Recreational Vehicle (RV)
Recreational Vehicle Industry Association (RVIA)
Overview
Capital City Bank (CCB) provides financing for experienced developers and investors who are building, buying, renovating, or refinancing RV Park’s for their income producing potential. When evaluating a loan request, confirm that either the property is located within CCB’s footprint, or that the borrower has an existing relationship with CCB.
The 3 primary loan product’s CCB offers prospective borrowers when financing RV Park’s include:
- Acquisition loans - the Bank finances the purchase and permanent financing of an existing stabilized property.
- Construction Perm Loans - the Bank finances both the construction and the permanent financing of a new or “to be renovated” project.
- Refinancing loans - the Bank pays off the existing lender and finance the property for the current owner.
Loans on RV Parks are originated and managed by designated Commercial Real Estate Lenders or Community Presidents approved by Credit Administration and trained and experienced in Commercial Real Estate (CRE) project financing.
Evaluating Site Location: RV Park
Visibility, Frontage, Location and Proximity
Visibility, Frontage, Location and Proximity to major highways, tourist attractions (beaches, historical sites), national and state parks, and nearby cities (medical needs, eating establishments, shopping) are vital to the success of an RV Park.
A lender needs to assess the borrower’s competition by visiting the competing parks within a 5 mile radius to:
- Assess the amenity package,
- Observe the overall condition of the competing properties, and
- Review the rental rates online.
Legal Access
Verify legal access to the property through the following:
- Visual inspection
- Review of a survey
- Review of title work
Confirm that the property is easily accessible.
Availability of Public Utilities
The availability of public utilities to the site to include water, sewer, and electric. The RVIA reports that the number one amenity that campers seek in choosing an RV Park is the availability of full- service hookups which includes water, sewer, and electric.
Slope of the land site
A level site is more likely to provide for a higher density of pad sites and have fewer drainage issues.
Potential environmental constraints or contamination
Evaluate the site for potential environmental constraints or contamination.
- Lender’s on-site inspection should look for potential wetlands (for example: standing water, low areas, types of tree growth), dead vegetation, unidentifiable debris or abandoned equipment/ autos/tractors/fuel tank (operable or inoperable)/homes or buildings, endangered species (for example: gopher turtles), indications of past use related to farming, dry-cleaning, manufacturing, railroads and processing facilities, waste dump sites, defense or military operations, and mines.
- Review the Environmental Risk Management Policy for documentation requirements.
Phase I Site Assessment
Drive around to identify any off-site properties within a 1- mile radius that could have the potential to contaminate or could have already contaminated the site you are considering financing. It is quite common for a property to become contaminated through the migration of contaminants from offsite properties.
Obtaining a Phase I Site Assessment performed by a qualified engineer will identify any potential Recognizable Environmental Conditions (REC’s).
Flood Status
If the property is located within a designated special flood area, evaluate the impacts that a weather event could have on your property’s cash flow, borrower, and collateral. Identify ways the Bank can mitigate its credit risk and decision the loan accordingly.
RV Park owners who have park’s conveniently located to the beaches are at a higher risk of loss of income due to a weather event. A lender must confirm that flood insurance is available to the site. In addition, verify that the master insurance policy includes business interruption coverage.
Within the state of Florida, our business clients are challenged by the constant turnover in insurance providers and rising insurance costs. A lender needs to understand what impacts there maybe be to a property’s cash flow if CCB had to place forced placed insurance on the loan.
Permitting
Confirm that your site has the appropriate zoning and future land use designation for the intended use. In addition, review the local permitting reports to determine if any new RV Parks have been permitted to be built within your property’s defined market area which is typically a 3-5 mile radius.
Demographics
Review Costar or Wikipedia to determine if the population of the nearest city or town is growing and what is driving that growth. Moreover, a lender should fully understand what is bringing visitors to the area. When financing RV parks, the research related to demographic trends is most often focused on the makeup of the tenant base and ensuring the borrower’s amenity package caters to its base.
The following report was produced by the National Association of RV Parks in 2021 and is based on 2020 data. The graph highlights by geographic location who the primary occupant is of an RV Park.
As you would expect, in the South, those who are of the age of 55 and up are the primary RV tenant followed by Gen X and Millennials. Those who are 55 years or older typically enjoy more leisure time due to retirement and higher disposable income.
Economic Factors
Evaluate the current and forecasted market conditions that have the greatest impact on RV Park performance. The key economic factors that are especially important include:
- Gas prices (lower will support stronger industry performance)
- Growth in the population of those 55 or older
- Increases in per capital disposable income
- The change in the demographics related to RVer’s. According to RVIA, the industry is seeing continued growth in RV ownership by Gen X, Millennials, and Gen Z. The transition to working remotely has contributed to this growth.
- The number of sales and shipments of RV’s nationwide reported by RV dealers. Data provided by RVIA.
- Review online the financial performance trends of the top four RV manufacturer's:
- Thor Industries- NYSE-THOR
- Forest River Inc- Subsidiary of Berkshire Hathaway- BRK.A
- REV Group- NYSE-REVG
- Winnebago Industries -NYSE-WGO
Evaluating Existing or Proposed Improvements
Assess the Overall Design and Functional Utility (New construction or existing)
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Pad Sites
- CCB prefers financing RV parks constructed with concrete or gravel pad sites and paved roads. The pad sites should be of a size that caters to wide range and type of RV.
- According to RVIA, the median pad site length for privately owned RV Park’s is 60 ft. Most pad sites fall in a range from 20 ft. to 80 ft.
- The average of Amperage (Amp) for utility hookups per pad site is 30 - 50 amps.
- Review Project Costs- Evaluate the land costs, soft costs and cost of improvements and confirm that they fall within industry standards. The appraiser can confirm the projected costs fall into industry standards based on the construction quality and proposed improvements. The typical costs related to RV parks outside of the land acquisition cost are asphalt paving for the roads, RV pads, utility hookups, site amenities, FF&E, and signage.
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Evaluate the adequacy and quality of the amenities- Common amenities related to an RV Park are as follows:
- Bathhouse- includes showers and restrooms
- Laundry facility
- Wi-Fi/Cable
- Dog Park
- Dump Station
- Community Kitchen
- Camp store with supplies
- Other less common amenities- swimming pools, playgrounds, community center, restaurant, fitness center, pickle ball courts and game room
Confirm that the developer’s amenity package is consistent or superior to the property’s direct competitors.
- Interior improvements- Assess the overall quality, age and condition of the improvements and note any deferred maintenance items. Undercapitalized properties may neglect maintenance needs when cash flows are inadequate which may impact occupancy levels negatively.
- Exterior improvements- Note the type of construction and quality of the building improvements, age of roof system, the condition of the pad sites and parking areas, lighting, and signage.
- Confirm the park has a professional reservation system and review the quality of the website.
Underwriting the Property
General underwriting guidelines for financing RV Parks:
- DCR - 1.25x – 15 yr. amort. or less; 1.35x- 20-year amort.
- LTV - 80% for 15 yr. or less amort.; 70% for 20 yr. amort.
- Minimum vacancy:
- Stabilized - the greater of 10%, market or actual.
- Management Expense - the greater of 5%, market or actual
- Reserves for replacements - 3% of EGI
- Other income should be measurable and supported by the historical operating history or appraisal.
- Pricing is available on netinterest under Bank Rates
The lender should obtain and review the following documentation once it has been determined that the site is acceptable along with the existing or proposed improvements.
Management Agreement
If professionally managed, review the terms and conditions of the Management Agreement and integrate the related expenses in your cash flow projections.
Research the management company to gauge their reputation and read online reviews from tenants.
The quality of your management company and reservation system are paramount to running a successful RV business. The ability to effectively manage the seasonality in your business, rental rates, occupancy, and the employment of sound property maintenance practices are critical to sustaining cash flow performance during the life of the loan.
Feasibility Study
If new construction, obtain a feasibility study to:
- Assess the competition
- Validate your borrower’s forecast for costs, rents, occupancy, operating expenses, and net operating income and
- Determine the stabilization period
RVIA Economic Report Online
Review the RVIA economic report online to document in your credit memo the current trends and forecasts for the RV industry. Contact the direct competitors or visit their websites to confirm the borrower’s rental rates are in line with market.
When reviewing the historical operating statement for an RV Park, it is best for the lender to review the operating history monthly. Having access to the monthly data will enable a lender to determine the seasonality in the business and incorporate that information into the 12-month proforma or forecast when underwriting the property.
Below is an occupancy chart provided by IBIS World utilizing 2021 data. The graph will show the reader the seasonality within the RV industry based on geographic location. As you will see based on occupancy, the RV parks located in the South have the least seasonality due to the warmer climate year around.
Rental Agreement
A lender is encouraged to review a standard rental agreement and make sure that there are no conditions included that could negatively impact the marketability of the property.
Other Income
Other income related to an RV park usually will come from the sale of camp store supplies (propane, firewood, convenience food) and administrative fees. Most often, this operating income line item would not exceed 5% of gross revenues.
Operating Expense Ratio (OER)
- On an existing property, the borrower’s financial statements (annually and monthly) and tax returns for the last two years will give a lender the most insight into the operating expenses associated with a stabilized RV Park. For new construction, the bank will utilize industry standards, the feasibility study, and the appraisal in estimating the operating expenses.
- The OER is the total operating expense divided by EGI. In the Quick Reference Guide for Non-Owner-Occupied Properties, the reader will note that the typical operating expense ratio for a RV Park falls within a range from 40% to 48% of effective gross income. A newer property will likely scale toward the lower end of the range once stabilized and an older property, the higher end. The more amenities, the higher the ratio.
Cash Flow Analysis
The lender is required to perform a cash flow analysis prior to presenting a RV Park financing request to Preflight or Credit Administration for confirmation that the requested loan amount is supportable based on the Bank’s underwriting criteria. Templates for cash flow analysis are posted in the Quick Reference Guide. Below is a detailed example of a cash flow analysis on an RV Park that is being newly constructed.
Underwrite the General Contractor (GC)-New Construction
- Assess the site contractor’s experience in building similar property types of the same scale
- Obtain an active contractor’s license
- Determine if the contractor is bondable
- Obtain financial information if required as a condition of the loan approval
- Review contractor’s website and request a resume of projects
- Collect and review GC’s liability insurance policy
Interest Reserves
From time to time the lender or Credit Administration will require the borrower to fund an interest reserve at closing. An interest reserve account is a credit enhancement considering the construction project is not income producing while under construction or in lease up.
Interest costs during construction will be funded from the Bank controlled interest reserve account as the interest comes due. Interest Reserves are non-interest-bearing accounts. Underwriting conditions that typically trigger an interest reserve requirement are:
- Low liquidity levels of the borrower,
- An extended timeline for project completion,
- Project size or type OR,
- Volatile conditions within the economy.
Closing and Monitoring the Construction Loan
The Construction Loan Administration Department administers the construction loan and oversee the funding of the draws. The amount of the draw to be funded is established based on a review of the inspections that are performed on site by Bank approved inspectors. Draws are funded utilizing an AIA Schedule of Values.
The key construction documentation required to be collected prior to closing are as follows:
- Collect the required permits prior to closing to include:
- Development Order that shows approval from the local permitting authority
- Environmental Permit
- Obtain the necessary documents from borrower to obtain contractor approval from CLA. (See Construction Loan Administration Requirements on netinterest)
- Obtain all final plans and specs associated with the project. Confirm plans and specs are consistent with the appraisal.
- Obtain the bond if a payment and performance bond is required as a condition of loan approval.
- Obtain any contracts associated with the general contractor. The contract associated with the project must be a Guaranteed Maximum Price Contract (GMPC). The acceptance of a Cost-plus Contract is prohibited and will require an approval from Credit Administration.
- Confirm that your LIP (Loans in Process Account) is adequate. When originating a commercial construction loan, a LIP line item should be recorded on the closing statement, in an amount of money sufficient to fund the completion of the improvements (per your costs breakdown and construction contract). If the loan is approved with an interest reserve requirement, the LIP should specifically disclose the amount in the LIP that will be allocated to the interest reserve.
- Equity Requirements- When closing, if the borrower has a required equity requirement per the loan approval, and the equity requirement is being provided through other sources besides the equity in the land, the lender is responsible for documenting the equity by submitting previously paid invoices (often pre-closing soft costs) or bringing cash to closing to supplement the LIP account. The practice of borrowers providing equity post loan origination is prohibited per CCB credit policy.
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Title Commitments- Issued title commitments and surveys on all commercial construction should be reviewed by Bank counsel pre- closing to confirm accuracy. The title endorsements at a minimum should include the following: 1) Survey endorsement 2) Variable rate endorsement and a 3) Environmental endorsement. In Florida, a Florida Form 9 endorsement is required on all real estate loans closed. (See Endorsements > Mortgagee’s Title Commitment /Policy)
- Special Provisions- Insure that the special provisions required per the loan approval are accurately disclosed in your promissory note.
- Credit Approval – prior to closing a loan, it is the lender’s responsibility to ensure that the loan is closed in a manner consistent with the terms and conditions approved and outlined in the Credit Memorandum.
- Lending personnel are encouraged to make periodic visits to the site throughout the construction process, stay informed on market conditions, and coordinate with CLA in monitoring any changes made to the original plans, specs, or costs.