The Opportunity Zone Expo Podcast

Sam Hales - Mobile Home Communities: Un-Sexy and Very Profitable

July 31, 2019 Sam Hales Season 2 Episode 12
The Opportunity Zone Expo Podcast
Sam Hales - Mobile Home Communities: Un-Sexy and Very Profitable
Chapters
The Opportunity Zone Expo Podcast
Sam Hales - Mobile Home Communities: Un-Sexy and Very Profitable
Jul 31, 2019 Season 2 Episode 12
Sam Hales

He recognized the opportunities in mobile home parks long before Opportunity Zones came into being. With a business model that provides affordable housing for those who need it most, and has the added benefit of being a perfect fit for the OZ program, Sam Hales' Saratoga Group is positioned to do well by doing good. He's my guest on this episode of The OZExpo Podcast.

Host: Jack Heald
Guest: Sam Hales

Show Notes Transcript

He recognized the opportunities in mobile home parks long before Opportunity Zones came into being. With a business model that provides affordable housing for those who need it most, and has the added benefit of being a perfect fit for the OZ program, Sam Hales' Saratoga Group is positioned to do well by doing good. He's my guest on this episode of The OZExpo Podcast.

Host: Jack Heald
Guest: Sam Hales

Sam Hale:

I know that we've made a difference in some of the communities we've been invested in so far. And, that's just, you know, at the end of the day, that's a really good feeling and obviously when it lines up with economics working out, but that's even better. So that's really an exciting part of it you want me.

Announcer:

Welcome to the OZExpo Podcast where we talk with the people who really know the Opportunity Zone market from investors, fund managers and developers to tax experts, politicians and attorneys. The most influential voices in the Opportunity Zone industry are here on the OZExpo Podcast.

Jack Heald:

Welcome back everyone to the OZExpo Podcast. I'm your host Jack Heald and I am joined today by Sam Hales, who is the CEO of Saratoga group out of Roseville, California. Sam, welcome to the OZExpo Podcast.

Sam:

Hi Jack, it's a pleasure to be here. Thanks so much.

Jack:

We were just talking about the, the fact that you sound so good. Normally my podcast guests don't typically sound good. Their sound quality is bad.

Sam:

Fair enough. Well, I'm gonna make sure my wife listens to this so that she knows how good I sound. How's that?

Jack:

Okay, that's awesome. I want to see if we can pick up some extra sponsors for this show. So tell us what the brand of the headset that you're using.

Sam:

Boy, I'd have to look.

Jack:

Ah,

Sam:

yeah, yeah, yeah. We'll have to put that in the notes, Jack. I'm not really sure.

Jack:

Excellent. Put that in the show notes. Okay. So Saratoga Group. Of course this show is all about the Opportunity Zone. So tell us what, where Saratoga group fits in the opportunities on ecosystem.

Sam:

Yeah. Perfect. If you don't mind Jack, I'll just maybe give a little brief history of Saratoga group. We started about 10 years ago, initially launched with, we, we raised money from China, focused on single family home investment. And actually, the genesis of the name Saratoga Group comes from the battle of Saratoga, which was the turning point in the revolutionary war. And we felt that's what we were trying to do. We were, you know, helping people get back in home ownership that lost home through bankruptcy or foreclosure. A lot of the issues that happened during the meltdown there. And so that's kind of where Saratoga group started. We've done a number of things in the real estate space. So we started with single family homes. We've done the infill development, we've done quite a bit of land entitlement, dabbled in a little bit of office in a couple other things. Started doing mobile home communities about three years ago. And, and I guess we'll get to this in the rest of the podcast, but really found when we heard about the Opportunity Zones that mobile home community investment in Opportunity Zones, there was a lot of corollary there that really made sense from an investment perspective. And so that, that was kind of what peaked our interest there. And we, we've actually already invested into some OZones and continued to look for more opportunities.

Jack:

Okay. So, before we get into what's happening right now with, with Saratoga group and the mobile home investment stuff, which, which is fascinating. I haven't run into anybody doing that. Let's back up. So 2008, 2009, the world is melting down and I don't remember the numbers. Millions of Americans lost their homes. And that's where you got started.

Sam:

That's where we got to start. In fact, I was in business school during the meltdown. And the fun thing about business school is, I mean a learn a lot in the classes, but the best part is on Friday nights and whatever is you're hanging out with your classmates and just kind of talking shop and bouncing ideas. It's just an exciting, exciting time. And that was really, you know, some, a lot of the discussion was kind of a core group of us that was interested in real estate and we talked about what was happening and recognize that there was opportunity here. We didn't know what was going to happen with home prices. Obviously they've escalated quite a bit. But what we recognize is that, hey, if you bought a home now and at the end it's in Oakland and it costs you $200,000 and you can get $1,800 a month in rent, forget everything else. Just the yield itself. It made sense as an investment.

Jack:

Yeah. He wanted to say he was a wall street trader back in the twenties. You've advocated by when there's blood in the streets I think is what he said. That's a lot of a lot of courage to do. That takes tremendous fortitude to be able to pull that off. Okay. So you get into investing in real estate, start with money from China and I guess now you're also picking up domestic investors as well.

Sam:

Yeah. That, that's correct. So, so actually mostly, the fundraising we've done over the last few years is lessons institutional and more a high net worth family office type of fundraising.

Jack:

Okay. So let's explore this whole mobile home communities thing. When I was, and when we were talking earlier about getting you on the show and you said you do mobile home investing. I gotta tell you that one. I never saw that one coming. So let's dive deep mobile home communities. It makes sense that many of them would be in an Opportunity Zone, but why is investing in a mobile home community yet a good fit?

Sam:

Yeah. Maybe where I'll start is just giving the background of why SL mobile home park investment is a good idea in general. And then one of them kind of talk about how it fits into the ozones. So we started looking into this three and a half years ago as we recognize that, you know, a lot of commercial real estate become somewhat frothy and expensive and recognize that it seemed the one area that there would continue to be growing demand was for affordable housing. And so, you know, it's interesting to a mobile home park investment. There's actually two publicly traded reads that specialize just in mobile home communities. It's equity lifestyle. ELS is our ticker at the Sam Zell Company. The other one is sun communities. And I had heard kind of this rumor that the two companies since they've been listed on the exchanges, it's been about 20 years on the public exchanges that they've reported, same store NOI growth, a positive same store NOI growth every single quarter for the last 20 years.

Sam:

You think about what's happened, I mean, you know, the great recession and the dot com Boston and everything else. And I was able to track down those numbers and confirm that that's actually true. So again, what I take away from that is what I like when things go the other way. When we cycled down affordable housing in, in this case, specifically mobile home communities seem to do very well in a down cycle. But then the second part of your question is, well, you know, how does that fit with Opportunity Zones?

Sam:

I think my, my first response to that is, is just the political intent, right. When this law was passed, the idea was to help people in these communities. The ones that live there, right. That reside there now. And what's nice about the mobile home parks is that's what we're doing, right. I mean, so we picked, mobile home communities that are in Opportunity Zones. Obviously, you know, people are there, but a lot of times, the communities have a lot of deferred maintenance that, you know, maybe some of the plumbing doesn't work very well. Really old homes are not well kept in terms of the park itself. And so we get to go in and really, you know, invest into that community, redo the roads, fix all the sewer lines, put new electrical pedestals. Bring in some new homes and all these things. And at the end of the day, people that are there already are the same people that we're helping to stay there. And also a lot of times there's quite a bit of vacancy and you know, bringing new people in for a nice community and it's affordable. So, so really, I think when we look at it from the perspective of political intent. It really meets what was, you know, what the politicians were trying to accomplish.

Jack:

Clearly. Now, I'm thinking about, you know, I live here in Phoenix and so we've got a lot of snowbirds who come here during the winter and they range the Econ, in terms of economic status. They range all the way from folks whose fourth or fifth home is up in carefree or Paradise Valley all the way down to folks who are pulling up a trailer behind them and parking it in a really, really temporary mobile home park. However, there is this one class of snowbirds, which is retirees who have either a first or a second home in it's technically a retirement community, but it's also, but the structures are mobile homes and those, to me, those seem incredibly stable sources of revenue. My mom actually lives in one of those communities. It's extremely well, I can imagine, owning one of those who'd be, I can imagine it would be very nice to...

Sam:

A dream, right? Yeah, yeah, absolutely.

Jack:

Yeah. But I'm guessing that there's more to it. Then that talk about, you mentioned there might be additional tax advantages with mobile home parks, that are inside operatings qualified Opportunity Zones.

Sam:

Yeah. You know, it's interesting. So, so part of the 2017 tax cut and jobs act, in addition to introducing Opportunity Zones, was that it introduced an accelerated depreciation. Yeah. And what this means is that for any, any real estate, and the portion of the real estate that has a 15 year or less depreciation schedule, you can actually write off the entire depreciation in the first year. And if you think about a mobile home park, you've got asphalt roads, you've got sewer lines, you've got fences, you've got electrical, pedestals and lines. Basically everything in a mobile home community is on a 15 year or less depreciation schedule. So over the last three years as we've been doing mobile home communities, and our investors, you know, let's say they put in $100,000, they get a k one for the first year that shows, hey, you know, you invested $100,000 and you lost on paper $100,000. So they get 100% right off of their investment. So basically you take, you take, exactly right. So you take that, yeah.

Jack:

Okay.

Sam:

Yes. I'm sorry, go ahead.

Jack:

No, go ahead.

Sam:

Yeah, I was just going to say that. So the numbers there, so you know, if we talk about $100,000, so if you take the the right off, let's say, you know, if you're in the harshest highest, federal marginal tax bracket plus the capital gains that you would pay. I mean basically we kind of did the math but you're really looking at maybe 35 cents on the dollar basis for an investment into a mobile home community that's in an Opportunity Zone.

Jack:

So, It's not necessarily a mobile home community tax advantage. It's just that the nature of the mobile home community falls on into this, this 15 year depreciation schedule.

Sam:

That's correct. It wasn't intended to just be for mobile homes. So the same thing if you, you know, if it's an apartment complex and it's underground sewer lines in there on a less than 15 year schedule. I mean, don't you know, all this stuff has a schedule from the IRS. Then the same thing applies to the apartments. It's just for a mobile home community. Everything is on a 15 year or less schedule, you know, unless you have like a clubhouse or something like that, then that would not be the case. But for us, I mean we're, we're buying workforce housing communities a lot of times we don't have a lot of amenities so it really ends up, basically 100% of the park is on that schedule.

Jack:

Okay. I'm going to push back a little bit because there, and I think anybody who's, who's investing is going to have the same thought. Um, we've got this substantial improvement test, which anybody who's paid any attention to this legislation over the last year understands. You got gotta, you've got it. Whatever. You've got to put dollar for dollar improvement into your investments but these are mobile home parks. The question that springs to mind is how do you avoid over improving?

Sam:

Right. No, that, that's a very fair question. And you certainly don't want to over improve, right? I mean, if you're adding amenities simply to meet the tax requirements. It's not something that going to bring any value to the community. Obviously, not an economically a good idea. But anyway, there's two things with regards to mobile home communities that help us meet that substantial improvement. I mentioned first of all that, you know, most of these communities that were buying them, there is a lot of deferred maintenance. So by the time you repave roads, you put a new sewer lines, water lines, you know, whatever else is required, lighting, signage. I mean you end up putting, you know, quite a bit of of investment capital into it but part of it what you got to think about is this is substantial improvement only applies to the improvements. And so the land is taken out of that, so what we do is we'll have a third party appraiser appraise the underlying land and that gets netted out of the approved that net portion.

Jack:

I bet the land in a mobile home park is the bulk of the

Sam:

Yeah. It's a significant portion. I mean so what we're finding so far with the appraisals that are coming back and obviously we want something that's defensible, so that's why we get that third party appraisal. But it's coming in at 50% and sometimes more of the acquisition price.

Jack:

Yeah. Wow.

Sam:

Right. So, so right there. Yeah. You're taking quite a bit off the table.

Jack:

My Mom, this park that my mom lives in, I mean it's, it is beautiful. It is gorgeous. It's just exceptionally well taken care of. Um, she actually owns the box she lives in, but she doesn't own the dirt. So yeah, obviously, if he came in and bought something like that, the, the land easily be 50% of the investment. Wow!

Sam:

Right. And actually, what you're referring to is actually kind of the second part of whatever we want to call the secret sauce. But, you know, let it in most of the communities that we're buying like that, what we just talked about and the improvements that we're going to need to do to really get it up to standard and make it a nice place to live. We're going to already meet that, that substantial improvement test. Sometimes we won't though. And the other thing that happens is, we work with the very reputable accounting firm that has kind of guided us on this and has a lot of experience. I've been doing mobile home communities for something like 20 years and worked with a lot of different practitioners.

Sam:

It's there professional opinion and we've checked with others as well that if you bring in brand new mobile homes, set them up and then lease them out, that they will be considered real property and that counts towards your substantial improvement. And that right there, it costs us around $40,000 in most markets to buy a brand new mobile single wide mobile home. Get it set up, skirting on porch, stairs, all that sort of stuff. And you can see you don't have to have too many of those brand new homes to significantly changing the amount of capital you're putting into the park.

Jack:

Huh. Wow. Okay. You know, it's funny that this is the least sexy sounding thing I've run into.

Sam:

Of course. That's why I like it.

Jack:

Oh my gosh. Okay. So do you follow a typical standard when you're doing your underwriting on these things or is this standard for your model for investing in mobile home parks a little bit different than folks would normally be aware of?

Sam:

Yeah, that's a good question. You know, I think this relates a little bit to what we were talking about with the political intent. Something that gets me excited as well is if you look at most of the Qualified Opportunity funds that are out there, they're focused on markets, well, like Phoenix where you are, or you know, downtown Portland or LA or Oakland, you know, New York City. And I would guess that at the end of the day, a vast majority of the Josie money that gets invested goes into those urban market, right? I mean that's where the job creations happening for them. Yeah. And, and I, you know, I just read an article, the New York Times kind of talking about this, which is that divide that's continuing to occur between the urban and the rural areas in the United States and this divide, it's somewhat troubling.

Jack:

Yeah.

Sam:

and what would I like about what we're able to do is, first of all, there aren't any mobile home parks in downtown LA, right? I mean, I say that maybe a little tongue in cheek. There's a couple, right? We're not buying them. They're there. They're going to get, I mean, if somebody buys them in there, they're getting traded because of the land value and they're going to get redeveloped and those residents are going to get kicked out. So instead, we're looking at markets and we criteria like population size and job growth and all those things are important to us, but there they're not these real urban areas right there. I mean, in our newest fund, we've got parks were buying outside of Austin, Texas, you know, kind of on the outskirts and Daytona Beach, Florida and Greenville, North Carolina, and markets like that where there's, there's good things happening. There is economy. But it's, it's not, it's not kind of these major metros that I think they're going to end up getting the book of the investment capital for the QOZs.

Jack:

Yeah. Wow. Okay.I'm sold. I'm in here. I think you've made your case. So let's take the conversation in a slightly different direction. You were in a business school? Was it, Wharton that you went to?

Sam:

Yup. Yup. Well, I went to Wharton Business School.

Jack:

Okay. And I, you know, I was looking at your bio and there was a long period there between the time you got your undergraduate and the time you went to business school. So I'm guessing you were probably in your thirties. Unless you went to college at eight. I didn't ask.

Sam:

That's a fair assumption. I did not go to college when I was eight. I was no Doogie Howser. Yeah. Um, yeah. That's right. You know, in fact, I'd always kind of had this in the back of my mind that I wanted to do business school, but life started to happen then the kids and the family. And I was like, well, that's okay if it doesn't happen. But actually I was working for a tech company in the bay area and actually my boss came to me one day and said, hey, we'd like you to get an MBA and we'll pay for it. And that it was hard to say no. So, I was fortunate enough to go to business school and really changed the trajectory of, like I said, I was in the tech industry and enjoyed that.

Sam:

But always had a desire to kind of do more with real estate. I'd done a number of things on the side and was excited to try it, you know, make that a full time career. It's been a lot of fun.

Jack:

Okay. Now I'm going to ask you the couple of things that probably don't have anything to do with the Opportunity Zone, but I'm interested in these kinds of things. You got a chemical engineering degree?

Sam:

Yes.

Jack:

Oh, okay. So I will confess that I'm a little bit of a fan boy of just that whole mindset. I discovered late in life that chemistry is absolutely fascinating. So, but if you graduate with a chemical engineering degree, what kind of work were you doing? I see that you went to national instruments, but were you actually working in chemistry?What were you doing?

Sam:

Well, okay. So here's what they don't tell you in school, Jack. If you're going to get a chemical engineering degree, you kind of have three choices of a career. I'm in general, right. So you're either going to work in an actual chemical factory, you know, like Dow chemical and the different chemicals that are making. A lot of people end up in oil industry, right. At a refinery and that sort of thing. Or you're probably going to end up in a semiconductor lab wearing a bunny suit every day.

Jack:

Right.

Sam:

None of them. Right. So I'm getting into my senior year and all of a sudden it's like this revelation to me. Ah, these are my job options. I was like, oh my gosh. Like I enjoyed my classes and I found that fascinating, but I didn't want to live in these places.

Sam:

I'd have to wait and I didn't want to do with what they were asking me to do. So basically, I went into the kind of business development. It really went kind of on the electrical engineering side. I mean, the nice thing about engineering is when you've learn to kind of think critically, like you need to do an engineering degree. It's transportable and you can take that to kind of different disciplines. I ended up in the photonix industry, and you know, very interesting, very fascinating. But like I said, I always had this desire to do real estate.

Jack:

Okay. Well, you know, I know that if you, especially chemical engineering, um, if you've got the kind of mind that can do that, then that's an analytic... that's tends to be an analytical mind to a very orderly mind. That's also very focused on detail, attention to detail. I've talked to a lot of guys, an awful lot of developers and fund managers who strangely enough, have an engineering background or a science background in some way, shape or form. And I think it makes a different, yeah.

Sam:

Yeah, I think so. Yeah. Thanks, Jack.

Jack:

Well, I, yeah, and, and chemistry is just bloody interesting anyway. Another thing that literally has nothing to do with anything, anybody, but you and I are interested in, you were in a men's chorus. Do you still sing?

Sam:

Yeah. You know, I do, I was with the good, this was at Brigham Young University where I did my undergrad. Actually if you've heard of the Mormon Tabernacle Choir, my choral director, my choral director is now, now directs the Mormon Tabernacle Choir. And I'm an amazing musician and it was a pleasure to have you part of that group, but yes, music's very important to me and my wife as well. And so we, with our kids, we've introduced a lot of music and they play instruments and we sing together. It's fun.

Jack:

Yeah, that is gorgeous. I'm actually in an adult chorus as well.

Sam:

Oh, fun.

Jack:

I was a music major in school. So, I allegedly am educated, but that, you know, I ended up in the tech industry.

Sam:

Yes.

Jack:

All right, well this has been frankly quite enlightening and I'm going to be driving around the valley here, seeing these mobile home parks, all, you know, all kinds of different socioeconomic situations in these mobile home parks. I'm going to be looking at them with a completely different set of eyes. I'm kind of gobsmacked to tell you the truth. This is bloody like,

Sam:

It sounds like you, you might've caught the bug. I definitely caught it three years ago and it's a fascinating space.

Jack:

Hey, you know what? I want to circle back around real quick and ask about this. So you actually got into mobile home parks prior to the Opportunity Zone Program kicking in. I'm guessing that you had investments already at that point. Did you wake up one morning and find out that you had investments in the Opportunity Zone?

Sam:

Yeah. Right. That was an interesting, kind of self-discovery. They'd say, Oh, okay, this program. Yeah, maybe we do. Ah, it turned out in terms of mobile home communities, we had one, we bought one in downtown Atlanta. We actually bought it after, you know, after the cutoff. But we didn't know anything about OZones time and so we didn't raise money based on that. You know, our investors haven't seen any advantages because of that. Didn't put capital gains money and, and so forth. Um, so, so yeah, one out of the first 12 communities that we bought wasn't an Opportunity Zone and then we've since purchased two more, that are in Opportunity Zones, you know, specifically raised money around that with capital gains money. And then, you know, looking to buy before the end of the year, probably by another, we're looking at maybe 10 to 12, we've got five in escrow, and, looking to buy another 10 to 12 before the end of the year.

Jack:

These are all Opportunity Zone Investments?

Sam:

All in Opportunity Zones. That's correct.

Jack:

Okay. I'm going to tell you that is quite the record in terms of proportion. There's a whole lot of money chasing fewer deals, at least from where I sit. That's what it looks like. So the fact that you're actually closing deals, ah, says something.

Sam:

Yeah, no. And that's an important, if you don't mind, I mean that's part of, you could say my pitch or are, is as far as what I'm seeing in the market, you know, we kind of talked about this where there's a focus on a lot of these urban areas. And they're kind of getting the preponderance of the money and probably the investment at the end of the day. But what happens is, you know, once it was recognized, hey, this part of downtown Portland is an Opportunity Zone. You think about most of those sellers either have bare land or maybe you know, the building that's either going to get totally redeveloped or torn down and built into something else. Those are relatively sophisticated sellers and they are going to understand the Opportunity Zones. And so what happens is, you know, prices escalated. I mean, it was like a step function. They escalated pretty dramatically once the legislation went through and ended there and there was awareness of it. On the other hand, mobile home communities, something like 90% of mobile home communities are still owned by what I refer to as like a mom and pop operator. You know, basically non-institutional, somebody that either maybe built the community or maybe their parents built the community and they're running it now. And so for them, they don't even know they're in an Opportunity Zone and, you know, sometimes the broker does and if there's a broker involved and, and even then they're not really sure how people capitalize on it. So, so what's nice, at least what we've found so far is that because there's not a general awareness of mobile home parks sellers in terms of the Opportunity Zones, we haven't seen the same price increase.

Sam:

Which is important, right? I mean, we're looking at yield, we're looking at potential yield and all that sort of stuff and you know, all of a sudden price simply escalates because they're in OZones. That can have a dramatic effect on the income and yield that we're buying and can inhibit our ability to start, you know, paying out dividends to our investors right away. So anyway, that's really kind of an advantage on the purchasing side for, for buying mobile home parks, is that, no, they're in all these desperate markets, kind of all over the US. We're a bit geographically agnostic. We do like the Southeast United States, but at the end of the day, if it's an Opportunity Zone and it's a place again where there's job creation and there's sufficient household income and median home prices, those sorts of things, then we're interested, right. And we're in six different states right now and with these new acquisitions, we'll be in at least two or three more.

Jack:

Okay. Well,we've got to now get to contact information. If folks are interested in the Saratoga Model and want to talk to you, find out more. How do they get a hold of you? What's the best way to do that?

Sam:

I'd say the best way to just simply be my email address, which is sam@saratoga, which is S-A-R-A-T-O-G-A and then group and it's sam@saratagogroup.net.

Jack:

Alright, very good. And I will remind our listeners that that information is also available on our podcast website. In fact, all the contact information for Sam will be available there.

Jack:

Well, Sam, I appreciate the time. I particularly appreciate you coming on and talking about this. This almost sounds like a peek under the covers at some proprietary information that I'm not sure I'd ever share with anybody else, but hey, thanks for doing it. That is great. Any last words for us before I let you go?

Sam:

Well, Jack. Yeah, I really appreciate you having me on. I think a,

Sam:

I just maybe reiterate, what we talked about at the beginning, which is, you know, and I've listened to a lot of the podcasts that you've had with others and I fear that there's, there's some danger in potentially, you know, this legislation sunsetting and there not being a lot of political support for it. If we don't have some good examples of money going into areas and number one, helping the people that are there and number two, helping in areas that otherwise aren't part of the focus. You know they're not these downtown areas. And so that's something that I get excited about. I know that we've made a difference in some of the communities we've been invested in so far. And at the end of the day, that's a really good feeling. And obviously when it lines up with economics working out that's even better. That's really an exciting part of it for me.

Jack:

Well said, Sam, I think we all agree. Well, thank you for stopping by listeners. I appreciate you taking the time out of your day to enjoy these conversations. There are always a lot of fun for me. On behalf of Sam Hales of Saratoga Group, I'm Jack Heald for the OZExpo Podcast. Thanks for listening. Be sure to subscribe so you're always updated when new new podcasts are released, and we will talk to you next time.