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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.
Most of the time, when you buy an RV park, you're buying a piece of land and improvements. You're buying whatever goodwill is out there from people who have frequented that RV park in the past. But when some buyers buy RV parks, they don't buy the land and the improvements and the goodwill and all those other items we all assume that you do when you buy property. Instead, what they do is they buy the entity that owns the RV park.
This is Frank Rolfe for the RV Park Mastery Podcast. We're gonna talk all about the dos and don'ts, the ins and outs of, instead of buying an RV park outright, buying an entity that owns the RV park. Now, why would you want to do that? Would be your first question. Why would someone, instead of buying the RV park, buy the LLC or buy the partnership that owns the RV park? Well, one key reason is property tax, because when you buy an entity, it does not trigger notice in most states or counties to the taxing authority of a sale. It's the real property sale done by a title company that normally triggers that.
But when you buy an entity, they're not really informed. They're not in the loop on that. So many people, to keep property tax low, they buy the entity as opposed to buying the actual RV park. Another reason is that when you buy the entity and not the property, it sometimes does not require any change in permit or license because typically the permit or license has to be changed when there's a new buyer. But in this case, there's not a new buying entity. It's the same old entity, so the name that's on the license and the permit never changes. Another reason is in some cases, it will not even trigger the loan due. You'd have to read your loan documents to confirm this. But in some cases, you have a due on sale provision in your bank loan for the RV park, but selling the entity does not trigger that due on sale provision. So you might say, "Okay, well, then those are some pretty good things about buying an entity, right?" Well, then why would you not want to buy an entity? Well, the first thing is when you buy an entity, you inherit all of the unseen, unknown liabilities of the entity that you're buying.
Let's say, for example, and we see it in the news all the time anymore of some talent agent in Hollywood who is now accused decades later of some hijink with some person trying to get into the movie industry. Those kinds of things that are floating around there could cause potential liability for the entity. So that's one reason is we just don't know what the former person did in their entity. Now, typically with an RV park ownership group, mom and pop probably isn't anything at all. But still, it's a concern because when you buy the asset, when you buy the RV park, everything prior to that purchase doesn't mean anything to you. That's just the way property law works. But when you buy the entity, you might have repercussions of things that have happened in the past. Another problem in buying the entity is there's no oversight from a title company. And we really like title companies because we think that title companies serve a very important purpose in real estate. They're kind of the referee that watches over everything. They don't want any problems with anybody, so they try and play it by the book, making sure that when you buy it, you truly own it and when you sell it, that you get paid.
But when you buy the entity, you don't have that referee. There isn't a title company making sure that everything is correct and the survey and title commitment, et cetera. So that could be a problem. But you can work around that with a good lawyer, so you could probably get over that hurdle. You will have extra legal cost, of course, because you have to have an attorney review all the documents and write the documents, and they'll be very customized to that entity. So as far as using a boilerplate agreement, this is a chance where you probably aren't gonna be able to use that boilerplate 'cause each buying of an entity is extremely one-off and extremely custom. So it's not kind of a one-size-fits-all. But even then, the legal costs can probably be managed, so that might work out okay. But probably the biggest issue for people in buying entities over buying assets, and it's been this way for the 30 years I've been in this RV park business, is it's just very uncommon. And because it's very uncommon to people, it seems very foreign and risky to them.
And I will admit there probably is much less case law regarding people buying entities for RV parks than are those on buying RV parks outright. And that fear of the unknown is probably one of the big drivers to whether you feel comfortable buying the entity or not. Now, I've done both. I've bought entities that own property and I have bought property outright. And traditionally, what it comes down to is your strategic goal for buying the entity. A very common one, going back to the three we discussed, is the fact that it does not typically require a change in permit or license, because in some markets, that change in permit or license you may perceive as being difficult to obtain. And of course, the other good one is the property tax issue. In some states, particularly like Texas, which is so prone to raising property tax, namely because it has no personal income tax, property tax is their big way of raising money. So they're always watching over, ready to pounce on any properties changing hands, thinking they can reassess it. So that's, of course, another important one. And I've done it in the event that it doesn't actually trigger any loans being due.
Sometimes when you buy a property, particularly it has established debt, you may want to just walk into the shoes of that debt. But what I'm not saying here is that it works in every deal. So I would definitely ponder whether the strategy works at all. I would talk in depth with your attorney to understand the ins and the outs and how to properly paper any such agreements to protect you to the utmost. There's nothing wrong in business for trying new things. With all the technologies we've had in modern times, of course, you'd be a fool not to be carrying an iPhone or a similar device where you can get texts and emails and send pictures and comments.
So you often have to embrace new ideas. But that doesn't mean that all new ideas work in every application. So if you're looking at a typical property where you have no real concerns with permitting or loans or taxes, then a straightforward purchase of the property may be the most appropriate course of action. But in cases where you do have concerns or issues on those three areas, then buying the entity may be the correct way to proceed. And as always, on something as complicated as buying an entity, you really need guidance from a licensed attorney in that state who really understands how it works to try and keep you out of trouble. Often today people get spoiled with all these online offerings of, here's a $19 agreement you can buy online, here you can write out your entire will and testament for $29. In these kinds of transactions where there's a lot of money at stake, it's normally the best course of action, particularly anything that's unique like buying an entity, to get proper legal and even tax guidance.
This is Frank Rolfe with the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.