Exploring Transition Options for RV Park Owners
Transitioning ownership of an RV park is a very pivotal decision. The most traditional options have been to sell the park outright or pass it down to family members, whereas in our blog, we discuss other more unique options, such as converting the park to a cooperative or bringing in a partner. Each approach offers unique benefits and challenges. Another lesser-known option is rolling ownership into a portfolio vehicle. This innovative method provides RV park owners with financial flexibility, tax advantages, and continued income potential while reducing operational burdens if desired.
What is a Portfolio Vehicle?
A portfolio vehicle is an investment entity, such as a private or public Real Estate Investment Trust (REIT) or a limited partnership, designed to aggregate assets like RV parks. Owners contribute their property in exchange for shares or units in the vehicle, and sometimes have the option to receive some cash as well. Portfolio vehicles provide liquidity, diversification, and professional management—making them an attractive option for RV park owners seeking an exit strategy.
Understanding Portfolio Vehicle NAV and Unit / Share Price
The Net Asset Value (NAV) of a portfolio vehicle represents the total value of its assets minus liabilities. The unit price or share price is derived by dividing the NAV by the total number of outstanding shares or units in the portfolio.
How It Works: The Mechanics of Ownership Conversion
Transitioning an RV park into a portfolio vehicle involves a process that typically looks something like this:
- Asset Valuation: The RV park is appraised (most typically by dividing its net operating income by the prevailing market cap rate) to determine its fair market value.
- Equity Exchange: Owners exchange their park’s equity for shares or units in the portfolio vehicle. This can be structured as a full exchange or a combination of cash and shares for immediate liquidity. The amount of shares or units received is based on the value of the owner’s RV park from the asset valuation relative to the NAV and unit price / share price of the portfolio vehicle, while also taking into account the split between shares and cash that the RV park owner is receiving.
- Tax Considerations: By opting for shares instead of cash, owners can defer capital gains tax, preserving more of their wealth for reinvestment. The tax treatment of the portfolio vehicle compared to the RV park owner’s current tax treatment may also result in tax advantages for the RV park owner.
- Professional Management: The portfolio vehicle typically assumes operational responsibilities, allowing owners to enjoy passive income from dividends.
- Flexible Involvement: If you aren’t ready to fully retire or move on to another endeavour, there may be the option for you to continue running the RV park or maintain certain operational duties.
Key Benefits for RV Park Owners
Opting for a portfolio vehicle offers several compelling advantages:
- Tax Deferral: Capital gains taxes can be deferred by accepting shares instead of cash, maximizing financial returns and/or shorter-term cash flow needs.
- Preferential Tax Treatment: The tax treatment of the portfolio vehicle may be more advantageous compared to the entity or individuals that currently own the RV park.
- Diversification: Owners exchange concentrated risk from owning just their own RV park for shares in a diversified portfolio of RV parks.
- Passive Income: Regular dividends from the portfolio can provide a stable income stream.
- Regular Liquidity Options with Potential for Partial Sales: Portfolio vehicles typically have regular redemption windows where unitholders or shareholders can sell some or all of their interest. In a traditional sale, it is not typically possible to only sell a portion of an owner’s interest in the property. In addition, shares can often be redeemed or sold in secondary markets, offering additional flexibility.
- Operational Relief: Owners have the option to transition away from day-to-day operations if desired.
- Growth Potential: The portfolio vehicle has the potential to grow its dividend and appreciate in value.
- Legacy Planning: Owning units or shares in a portfolio vehicle makes it easier to divide shares among beneficiaries.
Portfolio Vehicles: A Potential Option for Your RV Park Succession
Portfolio vehicles represent a growing trend in the real estate sector. Their scalability, coupled with operational efficiencies and attractive financial returns, makes them a promising solution for RV park owners. As these vehicles grow, they can drive innovation, enhance the guest experience, and improve overall park performance.
Making the Right Choice for Your Legacy
Transitioning ownership is not just a financial decision but also a legacy choice. Portfolio vehicles offer a harmonious blend of liquidity, growth, and operational freedom. Owners deciding on this path can typically expect success for their parks’ long-term future and to benefit from diversified, professional management.