RV Park Mastery: Episode 26

What Happens When A Seller Refuses To Share Their Tax Returns?

While every RV park owner files an annual tax return, some refuse to share those with the potential buyer and their lender. So what happens when the RV park owner refuses to provide these important documents? In this RV Park Mastery podcast, we’re going to review the impact of lacking tax returns when buying a property and how to use that as a tool to perhaps forge a better deal.

Episode 26: What Happens When A Seller Refuses To Share Their Tax Returns? Transcript

We all produce annual tax returns. That's how we pay our income tax to the federal government. However, we normally keep those private. But when you sell your RV park then often you're asked to share it. This is Frank Rolfe of the RV Park Mastery Podcast. We're going to talk about what happens when the seller refuses to share their tax returns on their RV park.

Let's first talk about why they would need to share their tax returns. Normally, when you go to get that loan on the RV park you go to the bank and the bank asks you for several items. One of those items is the last several years of profit and loss statements. Those come from the seller of course because you don't own the RV park at that point. Another item is the tax return of the seller. They want to see that to make sure the tax return matches to that which they gave them in the profit and loss, because clearly the bank knows what the profit and loss isn't of the same degree of solidity as that tax return because the impact is different. If you cheat on your taxes, that's tax evasion.

If you give someone a false P&L, it's not quite that big a crime. The other issue is you can always claim that you made a mistake on that P&L but you can't make a mistake on the tax return argument. So banks view a tax return, therefore, as being stronger, a stronger way to show what the income was than the profit and loss statement.

But when you go the seller and ask them to give the tax return to you, to give to your lender or just do some due diligence, some of them absolutely freak out. Absolutely not, they won't even ponder it, won't even discuss the idea of giving their tax return to somebody else. Now, I'll admit it's kind of an odd request. I can't think of any other time in your life in which you would ever give any stranger basically your tax return. But in this case, it's important. It's important to the bank because they want proof of what the income was. It's typically not the tax return of the individual they're seeking, it's simply that of the business itself.

Now some mom and pops don't have that business held in any other thing but their own personal name, but others have their tax returns set aside as part of some entity, whether it be an LLC, a regular INC, or an LLP. But never the less, you simply can't always get the tax return. So then what happens when you can't? What do you do when the seller says, "No, I'm sorry. I'm not going to give you the RV parks tax return because I just don't want to do it, and I won't do it. I absolutely will not do it, no matter what you say." What happens then? Is that the end of the deal? Do you have to walk away from the deal?

Well, it's going to tie back to some degree to banking and your bank. Now, there are a lot of banks out there which are more sophisticated about RV parks so they're able to feel a little more comfortable based on the size and location of that RV park to have some idea of its inherent value. But there are other banks that don't have any clue as to what an RV park even is, and only want to do the loan because they like you and they believe in you, and they think the asset has value, and they're only going to do a certain degree of loan to value against the asset. Therefore, they have the comfort to go forward but gosh darn it they really would like to see that tax return. So when you have the bank that demands the tax return, they won't do the loan without the tax return, well then yes. Not having the tax return basically kills the deal because you can't fake it, you can't make up the tax return. They either can give it to them or not, and if they say, "No, I've got to have it," well then you just lost that lender.

Other lenders will say, "Well, we can get along without the tax return. We'll still need to see the P&Ls. We need to do an appraisal. We need to look at our underwriting inside the bank, what we personally think." But there are many lenders out there that will allow you to go forward even in the absence of that tax return. However, sometimes not having the tax return can also be used as a lever to create a better deal.

Now, often the best debt you can get in the RV park industry is seller financing, because seller financing is typically non recourse. You typically will have a lower percent down than a bank loan. And also, it normally does not have all these expensive third party reports. You don't have to do an expensive survey. You need to do one, but not a super expensive survey. You can normally avoid the appraisal all together and avoid the property condition report, so there's a lot of money to be saved not even including legal fees and sometimes upfront points that banks charge. So clearly, if you can get a seller note, you're way, way ahead of if you have to get bank financing. That's pretty much always been the case. So sometimes you can spin it to the seller that if he won't give you the tax return, that's okay but he'll have to carry the financing. That's the natural spot you go in the negotiating process.

In fact, with the seller who doesn't know any better, they're already assuming that not giving the tax return will cause some degree of financing trauma. They know exactly why you're asking for it. They know exactly its purpose and that's to pinpoint exactly what was made on paper to the IRS, and not just what they throw out there on their P&L. So as a result, they already have kind of this back of the mind concept that if they don't give you those tax returns, then bank debt is impossible. If they believe that and if you use it as a negotiating point, you'll be miles ahead if you can convert that RV park deal into seller financing rather than bank finance, even though it may not be entirely true. You may not even go out and even try and hit a single bank without the tax returns, but instead try and use that as a lever from the get go, that well if you don't give me the tax return then you'll have to carry because there is no way I can get a bank loan, even though it may be possible to get one after all. Because the seller simply does not know that.

Now what about you as the buyer? Does not having a tax return sour the deal for you? Well, no it really shouldn’t for several reasons. Number one, if you're going to go ahead and buy an RV park correctly you have to do some superior due diligence. Benjamin Franklin said, "Diligence is the mother of good luck." He was completely correct although I know he never owned an RV park. So you should be able to build up from scratch the revenue and the expenses to a very, very high level such that not having the tax return really would not cause you problems as far as estimating the net income.

Another issue is not having the tax returns may give you a clue that the seller may be up to some shenanigans in their own numbers. A seller who is up to shenanigans, it may not just end with the numbers. A lot of times we've seen a correlation between the seller who doesn't want to give you tax returns and other errors in operations in the property. Such items as not compensating their employees correctly. Not following the laws of withholding taxes, trying to pay some people under the table. Disregarding minimum wage. It could also manifest itself in repair and maintenance issues. Sometimes they're not fixing things correctly, even though they know better. Because kind of they go off in this kind of Bonnie and Clyde bent where they try and do what they can get away with, even though it's not the right thing.

So sometimes not giving you the tax returns can be an indication that there's other issues you need to watch for inside the RV park. A well run RV park should have no problem giving you the tax returns. They should have computerized statements. They should be able to provide all the items a bank could require in due diligence with no pushback whatsoever. Why would they? Why should they? They've done everything correctly. They have no problem in giving you everything regarding the property. But the seller who won't give you everything, you have to be suspect is there a reason behind this. Are they in fact trying to hide something? And it definitely should increase your guard, your concern for your investment and your down payment. Because if in fact they're hiding key material facts from you, that's really going to obviously damage you after closing.

So not having a tax return is not necessarily a deal killer. Sometimes it's a deal builder because maybe you can turn that into a seller finance transaction. But it also can be a symbol to you that there's other more latent issues that you have to check into, because there has historically always been a correlation between the seller who is hiding things and the seller who is hiding more than just tax returns.

Sometimes we've found with sellers who hid their tax returns that the statements they themselves have been providing are false, but sometimes in a good way. Sometimes we've seen situations where mom and pop deliberately try and falsify such items as buying a personal vehicle, for example, and expensing that through the RV pack. They put it in their P&L but they're just not bold enough to do it with the IRS necessarily.

So again, there are many, many issues or ramifications of mom and pops behavior regarding their tax return. Some of them legitimate, some of them false. Sometimes a seller truly does not want to give forth their personal information, but sometimes it is hiding something much deeper, something more sinister, and you have to make arrangements for that and watch for those items in your due diligence. This is Frank Rolfe with the RV Park Mastery Podcast. Wanted to review what to do if the seller won't give you their tax return. Again it's not the end of the earth, it's not a good sign necessarily, but it's definitely something you can get over and still succeed with.