out 50/50 between us as general partner and the investors as limited partners, up until the investors get a 15% return. If there were additional cash flows after the investors got their 15%, then it would split based on this. Now we don’t typically take a hundred percent right off the bat or at the top after the 15%, but I showed it here because I want to show you something return metrics later, so it made more sense to put in a hundred here, but you could toggle that to be, you know, whatever.
Ferd Niemann: Why don’t you change that to say for a second change the 100 to like 60, you’ll see the addition to numbers have changed and the investor would get additional funds.
Logan Moore: Yeah, absolutely. And also point out, this is one of the things that I think makes looking at our deals probably better for an investor than some others, cause ours is a very dynamic spreadsheet. So I set this up so that investors can play with different scenarios and we could play with different scenarios to see what returns look like, where some investors have hard keyed everything. And so you can’t tell, you know, what if the deal doesn’t perform the way you say it’s going to, what’s that going to look like? But to your point Ferd, we changed the 15 to a 16.
Ferd Niemann: Change, that 100 to a 60 of zero.
Logan Moore: We need to change the outcome. Six zero.
Ferd Niemann: There you go. So you can see it up in year four, five, there’s a bunch more cash to investors because your investors are going, are still getting 40% versus the first 0%. So with the spreadsheet that easy to use at this point, it’s one of those it’s easy to use, hard to build, easy to use and very transparent. I know you got the other boxes down there, investor returns and fees and all that you’re going to talk about as well.
Logan Moore: Yeah, absolutely. And I think something else point out here, on that hurdle you see here, here’s all the excess cash flows that start going, you know, more favorable split in the GP based on, you know, what we’ve negotiated and agreed to. But I think that’s worth pointing out too, is in a lot of these deals that hurdle won’t kick in until later in the project, when you’ve really got it running and stabilized and generating excess cash, and then you refinance it later. You can see here, there’s excess funds if you will, for anybody in the first three years above and beyond that 16% return in this case. Then you get down here to this yellow section. I think this is probably what most investors care about. If not all investors, it’s their top concern, right. We project out here what’s the internal rate of return every single year based on this cashflow analysis, what’s the equity multiple. And then what’s your cashflow going to look like in a sample, a hundred thousand dollars investment. So the internal rate of return, and this is where I think you get into a lot of confusion with different syndicators or people who maybe don’t have this as firm of grasp on investing terminology and true returns. Internal rate of return takes into account the time value of money. So it’s the portion of money that you get and what year you receive it in. So for example, if I have a hundred thousand dollar investment and over five years, it makes a hundred thousand and so in year five, I get $200,000 back, right. But I get no cash flow in years, one through four. Well, I’ve got a hundred percent return if I average that over five years, that’s 20% a year, right. But that’s obviously very different if I get that full money in year five, as opposed to if I got 20,000 every single year, you know, year one, year, two, year three, year four. So internal rate of return takes into account, not just the amount of money that you make, but also when you get that money. I think it’s probably the best. I think it is the best return metric to look at. We’re looking at a real estate deal, but a lot of syndicators, I don’t think understand this. And they just say, well, you made a hundred percent over five years. It’s 20% a year. That’s your IRR. That’s not true.
Ferd Niemann: I want to jump in more. I’ve seen some of it, worse than that. They’ll call the IRR, the cash on cash, or they’ll call it the, not interim return, an Interim return in addition to time value, money, as we know, it also takes into consideration principal paydown so equity, takes in cash flows and the timing thereof and it takes in appreciation, an eventual exit of the property. And it’s calculated on a 10-year horizon, the year 11 NOI, and a reversion value. And I mean, I think you’ve probably have it still there. You have that one in the show. I mean, we looked at some recently, and this is an MHP syndicator, and it’s telling investors, you’re going to have an 18% IRR. And like, that’s, 18% cash on cash. Those are, the cash on cash was like six, the IRR was 18. If, and when all the assumptions and all the infill happened, it all just like, and it’s all at the end of the movie. So it was inaccurate at best.
Logan Moore: Yeah. I think this is the one you’re talking about right here. So here they’ve got over the course of the investment, right. Here’s how much you’re going to make. And so this scenario assumes there’s three years of cash flows, and then you refinance at the end of the story and here’s how much the investors get. So total return amounts says, here’s your annual cash flows. Plus the excess you get at refinance, plus the pref payments you’ve got, plus we’re going to return your initial investment. And that sums up to be your total return amount, which in this scenario is half a million dollars. And then they’ve said your total return on investment over the life of this investment is 247%, which is that total return amount divided by your return of your initial investment. There’s a key error in this calculation here, which is return on investment is the amount of money you make on the money that you put in, back to my earlier example of, if I put in a hundred thousand, I make a hundred thousand. At the end of the movie, I get my hundred thousand profit. Plus my initial hundred thousand back, I get $200,000 back at year 5. My return on my investment in that scenario was 100 divided by 100 for a hundred percent. The way it’s calculated in this scenario is using my numbers 200,000 divided by 100,000. So it looks like to an investor you’re getting a 200% return on your investment for being in that deal, which as I just stated is not true. It’s actually only a hundred percent. All right, so it’s very misleading what this is. If you compare it to our spreadsheet, this is your equity multiple. Or if you took your initial hundred thousand dollars investment, multiply it times your equity multiple, that’s the total amount of money you would get back at the end of the movie. So that’s the first key error here. But then what they’ve done is they’ve compounded that error and said, let’s just annualize that over this three years. So take the total amount and divide it by three. And holy cow, you’re getting 82.38% annualized investor return. Well, that’s not true, right? Let’s fix this real quick and let’s take, let’s back out our initial equity investment.
Ferd Niemann: Do that also with your 100,000, 100,000 example. But that would do right, it would act like there’s 200,000 in profit, really, it’s only 100,000 profit. But then further exacerbated it’s 200,000 divided by five and they say, oh, cool. Your cash on cash is 40%. When it really, as we know, you only had a total of a hundred thousand. Your IRR is going to be in the teens. So you think you’re getting a 40% yield and because you’re not looking hard where you’re not financially astute and the syndicators, you know, dishonest and people are literally writing this guy cheques and because they think they’re chasing the 40% rainbow. And it’s really more like 16.25.
Logan Moore: Correct. And that is what I was going to get you here real quickly. So keep people, let’s punch these numbers in, 247.15, 82.38, 28.26, right. If we set this up the way it’s presented to be, and we back out our initial equity investment.
Ferd Niemann: Okay. I can’t see your screen. Am I supposed to see your screen?
Logan Moore: You can, or you should, can you not?
Ferd Niemann: I see my template spreadsheet, not this junior varsity one you are playing with.
Logan Moore: How about now?
Ferd Niemann: There you go.
Logan Moore: Now do you see the old spreadsheet? Our spreadsheet and then now you see… Forgive me, I spent a year and I’m still trying to figure out how to use it.
Ferd Niemann: Your skills are better to use elsewhere than Zoom provisions.
Logan Moore: Anyway, so this is what I was showing, which I knew were the last people weren’t seeing. But previously the spreadsheet had these numbers in.
Ferd Niemann: Previously it’s a 247% total ROI.
Logan Moore: ROI over a three-year period, then annualize that, right. So divide by three, and you’ve got 82.3, 8% annualized. What this should say, if that were to be accurate. And so I hard keyed them here so you can remember those. So what it should say then is don’t include the return of our initial capital in our return metrics, 147.15 over three years or 49.05% annualized. Now this is technically accurate. I’d also point out these are not the actual returns that were projected. I changed them to protect the innocent if you will.
Ferd Niemann: We’re not that cruel. You’re exposing someone, but no one will know who it is.
Logan Moore: Exactly. Exactly. If you now compared to here, right. Holy cow! Look what a difference that makes in your annualized returns because they were being presented improperly, right? The other thing I want to point out here as they presented, it’s your cash on cash return, which is your investor share of the annual cash flows. Plus the amount you get every five, plus your pref payments divided by your initial investment, and then divide by three to annualize it.
I would say mathematically, that is technically correct. However, it is misleading if you will, because it suggests that you’re going to get 28% cash on cash every single year. What I’ve done here is I’ve said, what is the actual cash on cash in each of those years? And this is at purchase, but year one, year two, year three, your actual cash on cash returns in those years are low, you know, high single digits or double digits, nowhere near 28%. That 28% is as high as it is only because you get so much money back at refinance. If we use the preferred calculation, in my opinion, in the best calculation, the IRR here’s our initial equity outlet. Here’s our annual cash flows, including the pref payments. Here’s the return of our capital in the money we get at refinance, calculate an IRR to take into account time, value of money and all the other factors. And you’re looking at 18.8%, which is how we do it on our deals. And how is the most accurate way, the best way versus this 28.3%. I mean, of course, if I was an investor, I’d invest in this deal all day, but you know…
Ferd Niemann: So you’re basically exposing that, the screen that the real return, the average yield is 18.83%. And there’s the spreadsheet was put out by the syndicator. So, no, it’s total ROI of 247%. But annualized it is 82%. Oh, cash on cash alone is 28.26%. Where, so you basically say no, cash on cash is 7 to 15, not 28, return is 18, not 82 or 247. So it’s exponentially misleading and then just plain wrong. It’s amazing. I don’t want to get drilled down on spreadsheets all day, but this has been enlightening. I know you’ll geek out on this if I let you for another half hour. And despite being a recovering lawyer, I’d also like to geek out and be recovering financial analyst. So I’m with you, I’m playing with these things, but good stuff. What else do you want to cover on this? Or are we done with spreadsheets? And we can ramp up on high-level tips and tricks. I know you also want to give us your insights on what to look at under the hood of each prospective dealer.
Logan Moore: Yeah, I think that covers it as far as scratchy. Obviously, if we were raising money on a deal and investors have questions, I’d be happy to walk through it in detail with them. But things to look for when looking at a deal, most of them probably, you know, investors know if they don’t what’s the experience of the syndicator. Some people will look at just, what’s the absolute number of deals. I can tell you from my experience, looking at, you know, hundreds, if not thousands of deals in a former career that in my opinion, it’s not just the number of deals, but how many full cycle deals have they done and how long have they been doing it. I used to look at deals where one operator had done 10 senior living facilities, for example, but then when you looked at it, it was well, they’ve really only done that for two years. Whereas another operator maybe only had, maybe had three or four that they’d done, but they done it for five-plus years and they’d taken a couple of deals full cycle and they made a profit on it. So I think looking at the absolute number of deals can be good. But I think it’s as important to understand, not just the number of deals they have, but how long they’ve been doing it and how well they’ve done those deals in the past. I think stress testing, any spreadsheet we look at, or any scenario you look at is important. Understand what happens if a deal doesn’t work the way you expect it to, I used to work with the guy who would say, you don’t know what we’re talking about, looking at deals, you’d have a third party consultant put together what they call the feasibility study. And that basically said, this project is viable because the proforma numbers are going to do X, Y, and Z. But the joke was always, I’ve never seen an in feasibility study. Meaning nobody shows you that study, they got this at actually this deal is not going to work. They go back and find three other consultants to give them the answer they want. So stress test your deal and see what it looks like.
Ferd Niemann: I got a similar story on that I heard recently, nobody ever showed up bankruptcy in a Microsoft Excel spreadsheet. No one ever performance that their business is going to go or that their property is going to tank. It reminds me of that, you know, joke of there’s been more fiction written in Excel than in word.
Logan Moore: Yep, absolutely. So, you know, when we are sitting here our spreadsheet, which I think is superior, but you know, you can also test it and see what happens if things don’t work the way that they want it to. Something that’s probably talked about on here a lot, find out does your operator, your syndicator have all their permits in place, and do they have all their necessary approvals contracts in place wherever it may be. I used to look at deals where, you know, everything appeared to be good to go. And then you found out, well, they don’t actually have a real construction contract. They got an estimate. They haven’t signed on the dotted line. And so you fund the deal and then you know, you find out three months later, we never broke ground. Cause we didn’t actually have a real, you know, construction contract. So make sure your permits and contracts are actually in place or at least understand where they are on the process.
Ferd Niemann: In our business that the common, I guess the more accurate version or in mobile home parks would be, you know, have an operating permit. Do you have a zoning letter? Do you have some phase one? Do you have clean titles? Do you have clean survey? So it’s not as much construction permits on most cases, as much as you know, you don’t want to oops, the day after you buy it, they tell you that, you know, the city taken the property to put it on.
Logan Moore: All the things I know you talk about regularly to your listeners. And the other thing, the last thing I’ll say I can go on for a while probably, but I think transparency especially when the syndicator is raising money, are they willing to answer any questions you have? Are they willing to, you know, like we would do walk you through our spreadsheet, help you understand what’s going on, because if they’re not transparent with you, when they’re trying to get your money, imagine how much they’re not going to tell you when they’ve got your money and that deal is not working the way it’s supposed to. You’re not going to get a word out. And so it’s one of those intangible things. I think you really need to make sure your syndicators along to be open and honest about any questions or concerns you would have up front.
Ferd Niemann: You know that one’s a sore spot for me. Cause I sold that one part few years ago and I had to keep some money in the deal for this fund, this private equity fund as a condition of the sale because they supposedly, there seem to be as a lender required it and that group, I’ve been in that deal for four years. And I got, we own five parks in there. They have produced zero financial reports. They filed tax returns late. They violate the loan covenants of the bank. They violate sec governance as it pertains to syndication. They mismanaged the properties, everything is wrong, transparency, they can’t even spell MHP and they’re out there raising money. They were averaged 50 million in the first month. He left wall street with just 50 million in his first month. And he was good at that clearly. But never good at operations. And I’m watching mine, it’s a relatively modest investment. They had to keep him a deal. I’m watching him just Washington flounder because these guys, but then also I get zero transparency, zero access information. So very frustrating on my end. So yeah, definitely a sore spot.
Logan Moore: Yeah, absolutely. So yeah, I mean, I think it’s probably given a lot more probably some of the top ones are here.
Ferd Niemann: Yeah, man. Well, I appreciate the tips and tricks. Appreciate you walking through that spreadsheet. I know where to find you, I can see you outside of my office, where can people find you if they want to reach out to you?
Logan Moore: So I’m on LinkedIn just prefer Logan Moore. I don’t think there’s too many of us, but it’s the one that it’s at Third IV properties also search for mobile home park operator, owner, investor, etc. Or my email is Logan@thirdivproperties.com.
Ferd Niemann: All right. Thanks logan. I appreciate it.
Logan Moore: Absolutely. Thanks Ferd.
