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Interview with Luke DeGrossi of Pioneer Communities




SHOW NOTES


Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks to the co-founder and managing principal of Pioneer Communities, Luke DeGrossi. Luke offers his knowledge about the mobile home park industry for potential, new, and seasoned investors. Andrew and Luke chat about "The Broken Window Theory," value-add infill projects, cap-ex projects, and the business model of Pioneer Communities. Luke also shares some stories about his ideal mobile home park, his worst experience within a trailer park, and his advice for passive investors who want to invest in mobile home parks. Andrew also asks Luke about his endgame goals and his opinions on the hardest parts about the industry.


Luke DeGrossi is Co-Founder Chief Acquisitions Officer at Pioneer Communities where he is responsible for monitoring, maintaining, and reviewing Pioneer's pipeline, as well as underwriting and modeling cash flows for potential acquisitions. Prior to co-founding Pioneer Communities, Luke worked at HKS Capital Partners, New York City's premiere commercial finance brokerage with over $16 billion in transactions. As an associate in their capital markets group, Luke was responsible for structuring debt and equity capital across nationwide commercial transactions spanning permanent financing, ground-up construction, bridge, mezzanine, and acquisition finance. Prior to HKS, Luke worked as an Analyst at RPM Development Group, New Jersey's leading affordable housing developer, where he managed the daily operations, finance, and accounting for a portfolio of properties in excess of $950,000,000 in value.


Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,400 lots under management. His team currently manages over 20 manufactured housing communities across ten states - AR, GA, IA, IL, IN, MN, NE, OH, PA and TN. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.


Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew's team usually moves on location during the first several months of ownership. Find out more about Andrew's story at AndrewKeel.com.


Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick five-star review. I have a goal of hitting over 100 5-star reviews by the end of 2021, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your five-star review of the show.


Talking Points:

00:21 - Welcome to the Passive Mobile Home Park Investing Podcast

01:00 - Luke's background and how he got into the industry

03:28 - Luke's first property

04:50 - The hardest part about the business

09:35 - Cap-ex projects

12:07 - Luke's business model and their ideal mobile home parks

14:17 - The most important things passive investors should look for

15:51 - Value-add advice for new investors interested in mobile home parks

18:40 - The Broken Window Theory

20:55 - Pioneer Communities offices

21:51 - Park-owned homes

23:47 - On-site managers

24:15 - Value-add infill projects

26:28 - Does Pioneer guys invest money into the deals that they put together?

27:19 - Endgame goals

28:43 - Finding and reaching out to Pioneer Communities and Luke

29:24 - Conclusion


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Links & Mentions from This Episode:

Pioneer Communities website: https://www.pioneercommunities.com/

Pioneer Communities, LinkedIn: https://www.linkedin.com/company/pioneercommunities/ Pioneer Communities, Instagram: https://www.instagram.com/pioneercommunities/ Pioneer Communities, Facebook: https://www.facebook.com/PioneerCommunities/

Keel Team's official website: https://www.keelteam.com/

Andrew Keel's official website: https://www.andrewkeel.com/

Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel

Andrew Keel Facebook page: https://www.facebook.com/PassiveMHPin...

Andrew Keel Instagram page: https://www.instagram.com/passivemhpi...

Twitter: @MHPinvestors


TRANSCRIPT


Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host, Andrew Keel. Today, we have an amazing guest in Mr. Luke DeGrossi. Luke DeGrossi is the co-founder and managing principal of Pioneer Communities where he is responsible for sourcing potential acquisitions, arranging debt financing, overseeing the firm's marketing and operational strategies, and syndicating equity through Pioneer's well-established network of capital partners. Luke, welcome to the show.


Luke: Thanks, Andrew. How are you?


Andrew: Good, man. Let's dive right in if you don't mind. Can you please start out by telling our listeners a little about your background and how you got into manufactured housing?


Luke: I'd love to. My background was primarily in affordable multi-family housing in Northern New Jersey. That's where I got introduced to the industry. From there, I transitioned over to the debt and equity side at a shop in Manhattan which is where I currently reside now.

Got introduced to manufactured housing communities inadvertently, not even directly. I had a colleague of mine who was working on a refinance for a property. This was a time in the market where you are getting probably about 65% leverage on a traditional bread and butter multifamily refinance in Manhattan.

This was a park in Ohio (I want to say) or some market that I hadn't really played in before. Somehow, the sponsor was able to get 80% leverage. I was just blown away that the banks were so willing to lend on an asset that I had never even heard of.

That was where my ears perked up. I was just like, all right, if the banks are lending on this and they're lending on a traditional multi-family building in Manhattan at 65% leverage, there's got to be something there.

I struck a friendship with my now business partner, Nick Hakim, and we became friends. He worked at a private equity firm here in Manhattan, oversaw a portfolio of about 15–16 buildings, and was responsible for all things—sourcing, management, turnaround, and then eventually dispositions.

He and I struck a friendship. Then about two years into that friendship, I left the company that I was at and he left his company that he was at. We came together and we started looking at what we knew best, which was multifamily real estate. But given where we were in the market, given the cap rate compression that we were seeing around more traditional asset classes like multifamily, we eventually landed on manufactured housing communities.

We love manufactured housing communities for all the numerous reasons that most people do, but I would say that the main driver for us getting into that asset class was really timing. There were just no other investments. We were looking at a lot of deals that really made sense at that time and we felt strongly about the asset class. Once we toured in our first park, we were pretty much all in.


Andrew: That's fantastic. How long ago did you guys buy your first property? I think that was relatively recently, right?


Luke: It was, yes. That was an interesting story, too. We spent the first 9–12 months exclusively canvassing New York, given that we knew that market, we had proximity to it. That was before the new rent laws went into effect in New York. We were under an agreement on about 500 pads around New York and we ended up having to walk from all of them.

We had our first eight or nine months with a nice little introduction to failure and to the importance of legislation in the markets. We walked from all of those deals and essentially started our pipeline from square one which brought us to our first acquisition right outside of Savannah, Georgia about five months later. About a year and a month ago—actually to the day—we closed on October 23rd of last year on 170 units in the Savannah MSA.


Andrew: That's fantastic. That's a great area. Love Savannah, been there several times. Kudos, man. Congrats on the anniversary.


Luke: Thank you.


Andrew: Awesome. What would you say is the hardest part of the business? I believe you guys have how many lots now? It's two communities, you have one in Alabama, right?


Luke: We recently closed on 175 units in Northern Alabama which brings us to about 380 pads give or take.


Andrew: That's fantastic. What's hardest about those projects? Is it the value-add with infill? Is it rehabbing? I know you guys, similar to myself, have spent a lot of time on-site at those communities as I am a big fan of your Instagram page there. I love watching the day-to-day. You guys get your hands dirty in making stuff happen. Tell our listeners what has been the hardest part about running these for you guys.


Luke: The word hard is so subjective. The hardest part I guess would be the management side. Two years ago when we announced that we were getting into manufactured housing, a lot of the other operators were like, what are you doing for management?

From the get-go, we knew that that was going to be the area that would make a break a lot of deals and it's probably where a lot of operators fall short. We've always taken a very hands-on management approach on that deal in Savannah that we closed on that I was telling you about.

We moved on-site for three months which is something similar to what you do and to what other operators do, like Ryan and Ian. We wanted to really just immerse ourselves in the asset class given that it was our first acquisition. We knew that there was a lot of carryover from the multifamily side but we also weren't stupid or naive. We knew that there were obviously a lot of these intricacies that were probably very specific in particular to manufactured housing.

We knew that the best way to do that and the best way for us to preserve the capital of our investors who were entrusting us with this first acquisition was to really not take it lightly and to just go down there and spend as much time as we could on site. We did that. We lived in the back of the now office which we later found out was actually not totally legal because it is an office and you're not allowed to have beds in an office. We ended up getting in trouble for that. We bought two twin-sized beds, put them in the back of the office, and just put up shop for three months. I would say that those three months were pivotal in learning about the asset and learning about the ins and outs of manufactured housing.

To answer your question, yes, that is "the hardest part" I would say of any deal, but I say that the word hard is subjective because most people don't want to be hands-on in the way that you run your deals and the way that we run our deals as well. I think that's where the difficulty arises. I wouldn't say that the actual management or operation is difficult per se. We actually enjoy it.

I just got back from Huntsville. I flew into Huntsville on Saturday. The park that we bought in Alabama is in the Huntsville MSA. There's nothing I look forward to more than going down there and being on-site these days.

It's incredible to see the asset get turned around, to see our business plan get implemented, to see the difference that we're making in the lives of our tenants, to see the various different capital expenditure projects come along, and then eventually see them through the completion. It is certainly the most difficult part of successfully acquiring a mobile home park, but it is also one of the most rewarding if it's done correctly.


Andrew: I agree. I'll never forget, we painted a mural in one of our parks. There's a huge concrete wall and one of my business partners, his mom is an artist. She just painted a nice mural of a hill with some deer on it and a sign that said welcome home.

I'll never forget, one of the residents came up and literally was crying. She said, this place, I've lived here for 18 years. In 18 years, I would come home from work and I would just hate where I drove home to. It just had nothing pretty about it. But now, she comes home every day, sees that mural, and it just changes and puts a smile on her face. Things like that.

I've seen you guys have done a lot of cap-ex projects. I know that swimming pool I saw. Did you guys tear it out? Is that what you did? Because it was full of dirt. Maybe you can elaborate on some of the different cap-ex you've done in the two acquisitions.


Luke: Absolutely. Savannah is an interesting market because most operators do look for the 100% tenant-owned home model. We found out pretty quickly that if we were exclusively focused on those types of opportunities, we probably weren't going to be transacting too frequently, so we got very comfortable.

Thankfully, we were able to get exposed to it early on because the deal in Savannah is actually a pretty heavy park-owned home deal. A lot of the cap-ex on that acquisition was really just going in, identifying units that were not in a state of disrepair and that could benefit from some light cap-ex, and turning those homes. That was really good for us because we were able to get comfortable with the rental process.

The deal that we just closed in Northern Alabama right outside of Huntsville doesn't have quite as many park-owned homes. That was actually a very nice deal compared to the one in Savannah because it had more tenant-owned homes.

What we've been doing there as you just eluded to, this one was interesting because it did have this swimming pool that (I guess) the previous owner caught tenants partying in it and instead of shutting it down or just putting up a sign, he decided to literally fill it in with a bunch of rocks. It was just a total mess when we acquired it.

We were scratching our heads. We were like, what do we do with this? Do we open it back up, do we put the pool back in the park? The consensus was—even in talking to tenants—that it was between a basketball court and a soccer field. That was what the kids thought that they would get the most use out of.

We are actually in the process now. I'll probably share pictures with you for your followers here so they see what we're referencing. It is pretty much 95% to being a soccer field. We're going to get posts, set up goals. We’ve got a large community down there that loves playing soccer, so we're excited to get the kids in there and keep them busy.


Andrew: That's fantastic. I love that you guys do that and reinvest. I'm sure it'll add longevity to your tenant base because they enjoy living there.

Luke, what is your business model? What does the ideal park look like? What type of parks do you target? It sounded like you prefer the tenant-owned home model but you're okay with some park-owned homes. Can you elaborate more on that?


Luke: I would say we love the park-owned home model. We got really good at it in Savannah. We've turned 20, 25, or 30 of those homes and we've converted them over to LTOs. We've gotten really good at understanding exactly what each home is going to require, getting comfortable with the market.

If you buy a park that's 100% park-owned home, the homes are in relatively good shape, and there's a market for tenant-owned homes, that's really all upside. We don't mind deals where there is a large component of park-owned homes, as long as those homes are in good shape.

I would say that our ideal acquisition, there's got to be some scale for us (I'd say) to get interested so we like to be 75–100 and up. Both of these acquisitions that we transacted on were around 170+, so bigger is better for us. We're pretty much agnostic to utilities as long as they're in good working order. We don't really do wastewater treatment plants but we're okay with private septic and well. These two parks that we own are on city water and city sewer, which has been great. We're in the process of submetering one of them right now.

The ideal acquisition is one where we can go in and like you said, get our hands dirty, take advantage of the fact that we're young, we're not married, we don't have kids, we have the flexibility and the time to go down there. As I said, I just got back on Saturday. I’ll be flying back down at the beginning of December. My business partner, Nick, will be flying down December 1st to the park in Savannah. We're back and forth pretty frequently. We do like the hands-on approach and we'll probably continue doing that on all of our future acquisitions.


Andrew: That's great. What are the most important things passive investors need to look out for when investing in mobile home parks?


Luke: As a passive investor, I would probably want comfort in my basis. I see a lot of deals right now trading at a basis that I just can't really make sense of. I think you probably agree. You've seen a lot of new people come into the space and buy a lot. For all intents and purposes, we're relatively new to the space, but I think that I would want to be comfortable with the basis that the GP’s going in at. I would also want to really understand the market and make sure that there is a demand for quality, affordable housing in the market. I would want to understand the business plan and I would want to understand where the upside lies.

I believe that right now a lot of people are overpaying for these assets. I think that there are a lot of opportunities that we've passed on. I'm kind of glad that we did because sometimes the best deal is the one that you don't do. I'm confident that two acquisitions that we've closed on in the last year are both excellent deals and we're excited to generate the returns that we've pro forma’d. I would really just kind of implore investors to make sure that you've done your due diligence on the market. On the operators, make sure that there's a proven track record and make sure that the basis makes sense.


Andrew: Awesome. Yeah, I agree. That's some great advice. Would you mind explaining some of the nuts and bolts of your value-add components in this business? As mentioned before we started recording, a lot of our listeners come from other asset classes, whether multifamily, self-storage, or otherwise. They're interested in mobile home parks, but they're not familiar with the value-add in manufactured housing communities. Would you mind sharing a little bit about that?


Luke: Absolutely. I can use the park that we bought in Savannah as a prime example because a lot of these assets are mom-and-pop owned, so they're privately owned. It's usually individuals who don't necessarily have a background in real estate and don't really have access to the type of capital that is needed and required to turn around these assets. Usually, your typical story on ownership is like grandfather built it or acquired it, dad inherited it, and now, you've got a son and three daughters who are operating it. Nowhere along the line was there any type of real estate knowledge passed down.

Usually, the situation that we found ourselves in Savannah (for instance) park was inherited by a grandson, grandson lived locally, grew up in the park, knew the park but didn't really understand what it was going to take to just have it operating at full capacity and full potential. So basically, rented to anybody with a pulse.

We bought the park and we inherited a number of problematic tenants. We had to try and work with them and just kind of clean the place up. The value-add component is usually acquiring a park that has some level of mismanagement, capitalizing on those inefficiencies, and (again) deploying the knowledge, experience, and capital that it takes to bring that park up to its full potential.

That's what we're in the business of doing, and this isn't to say that we stray away from any type of larger institutional turnkey deals. We do. We're actively pursuing a few right now. We are, primarily, as exemplified by our first two acquisitions in the business of converting trailer parks into manufactured housing communities.

I would implore your listeners to take a glance at our deal in Savannah because we've got a lot of before and afters out there on our social media. That park was the definition of a trailer park. Whatever could have possibly gone wrong between collections, mismanagement, trailers in disrepair, drugs, crime, potholes. You name it, it was happening at that park. It is no longer happening at that park. That is the value-add. It's going in and it is deploying that knowledge and capital that will bring the property up to its full potential.


Andrew: That's interesting. I think it was Ryan Norris I was speaking to about this. You could spend a lot of money on a property, but until you change the mindset of your residents, you really haven't done much. You need people that have pride of ownership and pride in where they live. I couldn't agree with you more. It’s not just spending money. It's actually implementing and making changes within your tenant base.


Luke: Totally. It's the broken window theory, and it works both ways. In the same way that if you've got one broken window, probably a lot of other homes are going to have broken windows or are going to be in a state of disrepair. Once you get one tenant, one resident to start fixing up that home and to start actually taking care of their lot, it starts to be relatively contagious. The first thing we do on all of our acquisitions is we spend a lot of time renovating the office. We found that it is very difficult for us as new owners and managers to go around knocking on doors, handing out violation stickers when our own home is in disrepair for all intents and purposes.

The first thing we do post-close is we'll spend a week or two just getting the office up and running. We’ll power washer it, we’ll repaint it, we’ll clean out the interior, we'll get it nice and branded. We'll put up the name of the community, et cetera, just so that when we do go around and ask tenants to start taking care of their lots, we do have a nice baseline, an example that we can point them to.


Andrew: Yeah, that's huge. I really like that. Do you guys bring in brand new homes? Do you use that office as a sales or dealer office?


Luke: Yeah, we do. Well, they’re harder to come by these days with the cost of lumber going through the roof, but we did bring in a couple of brand new homes in Savannah and we're actually teeing up an order for about five new homes right now in Alabama.

Our office essentially does serve as a leasing office, if you will. It's also our property manager's office. We've got full-time community directors at both parks. One of them lives on-site and the other one we have not hired yet, but she lives locally in the market, so she's not far from the community. That's essentially where they can spend their days and where they can oversee the management and the operations of the park.


Andrew: Wonderful. Can you tell me about the park-owned home model? You said you don't mind it. How many park-owned homes do you keep? Do you plan on moving them all to lease options? Do you plan to keep some of them as just straight rentals?


Luke: Well, let me say something. We're not really in the rental business. We are in the land lease community business. These homes, there might be a few, like for instance, if we get a prospective tenant who knocks on our door and says, I'm looking for a one-bed, one-bath, and I need it yesterday. Do you guys have anything available? We'll spruce up a unit. We're not going to go and invest $10,000 into turning it, but we'll spruce it up and we'll get it up to code. We'll be very candid with the prospective tenant and just be like, look, we don't typically rent, but we do have some units available.

We'll usually do and instruct our community directors as if they have a good feel for a prospective tenant, they think that they'll make a good resident, and they don't want to buy the home. If we feel that they will be a good tenant, we'll certainly try to get them into a rental. I would say that 90% of our business is generated from LTOs and converting existing park-owned homes over tenant-owned homes, selling homes, bringing in new homes. We really want to get out of the rental model.

Again, that varies because there are certain markets where it's just heavy rental markets. You might have to have two maintenance managers instead of one, but you can definitely make money there as well.


Andrew: Do you have an on-site manager and you do have a full-time or part-time maintenance guy that helps?


Luke: Yeah. At our park in Georgia, we have a full-time community director and then we've got two maintenance guys on site.


Andrew: I'm sure that comes in handy because there's always something on those homes. It's nice to have a nice handyman around.


Luke: Yeah, exactly.


Andrew: With our previous interviews, when we interview operators, a lot of them have said that with value-add, infill projects have been one of the more difficult projects. How have you dealt with that? Have you found any tips that make it easier? Are you only bringing in new homes or do you bring in used homes as well? Could you shed any light on the infill process that you guys have employed?


Luke: Yeah, totally. I'd say it's a mix of both. We bring in brand new homes and we also try to partner up with retailers, local distributors. Any chance that we get, as I said right now, it is pretty challenging to find quality used homes. The cost of lumber has shot up over the last couple of months, mainly due to the fact that a lot of people are moving out to the suburbs.

A lot of single-family home builders are using a lot of lumber. That cost goes up. Not to mention the fact that COVID has shut down a lot of these factories and these facilities that build mobile homes. Overall, it is very difficult right now to locate, identify, and even purchase manufactured homes. The prices have jumped over the last couple of months and a lot of these retailers are totally back listed for months.

I spoke to a guy, I think he was a Clayton retailer. They're pretty much totally backed up until July. It's November. That's crazy. As I said, we do have a couple of new home orders teed up, but we do need to get creative (obviously) and try to identify used homes that we can bring in. We'll usually try to shoot for something like 2005–2006, and newer. We don't want to bring old homes into our parks. It's become very important right now more than ever (I think) to be creative on the infill process, for sure.


Andrew: Totally. Just the value that an occupied lot adds is huge. Would you tell me, on the deals that you guys do, do you guys invest money into your deals that you put together?


Luke: Of course. I have invested on the LP side, but if I were to do that as an LP investor and if the GP didn't have any skin in the game, I just wouldn't feel comfortable. How are you incentivized to do a good job if you don't have your own money in the deal?

We 100% allocate and put in our own dollars into these deals, and it keeps everybody incentivized; it keeps everybody honest. Usually, we'll put about 10%–20% of the equity into these deals as the GP.


Andrew: That's great. I always like to ask that because I agree with you as well. You want to invest with operators that have skin in the game.


Luke: Absolutely.


Andrew: Tell me, Luke, what's your endgame goal? Where are you going to be down the line 20 years from now?


Luke: I love manufactured housing. If you had asked me that two or three years ago, I would have looked at you sideways. If you had told me that two years from now, you're going to be in love with manufactured housing communities and you're just going to want to keep acquiring them and operating them, I would have looked at you sideways.

I think that I have truly found my calling and doing what I'm doing. I don't plan on going anywhere in terms of finding different assets to target. We're laser-focused at Pioneer Communities on acquiring manufactured housing communities. So, 20 years from now, I envision us owning a whole lot more of these things and I envision us providing the services that we provide to our tenants, to our investors on a much larger scale.


Andrew: Fantastic, Luke. Is there anything else? Maybe something that I didn't ask you that you think would be valuable for the listeners to know about you guys over at Pioneer Communities?


Luke: No. I think we covered pretty much everything. Is there anything you think we left out?


Andrew: No, I think you added a lot of value. Thank you for coming on the show. If any of our listeners want to get a hold of you, what is the best way for them to do so?


Luke: We're pretty active. We've got a website that they could go to, which is just pioneercommunities.com. They could also find us on social media. We're pretty active on Instagram, like you mentioned. If you just do Pioneer Communities, the handle also @pioneercommunities, you could find us there. Your best bet would probably be reaching out to us directly from our website. All of our emails and cell phones are up there.


Andrew: Awesome. Well, thanks again for coming on the show, Luke. I really appreciate it. That's it for today's show. Thank you all so much for joining us.


Luke: Thanks, guys. Thanks, Andrew.


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