Welcome to the RV Park Mastery Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate RV parks. Your host is the 5th largest owner of RV and mobile home parks in the United States, Frank Rolfe.
They say there are two givens in life, death and taxes. Now RV Parks, they don't die but they do have tax returns. There's a whole lot you can tell about the tax returns and the access to the tax returns when you're looking to buying an RV Park. This is Frank Rolfe of the RV Park Mastery Podcast. We're gonna talk about tax returns. Now what is a tax return? Income tax is a federal law where each year every person who makes over a certain amount of income and every business over a certain amount of income has to file a tax return. The tax return tells how much money they made which typically corresponds with payment of some kind of income tax. And if you lie on your tax return, it's a big deal. It can be a felony. You can go to jail for it.
You can have all kinds of fines and penalties. So most people take tax returns very seriously. And most people look at tax returns often as being the absolute ground zero to the fact that the numbers are accurate 'cause most people who might tell a fib here or there, they won't typically lie on their tax returns. So when you're looking at buying an RV Park, one of the questions that you ask of the seller is, hey, can I see your tax returns for the last three years? Now this is not something that the buyer is doing in the absence of any other rules and regulations because most lenders are also going to want to see the last three years tax returns.
And they do that because they feel like a seller might lie or fudge the numbers a bit on a standard profit and loss statement. But most people are not crazy enough to lie on their actual federal tax returns. So they look at the returns as being an affirmation that the numbers are in fact accurate. Now some sellers will happily give you the tax returns. They'll say, here are my last three years numbers and you'll get the tax returns. The tax returns will often match up to what they gave you as profit and loss statements. And you'll provide that to the lender and the lender will be very happy and say, ah, these are the tax returns. We can now checkmark that box on your loan application. And yes, the numbers do look in line with what you said and that's all great. But what happens when it doesn't work that way? Let's first start off with a scenario where they won't give you any tax returns at all.
Now, why would a mom and pop not give you tax returns? Well, one reason the standard excuse many people would say is they're cheating on their taxes. And they're afraid that you'll learn that or know that and somehow use that as blackmail potential over them by saying you'll turn them into the IRS for tax fraud. Now, do all RV Park owners cheat on taxes? No, but I've met many who have. I've met individuals who collect all of their rent and cash, pay all of their bills with money orders. And then report a ridiculously low amount of net income to the IRS.
Maybe with a big old RV Park, they might say they only make $1000 a month when actually they might be making $10000. So that's one possibility. But there's another possibility, which is that the tax returns just are completely erroneously inaccurate when compared to the profit and loss and they won't support the numbers that they're giving you. So in that case, mom and pop, they wanna sell the RV Park really, really bad. They've got a buyer on the hook, but they realize when you say, let me see your tax returns that they don't match. They don't line up in any possible way with what the numbers truly are. So instead of giving you Exhibit A of evidence that they're not giving you the correct estimates of net income, they instead conveniently say they won't give you the tax return. And often they'll make some excuse like my attorney told me not to give it to you or it's my policy not to give out my tax returns or whatever the case may be.
Now, when that happens, initially you have to push back and say, look, I have to have the tax returns in order to get the loan because with many lenders, the answer is that you must. So you can then just segue from that and saying, well, if you don't have tax returns that I can use, then I guess you're gonna carry the financing, right? Because I can't get a loan without the tax returns. And often that's a handy tool because the truth is that if you can't get the loan without the tax returns, they really have no choice but to carry the financing or you can't buy the RV Park. So that's a really good lever, a good tool to try and force a seller financing situation because seller financing is in fact, you know, the best way to finance an RV Park. So sometimes not having the tax returns is a good thing because it's a tool for you. But let's assume that they won't. They won't carry the financing.
So now can you go to the bank? Can you get a loan on an RV Park in the absence of tax returns? Well, the answer is maybe. You may have a lender who will do it without the tax returns because he sees the property, you're buying it cheap enough that he has confidence that it's worth at least 70% of what you're paying or 80% of what you're paying after your down payment. So it is untrue if someone says it's impossible to obtain debt without a tax return, but it certainly makes it much more difficult. It also makes it much more risky for you the buyer because you don't really know exactly how much money it made.
Now one way you can try and figure or guess about the occupancy and if the revenue is true or not is to look at by-products of people having RVs in the RV Park and one great by-product of that is the daily use of electricity. Now we all know that RVs in RV Parks typically want to plug into a power source and from that we all know that we can make a rough estimate of what an RV would cost per day in power use. Sure it's a ballpark, it's very rough, but it still is very beneficial to the buyer.
You can then take that number that by-product of use and you can see how many units of that fit into what the power bill is each month. And that will tell you exactly how many days of RVs were there. You can then take that times the rate, the daily rate, the weekly rate, the monthly rate, whatever the case may be, just pick a number and you can get a pretty rough idea of how much the revenue should have been and then you can match that against what the seller told you.
So in that manner you can kind of get a rough idea, right? Because if an RV was in that space it had to use a certain amount of power. If there's no power used, if the power bill was zero for the month, then you know there was nobody in the RV Park. If doing what I'm telling you gives you let's say 40 units, that means there were 40 days of RVs total in there and let's say the price is $30 a day, then they should have revenue of $1200 for the month.
But if they tell you they have $7000 it's clearly wrong. So we can try and extrapolate, we can kind of guess in that manner of what the revenue should be even in the absence of tax returns. But the bottom line is that the tax returns are kind of an essential item. Now what happens when you get the tax returns in due diligence and they don't match to the P&L, which is correct? Well, I would say you have to go by the tax return number. Now what if they say, well no, I cheat on my taxes. Well we don't know for a fact they cheat on their taxes. All we know is that the only number they're willing to sign their name against is the tax return. And on top of that when you're buying something from someone who claims they cheat on their taxes can you trust them on anything in that case?
Ross Perot, the US businessman, he's now dead, refused to do business with people who had had affairs on their wives. Who had been divorced because he said if they couldn't trust them even in their marriage how could he trust them in business? Kind of applicable here, right? So if someone says, well no, I cheat the government all the time, I lie on my tax returns constantly. Well what else are they lying about? The permit, the condition of the property, floodplain, who knows what?
In a perfect world the tax returns and the P&Ls all match. If the tax returns don't match to the P&Ls it can mean a lot of bad things going on. It's never a good sign. Can you maneuver around it? Yes. If however you are completely uncomfortable though by looking at the by-product of use and just using common sense then you should not go forward. And even if you wanna go forward many many lenders will not allow you to go forward in the absence of seller financing 'cause they will not be comfortable enough with it.
Tax returns are a really big deal. When sellers tell you, oh the other tax returns they don't mean much. No, actually those tax returns are one of the most vital items you can receive in due diligence. That being said you may be able to maneuver around it but you definitely want to obtain if you can tax returns on any RV Park you're looking at buying. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.