RV Park/Campground Operator s Manual Chapter 7 Buying An Existing RV Park/Campground Establishing Fair Market Value / location, competitive position, physical property, financial performance, financial potential Using Fair Market Value Checklist For Buying A Property Tax Considerations Overview Buying an existing RV park/campground is the usual way of getting into the industry. However, before making any decisions, consider the following advantages and disadvantages to buying an existing park. Advantages of Buying an Existing RV Park/Campground immediate start-up without waiting for development established locations eliminate much of the guesswork in anticipating future real estate development and determining RV park/campground demand in that area a good reputation provides a strong clientele from which to work property may be rundown but high undeveloped land values might make it a worthwhile purchase Disadvantages of Buying an Existing RV Park/Campground reputation, if poor, might be difficult to restore older parks with smaller sites may lead to a total redesign of the RV park/ campground site restrictions (legal and physical) could prevent expansion or rebuilding age or poor construction of buildings could lead to high maintenance costs older RV parks/campgrounds may have inadequate electrical or sewage services to sites, requiring a total upgrade RV Park/Campground Operator s Manual 7-1
Check why the current owner is selling. Is the park for sale because of the health of the owner, retirement, increased competition, declining profits, or buying a different type of business? Take some time to determine the real reason for the sale. Don t hesitate to bring in professionals. Plumbers, electricians and even engineers can inspect underground wiring, septic and water systems. Tips on purchasing an existing RV park/campground If you have decided to purchase an existing RV park/campground, retain a hospitality consultant, accountant or real estate company to help you find the right business. If you don t have a specific park in mind (and even if you do), investigate all available properties. Don t pass over the run-down property. It may be soundly located and only require a solid maintenance schedule to bring it up to par. And don t be taken in by the well-maintained and manicured RV park/campground. It may have a poor reputation and books in the red to match. Always have an accountant audit and verify the accounts. With your alternatives for purchase selected, establish a fair market value for each. How to Establish Fair Market Value Establishing the fair market value of an RV park/campground is dependant on a number of factors. Below is a list of some of the most important elements to consider when purchasing an existing RV park/campground. a. evaluate the location Is the park located near a major thoroughfare or in a rural setting (enroute or destination location)? Is it easy to reach (accessibility for RVs)? What outside elements must be considered (view, sources of disturbing noises or odours, landscaping, etc.)? Is there room for expansion? What developments are planned in the area (buildings, roads, etc.)? RV Park/Campground Operator s Manual 7-2
b. evaluate its competitive position Examine the RV park/campground s historical occupancy levels and average rates relative to other properties in the area. Estimate supply and demand for camping accommodation. Rate the location in terms of its closeness to various markets. Assess potential of future competitive developments and their effects on occupancy. Evaluate its reputation. Review camper registrations the higher the repeat business, the better the reputation. Investigate public image through local, regional and provincial organizations and the tourist bureau. Useful Tip Affiliation with trade associations can provide helpful information as well as offering significant marketing and financial benefits, and indicates pride of ownership. BC Lodging and Campgrounds Association is the association representing RV parks/campgrounds in British Columbia. www.bclca.com c. study of physical property Determine land value. Have the natural resources been overdeveloped or mismanaged which could hinder future RV park/campground use? Determine the state of repair of the physical structures and equipment, noting items in need of repair or replacement. Establish what percentages of gross sales were allocated for repairs and maintenance over the life of the property. Determine if there are enough amenities to keep the property competitive playground, snack bar, swimming pool, etc. The number of sites and what the competition is offering will dictate the size and number of facilities. Check to see if they meet market requirements and standards. d. review past financial performance Analyze income and expenses and compare with industry standards if possible for similar establishments. Check accuracy of income reports using numerical sequence of registration RV Park/Campground Operator s Manual 7-3
forms, cash register tapes, personal observation, staff interviews and existing financial statements. Review the depreciation policy. Determine the remaining useful life and current value of vehicles, fixtures and equipment. This will establish a realistic cost for replacement, which will be added to the purchase price to determine actual cost to the buyer. Examine leases on equipment, vehicles, and fixtures (if any) in terms of cost and possibility of reorganization. Check existing service contracts for their real value to the future operation and for escape clauses upon change of ownership. Investigate any major employee or sales tax liabilities. Evaluate the operating systems. If the business is functioning efficiently and still not making money, a change of management probably won t help. e. assess future financial potential From the analysis of supply and demand, project future occupancy. Look at future growth markets and probability of competitive development. Develop average site fees for future years based on historical average site fees. Take into account inflation, operating cost increases and anticipated market changes. Multiply projected average site fees by projected occupancy to calculate future revenue from sites. Add expected revenue from other sources (store, laundry, rentals, etc.) to arrive at a gross sales figure. From gross sales, deduct operating and overhead expenses in the same proportions that currently apply (provided that no drastic change in costs is expected). Also deduct liability and fire insurance and realty/business taxes. This leaves net operating profit. Assess future funding that will be required for major repairs. RV Park/Campground Operator s Manual 7-4
f. calculate fair market value Calculating fair market value A prospective buyer can enlist the services of a real estate expert to determine the Gross Income Multiplier of a particular property. The Gross Income Multiplier multiplies the gross revenues of a business by a specific value to ascertain whether the business is being offered at a fair market value. The value will depend on location, competition, age and performance but will give you an idea of whether or not the property is valued high, low, etc. Other factors as described below may also come into play. As a rule of thumb, multiply net operating profit (net Operating Profit Multiplier) by between 10 and 15. This process is called the times earnings ratio (t.e.r). It is not an absolute as it fluctuates property by property according to the risk involved. The greater the risk, the lower the t.e.r. Times earnings ratio is affected by age and condition of the property. It is also affected by financial status, current rates of return on similar properties, ratio of down payment to mortgage, current mortgage rates, overall economic outlook and personal investment guidelines. General guide: times earnings ratio for well-known, established properties with good business may be as high as 10 or 12, a poor business 6 or 7. The higher the multiple (t.e.r.) the lower the risk. For other ways of calculating fair market value see a financial expert. Return on equity Even if your true interest in operating an RV park/campground is qualitative rather than profit motivated, still use fair market value to calculate your percentage return on equity. Perhaps the property you re considering is a poor investment. With another RV park/campground, you can possibly have both the good life and a good return on your investment. RV Park/Campground Operator s Manual 7-5
Using Fair Market Value The following example demonstrates how to calculate fair market value and return on investment (ROI). It also shows the dramatic effect even small changes have on the return. Note that this valuation is a rule-of-thumb only. Assumptions: i. The purchaser has invested an amount equal to 25% of the purchase price (estimated fair market value) and borrows the remaining 75% in the form of a mortgage at 10%. ii. The asking price is $1.7 million and the net operating profit is assumed to be $150,000. iii. There are 100 sites on 7 acres of land. iv. Revenue is also generated from other profit centres. RV Park/Campground Operator s Manual 7-6
Calculating Return on Investment (ROI) Investment Times Earning Ratio Multiplier of 10 x Earnings Times Earning Ratio Multiplier of 11 x Earnings Net Operating Profit (a) (Gross revenue less fixed expenses and overhead is $300,000 50% operating costs.) Estimate Fair Market Value (Multiplier x $150,000) i.e. 10 times and 11 times $150,000 Less: Annual finance charges (interest on 75% mortgage over 20 years @ 10% calculated twice yearly). Assumes operator has down payment of 25% and the balance is financed. $150,000 (a) $150,000 (a) $1,500,000 $1,650,000 $1,125,000 $ 74,614 (b) $1,237,500 $ 82,024 (b) Sub Total (a-b) $ 75,386 (c) $ 67,976 (c) Less Depreciation: Land value estimate $1,000,000 Equipment $50,000 over 5 years Vehicles $30,000 over 3 years Buildings balance over 25 years Net Income (c-d) Less: Small Business Corporate Tax @ 15.5% (2008) $ 10,000 $ 10,000 $ 16,800 $ 36,800 (d) $ 38,586 (e) $ 5,981 (f) $ 10,000 $ 10,000 $ 22,800 $ 42,800 (d) $ 25,176 (e) $ 3,902 (f) Net Income after Taxes (e-f) $ 32,605 (g) $ 21,274 (g) 25% Equity investment $375,000 $412,500 Return on Investment [net income after taxes (g) / equity investment x 100% = Times Earning Ratio] 8.69% 5.16% Observe that a difference ($150,000) in fair market value plus the related financial charges, depreciation and tax will make a difference of 3.53% on return on investment. RV Park/Campground Operator s Manual 7-7
Although the asking price is $1.7 million, fair market value at 10 times earning ratio indicates a price of $1.5 million. A 25% downpayment is assumed in the example this is the minimum amount a buyer would likely have to provide. The balance of 75% will probably be split between a bank/mortgage company and the vendor. With the vendor taking back 10% to 25% it will provide the buyer with some protection against undisclosed maintenance expenses required. Note: this does not take into account repayment of principal. In 2008, many RV parks/campgrounds in resort areas are selling for $1.8 million and up, as the land is the most valuable asset. The business is being bought for redevelopment for housing, retirement condos and the like. Evidence of RV parks/campgrounds for sale in BC in the summer of 2008, show an average selling price per acre anywhere from $256,024 to $659,943. The above example indicates a price of between $214,285 and $235,714 per acre. Purchasing an ongoing business at $1.65 million that generates $150,000 net operating profit is unlikely to be profitable. It might be more prudent to look at other investment vehicles. Need more info on fair market value? See Chapter 14 Selling Your RV Park/Campground Checklist for Buying a Property 1. Are all of the existing owners of the property in agreement with the proposed sale? (Check to see if there are any internal disputes). 2. What is the state of title to the land and buildings? If it is proposed that you will be assuming any of the mortgages, are they assumable? Will you be locked in? 3. What is the state of title to the chattels? (The chattels will not necessarily be subject to the same charges as the land and buildings). 4. Are all the buildings structurally sound? As well as having the property examined, you should check with local fire, health, building and zoning offices. Ask the owner to disclose all known defects. Be prepared to look in and under buildings yourself. 5. Does the business have all necessary licenses? 6. Are there any outstanding orders that will affect the property? 7. Do the buildings comply with current zoning and building bylaws? (If not, and any building is destroyed, you may be prohibited from rebuilding). RV Park/Campground Operator s Manual 7-8
8. If the property is in a remote area, is it sufficiently close to fire prevention facilities so that insurance is not a problem? 9. When you receive the financial statements, confirm: the statements relate only to the RV park/campground you are considering nothing has recently occurred which may adversely affect the RV park/campground (i.e. another park has opened close by) if the RV park/campground is seasonal, are you proposing to purchase at the beginning or the end of the season? 10. Are there outstanding agreements to be inherited (e.g. land lease, sign lease, equipment lease)? If so, what are the requirements of the other contracting party for the agreements to be assigned? If there is little time remaining on the agreement, can they be renegotiated prior to your signing any agreement or as a condition of your purchase? 11. Are there any outstanding agreements or arrangements that you will be expected to assume or for which you might be held responsible? 12. Is there any outstanding complaint, dispute or litigation? 13. If necessary, will the vendor stay on for a reasonable period of time to allow for an orderly transition of control? Is the vendor prepared to agree not to compete with you for a reasonable time within a reasonable radius? 14. Where are they currently marketing? Make it a condition of sale that the vendor maintains existing marketing, listings, Tourism BC accommodation approval, etc. for the transition year. What s next? The above checklist should help you with your buying decision and demonstrate many of the business current characteristics. However, you probably still have to obtain the major portion of your funding from a lending institution, and to improve your chances of success, you should engage a consultant to undertake an in-depth feasibility study (see Chapters 3 to 6). RV Park/Campground Operator s Manual 7-9
Tax Considerations When Buying an Existing Property Although the tax implications of owning a business are extremely important, they are perhaps not as important as the tax implications of buying or selling a property. In these latter two instances, the tax implications can often make the difference between profit and loss, success and failure. When you buy a property (regardless of whether it is a proprietorship, a partnership or a corporation), you do not acquire any income tax liability, because you have not earned any income yet. However, it is vital that you allocate the purchase price among the various assets you are buying, in a way that is most beneficial to you from a tax point of view. The reason for this is that certain assets can be depreciated at higher rates than others; and the more you allocate to those assets that can be depreciated most rapidly, the better it is for you. In particular, you should realize that land cannot be depreciated for tax purposes, so you should try to allocate as little of the purchase price as possible to land. For tax purposes, the vendor, or seller, will want to allocate the purchase price (or, from his/her point of view, the sale price) in a different way to you. It is extremely important that you obtain professional advice before making your final offer. Property Assessment Impact BC Assessment is a provincial Crown corporation that determines the market value of all real properties in British Columbia. After determining the correct classification, actual value and exemption status of every property, BC Assessment provides taxing authorities with an Assessment Roll, which lists all properties, names of the owners and the taxable values of the land and any improvements (buildings). Market value for assessment purposes is the price an unencumbered property would sell for on July 1 of the preceding year if a reasonable amount of time were allowed to find a purchaser. Before purchasing a property the current assessment value should be obtained as it gives a guide to the value of the property. If you pay more that the last assessment July 1 the previous year you could incur higher property taxes and this must be factored into your financial feasibility. Through BC Online you can access the Landcor AVM (The Property Valuator) to calculate values based on the BC Assessment audited valuations. Go to www.bconline.gov.bc.ca and click on FAQ for more information. RV Park/Campground Operator s Manual 7-10
To summarize In 2008, many RV parks/campgrounds are being purchased for their development potential rather than as an ongoing business. Land located on, or close to, waterfront can be a prime location for a developer looking to build condos, retirement homes, etc. to fill the growing need of predominantly BC and Alberta residents looking for investment homes for vacations as well as retirement. Hence the high value being put on the business. Before purchasing a business to operate as an ongoing RV park/campground, ensure you have done all your homework and can justify the purchase price against expected income. Review Question 1: Question 2: Explain Fair Market Value. What is T.E.R. and how is it used? RV Park/Campground Operator s Manual 7-11