How to invest in parking lots? What are the benefits and drawbacks of parking lot investing? Are there many lenders available? How do you even go about learning about this new asset class? Brian Spear, Principal at Sunrise Capital Investors shares what he has learned over the years.

Tell us a little bit about you.
I was born and raised in the Chicago area, and over the last 15 years or so we've been spending a lot of time focused on the mobile home park sector. I'm a principal for Sunrise Capital Investors, and we have been buying and selling a lot of mobile home parks in about 14 states on the eastern half of the country.  My very first experience with mobile home parks was when I lived in one when I was 10 years old. My parents had divorced, fell on hard times, and every single month when I'm taking the cheque over to the landlord, I'm thinking to myself, how can I be on the other side of this table? So I just worked really hard throughout my adolescence, in an effort to try to ultimately turn the tables, I took a job traveling throughout the country, building piles of cash to make as much money as possible, all the while knowing that I wanted to turn them into streams of income. When I had those piles big enough, I decided to take the leap go full time into real estate. That's when I branched off and started going out and buying mobile home parks with my business partner, Kevin Bupp. In the last couple of years, we've branched off and leveraged some of our core competency. Going off market, direct to owner, and leverage that in a unique niche, parking lots and garage, is something that not a lot of people are doing.

What made you think about parking lots and get into them to begin with?
We've always tried to zig when others are zagging. Nobody really ever bragged about owning mobile home parks around the water-cooler, especially a decade ago. Over the past couple of years, it has become much more of a hot commodity and a well known asset class. But our core competency is going off market, direct to owner to acquire assets and true off market deals. Off market is outside the purview of a broker, I'll use multifamily as an example where, oftentimes, you'll go to a broker and that's where the vast majority of these deals are transacted. Even those "off market" deals are usually pocket listings, where a broker shops it amongst his preferred three, four or five different buyers. In a hot market like this, even a pocket listing typically ends up trading somewhere around the market value. But if you remove the broker, and make it a true off market transaction, by doing old calls, direct mail, etc, then you can usually buy deals with a nice margin of safety right out of acquisition. That's what we've been doing for the last decade.

Over time, as mobile home parks became more well known, our strategy began to be implemented along the way. Part of that is due to our team, we actually hosted our own podcast called "The Mobile Home Park Investing" podcast, where we take our business model and teach everybody what we do. We've created some of our own competition to a degree, but people started mimicking that strategy. Our team does somewhere between 16 and 20,000 outbound cold calls every month, and that works exceptionally well in fragmented industries, as cap rates have compressed over the past decade in the manufactured housing industry, we're seeking yield and the best opportunities to provide the best risk adjusted returns in the marketplace to our investors, and we happen to stumble upon the unique niche of parking. It's a very overlooked asset class, not a lot of people are digging into it. I will never forget going to my very first national parking conference, the juxtaposition of the candidates that were there, on one side of the table, you had high quality institutional folks that run billion dollar businesses that are publicly traded operators, exceptional folks, high quality skill sets, and on the other side of the table, you have exceptionally old school mom and pop owners of assets, they've been running a parking lot over the last 40 years themselves, in a family business, and have handed it off to their kids and are basically just accepting payments sitting outside the parking lot, in a lawn chair with an umbrella over them taking cash payments.

I remember feverishly scrambling on our flight back home and jotting down a SWOT analysis, telling my business partner that we should at least take a deep dive into this to see if it's something that we should explore. It was a very fragmented industry where the vast majority of the owners in the asset class only own one asset, one parking lot or one garage. We know that the strategy that we've employed historically, going off market, direct to owner in mobile home parks likely will do very well in parking as well. The more that we dug, the more overlap we saw amongst parking and mobile home parks. Both are very favorable long term macro economic tailwinds, there's actually a decreasing supply of parking throughout the entirety of the country. The demand for parking continues to increase and will continue to increase for the next several decades, it's exceedingly fragmented with a lot of mom and pop operators, we had the chance to go off market direct to owner and buy assets with a nice margin of safety. We view it as a long term cash flowing covered land play.

We don't have a short term horizon when we invest, it's not a buy, fix and sell model, or a fix and flip model. We truly view ourselves as long term, buy and hold investors. We invest for cash flow and legacy wealth. The cash flow from the parking lot covers the carrying costs in the near term, the land play suggests that over very long periods of time, the underlying land value will just increase in value because you're buying assets that are in exceptional location. We're currently closing on another parking asset in one of the number one beaches in the entire country, Clearwater Beach. It was newly constructed in 2017, and the underlying land value on Clearwater Beach is probably going to be worth more in 10, 20 or 30 years than it is today, these are just exceptional cashflow, covered land plays.

Do you get the land on all the parking lot deals as well?
We've historically always said we'd like to operate our mobile home parks like a parking lot. When we buy the mobile home parks, we don't like to own the homes themselves, we just want to own the land. We want the residents to own their own homes, and we just charge them lot rent on a monthly basis. It's the same philosophy in parking, we want to own the land, the value from our perspective is in the long term ownership of the land itself. Customers literally drive the car up and park on an hourly basis.

What are the pros and cons of owning a parking lot?
Starting with seeking favorable long term economics, the demand for parking is growing and will continue to grow over the next several decades. The two largest generations that we have, Gen Z and the millennials, are going to need vehicles and travel throughout the entirety of the country. That demand is continuing to increase, while the supply of parking is shrinking over time. As the population grows, cities are getting more and more dense, developers are taking some of the high quality parcels in downtowns and redeveloping those assets into a higher and better uses. There's actually a UCLA professor, Donald Shoup, who wrote a book called "The High Cost of Free Parking" in 2005, where he talks about the fact that a lot of to municipalities that allow free parking are adversely affecting the local economy. Both sides of the political aisle agree with this philosophy, the data has shown that this is ultimately something that needs to be enacted. He is proposing that a lower supply of parking is actually needed in those downtown urban cities. For that reason, a lot of municipalities are putting a moratorium on brand new parking, Carmel, California, Minneapolis, Minnesota, Buffalo, a lot of different municipalities have basically banned the creation of new parking in their cities. And for that reason, that unique supply and demand imbalance bodes well over very long periods of time.

Parking lots are prime parcels and some of the best locations in the country, just by the mere fact that somebody is willing to pay you money for the right to stand on my piece of land, tells you that you're in a very high quality urban business district, or a very high traffic tourist destination. It's exceptionally high quality land with low maintenance costs, there's really not a lot going on inside of a parking lot, you have some bumper blocks, striping, but there's not a lot of high capital expenditures inside of a parking lot. The vast majority of the revenue goes to the bottom line. If you follow any of Warren Buffett's investment philosophy over time, when you have that higher margin, lower capital expenditures, that bodes well because the cash flow that these assets throw off can ultimately be used to either send out distributions to shareholders, or purchase additional cash flowing assets and help you grow wealth and build more wealth over time. Those are just some of the things that we love about the asset class, not to mention the fact there's not a lot of folks doing it, there's low competition in this fragmented industry.

We feel like we're ahead of this wave of folks trying to consolidate the industry, it's very much a blue ocean. There is a business book called the "Blue Ocean Strategy", whereby you have an option when you're implementing a business model to either go choose to partake in a very competitive environment, where there are a bunch of sharks swimming around, and they're all trying to get this one fish, and somebody is ultimately going to get that fish, but there's going to be a lot of blood in the water, it's very competitive. On the flip side, you can choose to play in a completely blue ocean, where you're the only individual out there doing what you're doing, you're creating your own competition to a degree. We would much prefer to implement a business model in the blue ocean, where we're not operating with a litany of competition, which is compressing margins and a shrinking profit pool. It's an opportunity to try to create outsized, risk adjusted returns for our partners.

How about some of the negatives in that space?
We feel like the positives significantly outweigh the negatives. But in terms of negatives, because it is fragmented, it is more difficult to scale in the industry, due to the ownership structure, most folks only own that one asset or those couple of assets. In order to scale, you're not able to buy facilities at large swathes. Even the single family residential space is largely fragmented as well, there are more mom and pop guys that not only own one home, but 5 to 30 homes over time, and they can start to compile chunks of portfolios and ultimately scale a little bit quicker. Parking lots are more of a slow, steady plot.

Another drawback is on the financing side. While there are some good lenders, just the mere fact that it's not a well known asset class, there are fewer lenders in the marketplace that understand the asset class. And for that reason, if you have a more modest sized parking lot, you're likely going to have more difficulty garnering the best and most attractive financing terms available in the marketplace.

The government subsidizes residential financing, through SFR, multifamily, built to rent, mobile home parks, etc. The agencies will subsidize them to a degree and provide better yields and returns than what you might find in some of the other asset classes. You certainly don't have that benefit in the parking side. But even amongst all the different commercial real estate sectors, parking is a little bit of a unique nuanced asset class, there are fewer specialized lenders, but once you get to grow the network, you can leverage some of the specialty brokers, parking brokers that know all of the players in the industry. But if you're just getting started, you might have some difficulty locating the best players to help you garner the best financing in the marketplace, especially if you're only buying parking lots on a small scale, and maybe in secondary markets.

How did you find that first lender?
By networking at these parking conferences, there are a handful of those national conferences on an annual basis. It's a relatively small industry, and because these are relatively small niches, you have the ability to climb the ladder a little quicker than what you might be able to do with the other asset classes. You can network with some of the players that are top tier in the industry, by virtue of attending some of these conferences and things of that nature and spending some time in the conferences, talking shop with some of the players in the industry, you can garner some business cards that will help you attract some of the better debt available.

I always tell people go to a conference for any new asset class, that's the number one step, you're going to meet so many people that can help you.
You can do a ton of learning while you're driving and listening to podcasts, but at some point, you have to get out there and meet people and start to take an action in that manner as well.

Brian Spear