Scott is back on the show for a special segment today. We’re going to be talking about a deal he has going on. He found an RV park in the middle of nowhere, bought it, and is now telling us his business plan for the park. If you ever buy an odd property, you know you have to get creative sometimes, let’s learn from Scott’s experience and apply it to our own businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Scott Lewis Real Estate Background:
- Co-founder and Chief Executive Officer of Spartan Investment Group, LLC (SIG)
- SIG has completed $6M in development projects, has $30M more underway, and raised over $10M in private equity.
- Based in Denver, CO
- Say hi to him at https://spartan-investors.com/
- Previous best ever advice: https://joefairless.com/podcast/jf965-why-he-sold-all-went-war-then-returned-to-develop-land-syndicate-big-deals/
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment called Situation Saturday. This is a fun one… You come across an RV park in the middle of nowhere, and there’s a lot of challenges involved with that… What do you do? How do you take it down? How do you execute the business plan?
Well, fortunately, we have a guest on the show today who has acquired an RV park in the middle of nowhere, and has implemented a business plan at that property, and we’re gonna talk about the challenges and the individual disciplines within the team members that are required in order to do this type of deal.
With us today, again, how are you doing, Scott Lewis?
Scott Lewis: Hey, Joe, and Best Ever listeners, and happy Saturday out there! Great to be back on the podcast. I’m doing outstanding, I just got back from a couple of days in Las Vegas, at a mastermind out there that was fantastic, and I’m happy to be on this show.
Joe Fairless: What mastermind did you go to?
Scott Lewis: It was a self-storage mastermind.
Joe Fairless: Okay. Who put it on?
Scott Lewis: Scott Meyers.
Joe Fairless: Cool. Good stuff. What was the takeaway that you got from it?
Scott Lewis: I don’t know that there was any one thing that I was taking away from it, other than as a company we’re doing all the right things to be able to acquire self-storages.
Joe Fairless: Well, it makes sense, and we will transition into the RV park… But first, I want to give a brief overview of Scott’s background — and you might recognize Scott from our previous interview, which was episode 965. It is titled “Why he sold all he had, went to war, then returned to develop land and syndicate big deals.”
A little bit about Scott – he’s the co-founder and chief executive officer of Spartan Investment Group. Spartan Investment Group has completed six million dollars in development projects and has 30 million more underway; has raised over 10 million in private equity. Those numbers might even be higher… I’m not sure what the latest is on those numbers. Also based in Denver, Colorado. With that being said, Scott, do you wanna give the Best Ever listeners just a brief refresher of your background, and then roll right into this RV park?
Scott Lewis: Thanks, Joe, and Best Ever listeners. I came to real estate by way of the military and the Federal Government. I’m still an active reservist, out here in Colorado, which is fantastic; I do a lot of good training that helps me be successful in my role as the CEO for Spartan Investment Group.
I started in real estate when I was in high school, building houses, and that’s kind of how I put myself through college as well, as a framer. I became a — I’ll say a “reluctant investor” in 2007 when I joined the military, because I bought a condo in 2005, and everybody’s aware of the history… I still own that condo. I won’t say it’s the bane of my existence, but it’s definitely a third leg that’s not all that helpful.
And then really just kind of got started in DC, bought a really crappy rowhouse, and flipped it, and that’s really what started our company, and we’ve just been growing ever since.
Joe Fairless: And one part of the growth was an RV park that you all came across. Tell us the story about that.
Scott Lewis: Yeah, it’s really an interesting story. It’s a story of — maybe we can call it an epic adventure, so we need some really cool instrumental music in the background right now…
Joe Fairless: You’re setting the expectations really high…
Scott Lewis: [laughs] It came kind of on a tangent to a two-property portfolio in self-storage that we were looking at taking down. Our primary mission right now is to purchase self-storages… However, that particular deal fell apart, and the agent was really impressed with our acquisitions process and how we handled that, and he was like “Hey, you guys gotta take a look at this… I’ve got a deal for you. It’s an RV park.” We were like, “Um, what?” He’s like, “It’s an RV park.” We’re like, “Okay, where?” “In Gardendale, Texas.” “Say again?” “You know, Gardendale…” “No, we don’t know it.”
Joe Fairless: Everyone knows Gardendale…
Scott Lewis: Yeah, so we’re like “Alright, can you orient us to where we need to look?” He’s like “Oh, it’s just North of Odessa, Texas.” So for Best Ever listeners that aren’t geographically sound with Texas, Odessa and Midland are approximately about five hours South-West of Dallas, maybe about 4,5-5 hours… Pretty much do West of Austin, kind of in West Texas.
For the listeners that aren’t familiar with what West Texas is, it’s oil… And it’s actually called the Permian Basin, and it’s the second-largest oil shale outside of Saudi Arabia; it’s one of the main reason why–
Joe Fairless: Friday Night Lights?
Scott Lewis: Absolutely. Midland and Odessa were featured in a movie Friday Night Lights. That’s where it was. And it’s everything that you would think it would be – there’s tumbleweeds, lots of cowboy boots… A Prius could fit in the cab of every single pick-up truck that’s driving around down there…
Joe Fairless: Yeah, I was gonna say, there are no Priuses in Gardendale, Midland or Odessa, Texas.
Scott Lewis: Yeah. For any listeners that are down there, if you rent a Prius, a Dodge Ram or a big Ford F-150 will eat your car.
Joe Fairless: Yeah, yeah… [laughs] If you’re driving a Prius in Odessa or Midland, your safety is in danger, I believe.
Scott Lewis: You are incredibly in danger if you’re driving a Prius down there, so do not do that. But just a quintessential, solid Texas town. Good community, good, solid, hardworking Americans that are working in the oil fields down there. So when the agent first proposed this, our director of acquisitions brought it to us, and we said no. No way in hell. And he started running the numbers on it, and they were offering it at a 16-cap, which for an RV park is a little high, but it’s not outrageous.
Our acquisitions director started running the numbers and that cap rate started creeping up. So by the time he was done running his analysis, it was right around a 20 or 21-cap. So that started to pique our attention. That’s when we really started to dig into “Well, what is this about?”, so that we understood the underlying reasons for the sale. It was a group of cousins and friends and brothers that had formed to buy and build the park, but they just weren’t really getting along, and it was just time for them to part ways and get rid of the park.
They didn’t have great management systems just because it was kind of a fractured relationship, and that’s not really what [unintelligible [00:09:07].16] We’ve actually become good friends with them, and they’re just good, solid, hardworking Americans. They do dirt work and paving. That’s what they specialize in, not operating real estate assets. So the park had kind of been run down a little bit, it wasn’t being operated very well, and it had just kind of become a thorn in the side for some of the partners, and they decided that they wanted to sell. So it was a really good situation.
So right out at the beginning, once our director of acquisitions convinced us to do this deal, we’re up against a cash offer, and the cash offer was offering to close really quick. This was in November of 2017. Well, we went back with an innovative strategy to say “Listen, you actually don’t wanna do that. You wanna take our offer, which will be private equity and debt, and we’ll close on January 5th, so that you can delay your taxes an extra 18 months, versus having to pay the taxes in 10 months if you close in 2017, since we’re so close to the end of 2017.” And they were all over that. So that’s a potential strategy, Best Ever listeners; if you are trying to close a deal in the end of the year, you may be able to add value by just waiting a couple of weeks, because it’ll allow the seller to basically have a tax-free loan for up to 20 months, or 18 months, whatever it is, if they extend their taxes. So it’s a tactic that you can use to potentially win deals with not being the highest price offer.
But anyway, so we went under contract with that, and it was heavily contingent on financing. It was going to be a very, very tough deal to finance, because it’s an RV park in Odessa, Texas. However, when we did the feasibility work, it had fantastic fundamentals from a feasibility standpoint, and the Permian Basin when compared to other oil producing areas, had the most resiliency through boom and bust cycles. They’ve been doing it for 80 years.
The people of the Permian are resilient, they’re tough, understand how to ride those waves out. So even in the worst times, when oil was in the $25/barrel area, unemployment was still 5% to 7%, versus up in North Dakota or Wyoming, where unemployment reached double digits.
So we decided to go forward, and we decided to go out and raise private equity and take down the park. The price of the park was 1.71. We had negotiated a $40,000 credit to fix some [unintelligible [00:11:37].21] stuff, so we were gonna raise about a million dollars to do some repairs and maintenance, and then we were gonna take down a loan for a million bucks. We called EVERYBODY. Everybody and their mother, and we couldn’t get it financed at all. The financials were a mess, the record-keeping wasn’t good… It was very, very hard for us in our due diligence to even understand what we were gonna be getting into, and it was even harder for banks to understand.
So at the last minute we found a hard money lender that agreed to lend us money, and we were able to raise the private equity. It’s a pretty good return; our investors are earning 26% cash-on-cash on that particular deal, and it’s supposed to be a four-year deal, so it’s about 100% return over four years… Pretty darn good return, and really good cashflows along the way, but it was the debt financing that was really tough,
Here’s where we really kind of shined as a team – our director of business intelligence had put together a phenomenal feasibility study. Just really good, really easy to follow, and our investors loved it. The debt lender loved it, as well. It was all juiced up, ready to rock, and then about a week or so before we were ready to close, they just up and decided not to fund us, at all.
Joe Fairless: Why?
Scott Lewis: That was really interesting. They told us that the financial part didn’t make sense; we weren’t strong enough as a buyer, and they didn’t like the fact that we didn’t live there. What was really annoying about this is they had everything, all of that information, for a month before they decided just to pull out at the last minute. So what we think is that those buyers failed on their side and they couldn’t get it done, and instead of acting with integrity, they blamed it on us.
I’m not gonna say their name, because I just don’t wanna deal with the legal ramifications of it, but when we have an opportunity to give a recommendation for these folks, it will not be positive. We do not believe they were good people, and they did not act with integrity at all.
Joe Fairless: Imagine coming across that in commercial real estate. Shocking.
Scott Lewis: I know… It was really irritating, because they could have told us no a month before. There was absolutely nothing new that they discovered.
Joe Fairless: So that was two weeks before the scheduled close?
Scott Lewis: About a week or so… A week and some change.
Joe Fairless: About a week before scheduled close. How much money and time did you have into this deal at that point?
Scott Lewis: We had gone hard on our earnest money, and we had pulled some studies, and this and that… So it was about 50k.
Joe Fairless: Okay. What was the earnest money?
Scott Lewis: 30k-35k, somewhere in there.
Joe Fairless: Okay. And then how much time would you estimate that you all had put towards it in total number of team hours?
Scott Lewis: Oh, in total number of team hours? Between trips, acquisitions, capital, finance… Maybe 100.
Joe Fairless: Wow. Alright, so you’ve put a lot of time and money into this deal, a week before closing financing falls through from the debt side. Equity side is still strong, right?
Scott Lewis: It is. Fully raised.
Joe Fairless: Okay… So now what do you do?
Scott Lewis: Well, as we mentioned at the beginning of the podcast, I’m a military guy, so I am fanatical about planning, and I’m fanatical about planning worst-case contingencies. In the military, in a planning process you have the most dangerous course of action and the most probable course of action. Now, from a military perspective, that’s based on what the enemy is gonna do. So when we look at our deals, we have a couple of different enemies, and one of them is always the lender. The lender in our deals is always one of our enemies… Another one being government bureaucrats, or something along those lines. Not a quintessential enemy, but someone that could act in such a way that it would damage our ability to execute our mission.
So for this particular one, our acquisitions director had gone through and analyzed the most dangerous course of action and the most probably course of action for the lender. The most dangerous course of action that we had built out two months earlier was that they would pull out a week before closing.
Joe Fairless: [laughs] Wow…
Scott Lewis: It was already in our system… And then with each one of these most dangerous and most probable courses of action, we have mitigation strategies to take care of it if those come to pass. So the plan was already written.
We basically just did nothing for 24 hours, reviewed our plan, and the plan that we had written was that banks were going to fail, so we would have no choice but to raise our own private debt instrument from our investors. That’s the only thing that we could do. We had never done it before, we didn’t know how to do it, but that was our plan.
96 hours later we had a promissory note written, a deed of trust written, and a million dollars raised at the same terms that the hard money lender was gonna give us, and we closed the deal.
Joe Fairless: Wow… What are those terms?
Scott Lewis: They were miserable. 12,5% interest-only loan.
Joe Fairless: What was it, 12,5%?
Scott Lewis: It was.
Joe Fairless: 12,5% interest-only loan… For how long?
Scott Lewis: It had a three-year payback, but if we went to years two and three, we got hit with an additional point each year, plus we had to give up equity positions to the debt guys if we went there. So it was basically 12 months to get our act together and get different financing on it.
Joe Fairless: Okay. How long ago did you purchase this property?
Scott Lewis: We closed March 1st.
Joe Fairless: Okay, so we’re still in the 12-month period; I’m very excited to hear how it’s going… But I don’t wanna fast-forward too much. Alright, you all found the person for the hard money… And how did you know this person?
Scott Lewis: It was actually 12 of our investors. They were our normal equity investors that just took a debt position on the property. We actually had maybe two or three investors that actually took a straddle position to where they had equity and debt. They did both.
Joe Fairless: And the original lender backs out… A little shock, but you have that in the worst-case scenario for your contingency plan… What did you do to communicate, or rather how did you communicate to your investors the fall-out and what you needed in order to close?
Scott Lewis: It’s a good question. For the equity side we really didn’t even have time to communicate. We sent out an e-mail basically saying “Hey, this is what’s happened. Here’s our course of action going forward. Anybody that’s in on the equity side, are they interested on the debt side?” So we had a couple of people raise their hand right away. We had very, very little time and we executed the strategy in four days or so. 96 hours I think it was when we had closed the million bucks on the debt side.
Then we just opened it up to our regular list. We put it out to our list of our personal investors that know us; we had personal relationships with all of them… And we just put it out to our list, and we had an overwhelming coming back to say “Yeah, we’re gonna do this with you guys.” Everybody loves 12,5% interest for the first lien position on an asset.
Joe Fairless: And why did you go with those terms, instead of a little bit less than that?
Scott Lewis: Good question. We had very, very little time, and we really didn’t have time to struggle with the raise. We wanted to make sure we could take this down, because it was a good deal, as I’ll get into here in a minute, for the operation side of the house here. It was a really good deal, and we wanted absolutely zero probability that we wouldn’t be able to execute.
So we kind of took it on the chin a little bit upfront, knowing that we were gonna be successful in our business plan and that we would be able to take it out later.
Joe Fairless: So you’re about 7-8 months into it… What’s been the result?
Scott Lewis: The operations have been fantastic. Our business plan was to do a number of different upgrades to the park, stemming from cap-ex, like improving electrical, to just vanity upgrades, by putting in a fence around it and just really making it a much better environment, to operational upgrades such as digital management software, better marketing, a call center, you can pay by credit card… All the barely standard improvements that you would do to a particular asset to take it from a class C to a class A asset, as much as an RV park can be a class A asset.
We plan to add additional spaces. The park started out with 102 spaces, and we are in the process of finishing up 14 more, so we’ll have 116. We actually installed a propane dispensing station on-site and got our managers trained, so people can stop by and buy propane at our facility now. We’ve just done a number of different upgrades, which has allowed us to raise rents… I’m not sure what the percentage is, but it’s over $100/month per spot, and that’s really driven the NOI up a lot, by a factor of probably double or triple.
Joe Fairless: You’ve still got the loan on it?
Scott Lewis: We’ve just executed the refinance on the loan…
Joe Fairless: Oh, bravo! What a relief…!
Scott Lewis: It was. And we were able to do it in a fantastic way, as well. We went out and we engaged some lenders, and we actually got a really good bank down in the Midland area. They were really awesome to work with, and they gave us a term sheet, and it was our plan all along to go down and see what we could get from financing. When we have an opportunity to pay people, we wanna pay our own people.
The bank gave us good terms. They were a great fit for us. The terms we cut was 5.5% interest, amortized over 15 years with personal guarantees. So the interest rate – fantastic; the personal guarantees we were really kind of ambivalent to. We didn’t really care. But the amortization over 15 years – it really didn’t do the greatest for the cashflow for the park.
Joe Fairless: Right.
Scott Lewis: So what we did is we went back to the investors that had done the loan with us in March, and we had told them all along that our primary objective here is to refinance this loan out as fast as we can, because we have a fiduciary responsibility to our equity investors to make the park produce as best as possible, and one of it is to get rid of a very high-interest loan.
So we went together and we put together a new terms sheet for them, and we offered 8% interest-only, because that’s what we felt was good for our investors, we liked the interest-only, we wanted to take care of our people, it reduced the burden of debt on the park by $3,800/month in debt service, and it allowed us to take care of our internal people.
100% of the investors said “Fine, modify the loan and we’re good to go.” So now we are at 8% interest-only, versus 12,5%, and we did that in about six months.
Joe Fairless: That’s beautiful. And it’s amortized over 30 years?
Scott Lewis: It’s just an interest-only loan–
Joe Fairless: Yeah, it’s interest-only so it doesn’t matter.
Scott Lewis: Yeah. It’s really been good that — you know, people are still getting a solid 8% return, and the equity investors are getting a lot more as well.
Joe Fairless: What’s the term of the loan?
Scott Lewis: It has a balloon at five years, with extension periods to six and seven years with one point. At seven years, if something has happened and we can’t refinance it, then in addition to continuing to receive that higher interest, the debt investors get equity positions that comes out of Spartan’s stake on the deal. So not only will they have a debt position, but they will also get equity positions as well, if we can’t refinance them out.
Joe Fairless: Wow. I love this story, this epic adventure, and I love this case study. How can the Best Ever listeners learn more about what you all are doing?
Scott Lewis: They can find us on Facebook, Spartan Investment Group on Facebook. You can go to our website at www.spartan-investors.com, or you can reach out to me at scott@spartan-investors.com.
Joe Fairless: Or they can meet you…
Scott Lewis: Oh, absolutely. We’re gonna be speaking at the Best Ever Conference. I believe it’s February 23rd and 24th, 2019. We’ll have a booth there. Best Ever listeners, and those of you that are new to the Best Ever podcast, I wanna say from a participant in every single Best Ever Conference that it is by far the best ever conference that I’ve ever been to, and I do not like conference at all. Joe puts on a fantastic conference.
So don’t worry about the cold in Denver… A little secret here – sometimes it’s 50 degrees, 60 degrees in February. Anybody that comes to that conference will have an absolutely amazing time, and I don’t care how long you’ve been in the business, you will learn a ton.
Joe Fairless: So meet Scott at the Best Ever Conference, February 22nd-23rd. You can go to besteverconference.com.
I enjoyed our conversation today and loved learning about this case study on the RV park. Then also I enjoyed your presentation last year at the conference… In your presentation last year you talked about the planning for how you look at worst-case scenarios, and lo and behold, here you go, now you put it in action.
Thanks for talking about this case study, thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.
Scott Lewis: Thank you, Joe. I appreciate it, as always, being on the show.
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