How to Finance a Campground or RV Park
9 Ways to Overcome the #1 Challenge of Investing in Campgrounds and RV Parks: Financing
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Estimated time to read: 11 minutes (this is a longer one, but we wanted to do our best to paint the full picture of this subject!)
TL;DR:
These are the 9 options you should pursue to finance a campground/RV park, in order:
Seller financing
Loan brokers
Bank loans
Life insurance companies
SBA loans
USDA loans
CMBS/Conduit loans
Debt funds/hard money
Equity
Side note:
Since last week, we released a podcast where we reviewed our Instagram giveaway results (link below):
Breaking Down the Numbers: Instagram Giveaway Campaign - Part 3
I've seen a few blog articles called "The Ultimate Guide to RV Park and Campground Financing" or something of the like, but frankly, I felt I needed to write my own that went deeper.
A few things can make financing an RV park or campground challenging. There are fewer lenders for campgrounds and RV parks than apartment buildings or other more common types of commercial real estate.
When purchasing a campground or RV park, traditional lenders also scrutinize the historical financials of the business to determine if/how much they want to lend to you. If you’ve looked at campgrounds/RV parks for sale, you know that many of them come with books that are a complete mess or even nonexistent. This will create challenges for financing.
Here are 9 ways to approach financing campgrounds and RV parks (in order):
1. Seller Financing
Seller financing describes an arrangement where the seller sells you their property and holds a note. You pay them the down payment and then pay them principal and interest over time to satisfy the remainder of the purchase price. If the seller’s books are a total disaster or nonexistent, seller financing or a cash purchase may be your only option.
You should always first explore seller financing when purchasing a campground or RV park. Seller financing provides the potential for a much easier, faster, cheaper loan process compared to a bank or another type of lender. The opportunity to secure flexible funding at more attractive terms than anywhere else is also too great to pass up.
This is where it helps to be familiar with the current financing market for campgrounds and RV parks.
These are the terms you should look to negotiate with seller financing:
Down Payment
A highly motivated seller will likely be more willing to structure a seller financing deal. 0% down is not unheard of. 10-20% may be a more realistic target. For reference, banks or other lenders will require 20-35% down.
Interest Rate
You should also get a better interest rate than is available from traditional lenders. The lower your interest rate, the higher your cash flow and investment return.
Loan Term
The loan term describes the length of time that you can borrow the money. You can either have a fully amortizing loan or one with a balloon payment at the loan’s maturity date. Common terms are 5-30 years. Balloon payments add risk because you'll have to refinance the loan before the maturity date (or find another way to pay the balloon payment).
Amortization
Amortization describes the time horizon over which the loan payment is calculated. On a fully amortizing loan, the term and the amortization are the same. There is a balloon payment on most commercial bank loans, meaning the amortization is longer than the term.
Besides these main terms above that will have a direct impact on the calculation of your loan payments and the timing at which you have to pay it back, the following terms can also be more easily negotiated into a seller financing arrangement:
"Assumability" of the loan (if you sell the property, you can pass the loan to the buyer)
Non-recourse vs. recourse (some traditional lenders always require recourse, meaning you can be held liable personally/sued for any unpaid loan balance)
2. Loan Brokers
If the seller is unwilling to provide seller financing (or if the terms at which they are willing to finance are unreasonable/less attractive than what you can get elsewhere), then your next step should be to engage an experienced RV park/campground loan broker to go out and shop for a loan on your behalf.
Loan brokers will typically charge 1-3% of the loan amount depending on the size of the deal. Expect a minimum fee of around $10,000-$15,000. This is a no-brainer.
A good loan broker will help you assemble your loan request package, reach out to many more lenders than you will on your own, create a competitive process and negotiate on your behalf, and even help you close the loan once you select the best lender. You will save a ton of time AND get better loan terms in the end.
All that being said, it still helps to understand the options you have at your disposal at a high level. They are:
3. Bank Loans
Local banks and credit unions are notoriously difficult to deal with. HOWEVER, some can get creative/aggressive with terms, especially if they are a "portfolio lender," meaning they hold the loans for the entire term without selling them. This adds flexibility because they don't worry about lending money in a way that conforms to other lenders’ parameters on a potential note sale.
The downside of local banks and credit unions is that they typically move slowly, are unsophisticated, and are much more fickle/conservative when the market is turbulent. Getting money from local banks for campgrounds/RV parks has been challenging in the last year or two.
When you start dealing with larger banks, you'll find higher the probability and predictability of closing the loan but much lower flexibility and creativity with terms.
With most banks, expect to have to put 20-35% down and borrow money at 3-10 years with a balloon payment at your maturity date. Amortization will likely be 20-25 years. Rates will typically be competitive and based on 10-year treasuries or another index.
Bank loans likely aren't your best option because of short terms and inflexibility, but in certain circumstances, they may be your only or most available option.
4. Life Insurance Companies
Life insurance companies are one of the more unknown sources for financing in the campground/RV park space. Life insurance companies have long been an attractive source of debt for commercial real estate because they typically have very competitive rates and long-term loans (10-25 years).
I know that only a few life insurance companies play in the campground/RV park space. The most common way to secure a life insurance company loan is to engage a loan broker who is also a "correspondent" for life insurance companies. A correspondent will broker the loan and potentially service the loan (collect payments and be your point of contact throughout the life of the loan).
There is a certain level of exclusivity with correspondent lenders and life insurance companies, so ask around and research to find one that can get you into the life insurance company markets while also casting a wide net among banks and other lenders.
Expect interest rates slightly better than banks and terms up to 25 years.
5. SBA Loans
The SBA (Small Business Administration) is active in hospitality, including campgrounds and RV parks. Before wasting your time pursuing SBA loans, you should ensure that your RV park or campground is SBA-eligible. The main consideration for eligibility is that at least 50% of your gross income has to come from short-term stays not longer than 30 days. In other words, if your park is predominantly full-season or annual site rentals, it is most likely not SBA eligible.
Two main types of SBA loans will apply to acquiring an RV park or campground. They are:
SBA 7a loans
Typically offers a maximum loan amount of $5MM, requires a 10-30% down payment and comes with a VARIABLE interest rate. They also typically require a 1.25x DSCR (meaning your NOI has to be 125% of your debt service). Funds can be used to finance the acquisition or expansion of a business, commercial real estate and working capital. SBA 7a offers a 10-year repayment term for working capital and a 25-year repayment term for real estate.
These loans usually come with a borrower/guarantor aggregate loan cap of $5MM or $10MM. Financing a development with the SBA as a first-time developer/operator will likely require a feasibility study. There are two levels of approval (lender and SBA).
SBA 504 loans
Typically offers a maximum loan amount of $5MM, requires a 10-20% down payment and comes with a FIXED interest rate. They also typically require at least a 1.25x DSCR. Funds can be used for construction/renovation, real estate purchase, and equipment financing (including glamping lodging setups or park model cabins). SBA 504 offers 10, 20, or 25-year repayment terms.
SBA 504 loans also come with job creation, job retention and public policy goal requirements for your business/project. They have the same borrower/guarantor aggregate loan cap and the same likely feasibility study requirement as 7a loans. They also have two levels of approval (lender and SBA).
6. USDA Loans
To get a USDA loan, your property must qualify as a rural business/location. You can check your location's eligibility on their website. Typically, your city/town must have less than 50,000 population. There is typically a max loan amount of $25MM. Expect a 20-40% down payment and at least a 1.25x DSCR requirement. With USDA loans, you can get up to 30-year repayment terms. Fixed or variable interest rates are available.
USDA funds can be used to purchase real estate, machinery, and equipment, as well as to develop real estate and fund working capital. Feasibility studies are required for all new businesses. There are two levels of approval for loans up to $10MM (lender then USDA district office), while there are three levels of approval for loans over $10MM (lender then USDA district and national office).
A big advantage of USDA loans is that no borrower/guarantor aggregate loan cap exists! This means you can do multiple projects up to the $25MM loan amount.
7. CMBS/Conduit Loans
CMBS stands for "commercial mortgage-backed securities." The word "conduit" describes the function of the bank/lender that originates the CMBS/conduit loan. They don't hold the loan on their balance sheet but package it into securities and sell those on Wall Street. Once the securities are sold, your debt service payments go through a loan servicer to the people/entities that purchased the securities.
This type of arrangement creates a less flexible set of loan terms. The loan originator must create a loan/securities that are attractive in the public markets. The biggest drawback with CMBS/conduit loans is "defeasance." If you're looking to pay off a CMBS/conduit loan before the maturity date, you'll likely have to complete "defeasance," meaning you'll have to purchase substitute securities (typically treasury bonds) that will match the payout of the mortgage securities. This can get very expensive.
Some advantages of CMBS/conduit loans are competitive rates, terms of up to 10 years, and "assumability" of the loans.
8. Debt Funds/Hard Money
The terms "debt funds" and "hard money" are sometimes used interchangeably, but they aren't exactly the same. "Hard money" can describe individuals or boutique shops that offer creative financing arrangements. "Debt funds" are often "hard money" lenders more sophisticated counterparts. Debt funds are often more professional outfits that raise/syndicate money from institutions and high-net-worth individuals to then lend out on real estate.
A common misconception about "hard money" is that it is called "hard" because the interest rates are high or the terms are bad. In reality, the word "hard" describes the collateral for the loan, a "hard" asset, like real estate. It also describes the nature of the loan, focusing on the attributes of said hard asset vs. the credit or financials of the borrower.
Either way, you should tread carefully regarding hard money or debt funds for your RV park/campground deal. Both types of lenders are known to be figurative real estate "loan sharks" or engage in "loan-to-own," in other words. These lenders are eager to give money out because they know they can be made whole by foreclosing and liquidating, or even holding your asset.
Expect higher interest rates from these types of lenders. The advantages of these lenders are quicker loan closing processes and higher leverage loans (a higher percentage of the purchase price in the loan amount). Terms are usually shorter with these lenders, so you'll have to figure out how to refinance sooner rather than later.
9. Equity
If you cannot secure financing through any of the 8 methods above, your only option may be to explore raising equity. You can raise money from friends and family or go the "crowdfunding" or "syndicating" route. Either way, you must get familiar with and abide by SEC regulations. Get an attorney familiar with securities laws and be prepared to pay a pretty penny in attorney fees.
A whole set of additional risks comes with this type of fundraising, so do your homework on Regulation D of the Securities Act, particularly Rules 506(b) and 506(c), as well as the SEC's definition of an Accredited Investor.
That’s all for this week. Thank you so much for reading!
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Well written, thoroughly researched and informative. Thanks, Matt!