Business Plan

Investment model

The liquidation of Coastal Cabins resulted in passive investors in rental cabins either having to take active management of their cabins or enrol with PMP, a company that was taking over the rental book, but which did not take over the factory (which was sold to a third party).

While PMP will take over the hard work of marketing, qualifying, leasing, transporting and refurbishing the rental units, there is a need to align investor needs with a better investment instrument. In 2020, for the late John Brown, then MD of Coastal Cabins, this plan was being conceived as Aligned Capital Fund (ACF). But COVID lockdowns disrupted it, and it was shelved. Now it is being revived with the cooperation of PMP. At this point, this web page is a discussion document.

The need includes

• Capital preservation: Cabin value based on rent collected, not resale market with capital loss
• Liquidity: Easier to exit the investment (sell shares not cabins)
• Shared risk: Vacancies shared equally by all (spreads risk)
• Oversight: Fund monitors for performance measures, no co-mingling, succession plan

How it works

• Existing owners of rental cabins buy shares in ACF at initial purchase (ex gst) price of their cabin
  • Example: If cabin owner paid $80,000 (ex GST), they would receive 80,000 shares in the fund
  • The value of each share (technically called a “unit”) is $1 par
  • Vacant cabins do not enter the fund until they are leased and generating rental income
• All rent is pooled, reducing accounting costs and spreading vacancy risk
  • If the overall occupancy rate is 96%, this is shared by all investors, not the unlucky one
• Insurance is deducted from the collected rent at a fixed fee before managed rent is calculated
• 25% management fee is deducted. This is the same as was deducted by Coastal Cabins
  • Over time, as the economies of scale kick in, this can be expected to decline
  • But for now, management is complicated, justifying the 25%
  • No decision has been made how to provide for refurbishment costs. Unde Coastal Cabins it was part of the insurance deduction. This line will change when decisions are made.
• The net rent from all units is pooled and paid out equally to each share
  • For example, if weekly net rent for 50 cabins was $10,800 with 4 million shares, 80,000 shares would earn $216/week ($11,232 on $80,000 invested) or about 14% EBIT
  • This saves considerable cost of backroom accounting

Over time, the ROI will increase as rent goes up with inflation while the capital base (the investor’s $80,000) remains fixed at original purchase price from Coastal Cabins.

Liquidity of Shares

Selling a cabin to exit the investment is hard and most likely will result in a capital loss. Selling shares in a mutual fund returning over 10% in a passive investment is much easier.

The fund will initially use a clerk-maintained online registry and email communication to enable its investors to sell and buy shares. Over time this will be automated. Initially sales will be at par value, so each share will be offered in blocks at $1 par.

Until FMA rulings are clarified, the market for shares is limited to sophisticated investors. This includes the existing investors in the fund. Clarity will be sought, and when funding supports it, ACF will seek FMA approval for fund shares to become a retail investment able to be sold to anyone.

When the fund secures FMA approval, and market software is put in place, the fund may operate similar to a bond market, where buyers may pay more than par value because the ROI is seen as low risk relative to return. 

Growth

The fund will be asset-backed at a 1:1 ratio of shares to cabin cost. When market demand exceeds the existing rental pool, the fund will offer new shares equal to the cost of placing a new cabin in the field. If the new cabin costs $90,000 (ex gst), 90,000 new shares will be offered to the existing investors at $1 par. This also opens up the potential for raising the ROI of the fund by the management company acquiring second-hand cabins that are being sold at a loss in the market, refurbished to look like new, and added to the rental fleet, since the ROI will be higher.

LOP

LOP cabins have a different management profile. If the lease is performed, there is no remarketing, no retrieval and relocation towing and no refurbishment. However, when there is a breach, it becomes like a rental cabin, except in some cases, the tenant is not as cooperative.

The market for LOP cabins is large and it is socially beneficial. It is the hand-up, not the hand-out. For it to work in ACF, there needs to be a critical mass sufficient to generate enough principal to pay for new LOP cabins. This works for investors who are in it for the long term, where their principal is reinvested in new LOP cabins. The challenge comes in the contract breach. This section will be updated as it is determined how best to handle LOP.