Case Study: Tenant Revolt
One of the many benefits of mobile home parks is low tenant churn. Unlike apartment turnover of 50% per year, MHP turnover tends to be in the low / mid single digits. We’ve had a ton of tenants in our parks for well over 20+ years.
With this stability comes an interesting downside: the knee jerk reaction to change. Tenants who are used to a certain way of living are harder to mold as new ownership applies new rules.
This happened (in the extreme sense) at one of our early acquisitions.
Park Profile:
Smaller park (<75 pads)
Public utilities
~85% occupancy
Small town, but 40 mins from a major metro
Purchased at an 8% cap with 30% below market rents and no utility reimbursements.
We acquired the park at compelling basis so (to hit our goals) we simply had pass through utilities in year one followed by a few small rent increases in years 2-4.
Value-add plans look so easy on a spreadsheet.
Unfortunately, the previous owners were quintessential mom & pop owners who had apparently told their tenants they ‘would never pay for utilities'. Was this in the leases? Nope. Did the tenants care? Nope.
As standard due diligence, we spoke with a number of tenants before closing but this issue never surfaced. We’re not even sure how we could have uncovered it - perhaps we could have interviewed a lot more tenants. Presumably someone would have brought up this concern. Of course, interviewing ever mobile home tenant prior to purchase isn’t practical.
So we went about our merry way thinking all was ok. After closing, we sub-metered the park and gave the tenants notice that in lieu of a lot rent increase, they would be responsible for their water & sewer charges (like every other park in the market).
The response to this notice was a complete tenant revolt. Not a single tenant paid the new charges. We’ve never seen a group of people organize so quickly. The tenants felt cheated by the former owner and, come hell or high water, were putting their foot down.
We were shocked as this was NOT an aggressive increase. No matter what the increase is, you typically see a few holdouts the first couple months, but an entire park? This was new.
Some tenants claimed they didn’t have to pay water charges because it wasn’t in their lease (most were on the original leases & were now month to month).
Technically, our notices and new leases superseded their leases. However, seeing as they were refusing to sign the new leases, they felt empowered to push back.
We were playing a game of chicken and had no idea who would blink first.
Our first tactic was to send scary notices from our attorney. Surely this would scare some tenants into breaking ranks and paying to avoid eviction. No dice. Didn’t feel great, but this was impressive tenant solidarity.
We tried formal pay or quit notices, even attempting eviction proceedings on a subset of tenants who had also falling behind on lot rent. No luck there either. The whole park knew those tenants were out of work and weren’t paying lot rent.
So what now? Evict the whole park? Could you imagine the PR fallout “Evil Private Equity Firm Evicts Entire Trailer Park”…news at 7pm.
That plus the logistics of acquiring all the old homes, or worse, having tenants (or perhaps a competing park owner) yank out the homes were real risks.
This doesn’t even include the moral dilemma starting an eviction process on dozen families over mere water charges, something we weren’t willing to do.
Would any of this happen if we drew a line in the sand? Perhaps not, but it wasn’t a stretch to see how this park could have spiraled out of control.
We ended up evicting a couple very delinquent tenants, hoping it would send a message to the rest of the tenants. This helped a little, as some tenants caved - but the bulk remained defiant.
Conclusion
After months and months of evictions and only incremental improvements, we pressed the easy button. We just raised the lot rent higher than we had planned to account for our sunk cost of the now useless sub meters.
This was ridiculous but it worked. This is partly why some older park owners don’t mind well water parks, they’d rather just let the tenants go hog wild with the water. We disagree for a number of reasons, including the excess strain on the pipes.
What we learned:
We should have quickly pulled the manager / offered to move him to a different park. As a long-term resident himself he was stuck between his new boss & long time neighbors - all telling him how wrong the other side was. Either way it wasn’t working. This is why some operators always replace the manager. Sometimes a new manager is all you need to “reset” a park.
Looking back, it would’ve been significantly easier to simply raise the lot rent far earlier in this process once the tenants revolted. I understand it’s a bit sheepish to ‘acquiesce the revolutionaries’ but we ultimately would’ve made more money, which is kinda the point.
When asset management spent more time onsite, chatting with tenants & putting a face to the corporate name, we started seeing a more cooperation. Some tenants just want to be heard before they will comply. Don’t underestimate the power of a face to face chat & handshake in mobile home park investing.
We started being a bit more transparent with our post closing plans during tenant interviews (in due diligence). While not always a fun conversation, that seemed to reduce our post closing drama.
While not fun, this was an outlier situation that was eventually resolved. It certainly hasn’t discouraged us from sub-metering numerous parks (thankfully, with far more success) since.
Has an organized tenant revolt happened at any of your parks?
Reply to let us know what happened and what you did to resolve and we’ll share in a later issue.
Happy Trails,
MHP Weekly