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This issue of the MobileHomeParkStore.com and MHBay.com Newsletter includes:

1. April 2009 Bootcamp Report

2. Article: Environmental Due Diligence FAQ Part 1, by David VerSluis

3. The Stars are Falling, by Frank Rolfe

4. Manufacturing Housing Institute Selects Wells Fargo
   Community Lender of the Year

5. Articles from Joanne Stevens of NAI Commercial

6. Tell us what you think and send us your articles!

THE STARS ARE FALLING

The manufactured home community business is breaking in two, and nobody has noticed it. But its impact may change things forever, and certainly points the way to the potential, and limitations, of the industry.

The see this enormous shift, all you have to do is get in your car and head into Denver, Colorado -- although it could be any big city in the U.S. Once you get there, drive into some 1 star communities and then into some 4 star ones.

The first thing you'll notice is the occupancy. The 1 star properties are full. Every lot you can shoehorn a home onto is occupied. However, the 4 stars have vacancies everywhere. You'll also notice that there are "For Sale" signs in the windows of many of the homes in the 4 star communities, whereas there are hardly any in the 1 star. If you call the managers and get the lot rents, you will also find a strange phenomenon -; the rents are actually higher in some of the 1 star properties. Higher occupancy, retention and rents in 1 star communities: how can this be?

What's happening is the continued growth in demand for affordable housing, and the continual lack of interest in the manufactured home product from those who have other, more expensive, options.

$500 Per Month Is The Sweet Spot

If you earn minimum wage, and believe the government's assertion that you should not spend more than 33% of your income on housing, then these Americans' budgets are $15,000 x 33% divided by 12 = around $500 per month. This is about as much as they can spend for the lot rent and home mortgage combined. They want a detached single-family dwelling. What they have to choose from are older homes in older 1 star communities -- the kind you can buy for $1,000 to $5,000. The demand for this product is increasing daily. But there are no new parks being built that meet this market, nor are there any new homes being built to serve this demographic. As a result, they've bought every home available, and they are so happy to have found such a niche that they have excellent retention and satisfaction.

On the other hand, at the typical 4 star property, the combination of lot rent and mortgage is around twice that figure -; over $1,000 per month. To meet this housing, you have to earn about $30,000 per year. That's about twice the actual housing budget for most folks seeking affordable housing. As a result, they have no desire, or ability, to move into a 4 star community. They are simply priced out. And the net result is empty lots at these communities.

The Rich Have More Options

Well, not really rich. In fact not well-to-do at all. But folks who can afford a $1,000 per month housing payment have many choices that people with a $500 budget don't. For example, a stick-built home. Or a condo. Or a fancy apartment. So those residents in 4 star communities are constantly battling the desire to move to something nicer. And the minute they realize that they are upside down in their manufactured home, with a $35,000 mortgage and a $20,000 resale value (if they can find a buyer), they put a "For Sale" sign in the window and start the process to upgrade into something better.

At the same time, those residents in the 1 star community have zero options. They are thankful to have something to live in that meets their budget. So the "For Sale" signs don't pop up in their windows at all. On the contrary, they often bring in their friends and families to buy any homes that come on the market in their price range.

Lower Home Payments Mean Higher Lot Payments

How is it possible that the 1 star rent can exceed the 4 star rent? Well, it's just a matter of economics. In the 4 star property, the majority of the monthly payment goes toward the home mortgage, plus its related property tax and insurance. So that leaves less money for the lot rent. In the 1 star property, the home costs are small, and there is more money available for the lot rent. The community owner is the big winner in the affordable housing model.

Better Grab Reality Before It Beats You Over The Head

Affordable housing is flourishing. It's more expensive counterpart is flailing. To right these problems, home costs must come down. If you own a 4 star property, you need to get together with your peers and find a way to get the manufacturers to put their collective minds around ways to build cheaper homes. As home prices continue to rise, there is less money available for lot rent, and more dissatisfaction in the end product, leading to poor retention.

And if you own a 1 star property -; "what recession?"

 

Manufacturing Housing Institute Selects Wells Fargo
Community Lender of the Year
Third Consecutive Year
 
San Francisco, April 16, 2009 -; Wells Fargo & Company (NYSE: WFC) has been named the Manufactured Housing Institute's (MHI) 2009 Community Lender of the Year.  MHI presented the award April 15 at the 2009 National Congress and Expo for Manufactured and Modular Housing in Las Vegas.
 
"We have always focused on providing our customers with the best financing alternatives available, through all economic cycles," said Tony Petosa, a Wells Fargo Multifamily Capital senior vice president who is based in Carlsbad, Calif. " Winning this award for the third year in a row demonstrates our commitment and ability to serve the manufactured housing industry."
 
Wells Fargo Multifamily Capital finances manufactured home communities nationwide through the Fannie Mae DUS program and also its direct lending program. Wells Fargo has originated over $4 billion in manufactured home community loans since 2000. 
 
 "Wells Fargo continues to be a very dependable source of financing," said Creighton Weber, a Wells Fargo Multifamily Capital senior vice president in Troy, Mich. "As an experienced manufactured home community lender, Wells Fargo offers the most comprehensive selection of loan programs available from a single source." 
 
About Wells Fargo
Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets, providing banking, insurance, investments, mortgage and consumer finance through more than 11,000 stores, over 12,000 ATMs and the internet (wellsfargo.com) across North America and internationally
 
 
Gabriel Boehmer
Communications Consultant
Wells Fargo Wholesale Banking
1300 SW Fifth Ave.
Portland, OR 97212
Office: 503-886-4186; Mobile: 503-784-5319
E-mail: gabriel.h.boehmer@wellsfargo.com
 

HOW HAS THE FINANCIAL CRISIS AFFECTED THE
VALUE OF PARKS AND COMMUNITIES?

The media frenzy about the economy and how dire and awful and how long it will last is not the whole story. What the news doesn't tell us is that the predictions and the current stories are compiled by throwing all of the bad news that is either the dramatic news in over-built, over-supplied markets (Las Vegas, Phoenix, Florida), or it is about average price declines. They purport that this is true for all U.S. markets, all real estate and all commercial and residential property types. This is not the case. Real estate will always be a local business and, yes, national trends can have an affect, but the reporting of the economic real estate news, especially for commercial real estate, needs to be tempered by stirring some reality into the mix. And, a piece of that reality is that from 2004 to mid-2007 it was like trying to "nail Jello to the wall". There was no clear idea of what was going." (Stephen Blank, Senior Fellow, Finance, the Urban Land Institute.) At least now the truth is starting to come out. The Emperor has no clothes!, which is to say that a lot of deals that were made during the overheated, frothy years didn't make sense. Too many dollars were chasing deals without the normal rudimentary real estate fundamentals. So here we are.

Much of the news about the recession is hyped. This isn't helpful to the economy's recovery. It scares and confuses some investors, causing the behavior of doing nothing. This "do nothing" behavior will only contribute to prolonging the recession.

So what is it like today for selling a park or community? What is going on with prices, financing and investors for parks and communities?
PRICE. For the last several years buyers and sellers have been fixated on the cap rate. "I'll buy at a __ cap," said the buyers. "I'll take a __ cap," said the sellers. Same thing with lenders. The cap rate was THE thing that mattered the most. But a capitalization rate is only one measure of an investment and it only measures the price as a ratio of the first year's net operating income.

So, the cap rate is being talked about a lot less, especially by buyers and lenders, simply because there are other measures with which to evaluate investments that go deeper into examining a property. The cap rate method doesn't seem so relevant anymore. Instead, investors are looking for the highest return on their cash. They are analyzing the "cash-on-cash" return and comparing the highest returns against the risk (lenders) and alternate investments (buyers).

Another method is the IRR (Internal Rate of Return) which measures the cash flow, the tax benefits (depreciation), the principal reduction and the appreciation over a 5 to 10 year hold. The IRR often helps to justify a higher price than a cap rate because all of the financial benefits of owning investment real estate are considered and not just the cash flow. The problem with the IRR is that many investors either do not understand it or do not take the time to use it. That may change as more lenders do more analysis and explain to the buyer how the bank arrives at value. In addition, real estate isn't appreciating at the current time.

FINANCING. The discussion about financing and the banks has been blown out of proportion. Financing is harder to find and it takes longer because the lenders are doing more due diligence than in the recent past. But financing is still available, and some of it is quite good. It's a funny thing about lending and investing. When capital was plentiful and easy to get, a lot of due diligence was hurried through or maybe not reviewed in depth. Now, buyers and lenders want more detail and ask more questions. But for anyone who has been through a few economic cycles, what is really happening is a return to a more normal lending environment. The biggest problem with bank financing today is higher down payment requirements, which lowers the return and makes the property worth less. With government sponsored loans (GSE's) like Fannie Mae, it is business as usual, with good rates and reasonable terms. And, there are FHA programs, too.

For owners who want to sell for top dollar and also want an easier, faster, cheaper transaction, Seller Financing is the way to go, and here is why. In the past, economic down-turns caused sellers to carry some or all financing on the sale. The difference between then and now is that the cash-out to a seller used to be 7 to 10 years. Today, the buyers are talking about 3 to 5 years or just long enough for lending to return to more "normal" requirements while the buyer also builds a little equity in the property.

The words "seller financing" and "contract sale" often stir a negative reaction in an owner. Owners/sellers, it seems, have been acculturated into not wanting to do a contract sale. Contract sales are not for every seller and every situation. For example, if you are doing a 1031 exchange, the sale needs to be all cash in order to buy the substitute property. But, there are at least a couple of reasons to consider a contract sale and some differences between this down cycle and previous down cycles. This is a time to review your options and not automatically discount anything.

DIFFERENCES.
Caliber of the Investors. Most sellers think of deadbeat buyers when they hear the words "contract sale". Everyone either knows someone or has heard of someone who experienced the buyer from hell who "milked" the property and never made a payment to the seller. The reality is that this rarely happens, but still, this on the top of owners minds. Today there are buyers who have solid, operational and management experience as well as very healthy financial statements. They want to buy parks and communities! These buyers know what they are doing and could get bank financing, but don't want to because they have been so turned off by the banks' requirements (higher down payments, longer decision times, higher rates, shorter terms) and are frustrated by the banks' treatment of them. Before discounting seller financing, be open to what kind of offers and buyers are out there because these operationally and financially strong buyers are usually willing to pay strong prices.

The same thing goes for Rent with Option to Buy. Sellers are also turned off by this because they don't think it through. It's really interesting. In other commercial/investment real estate venues such as office and retail, owners spend thousands of dollars to build-out a space to rent to the tenant's specifications with a one-month security deposit and one month's rent. If the tenant doesn't honor the lease, the only money the owner gets is the one month's security deposit. This is how leases in shopping centers and office buildings get done everyday. In a Rent With Option to Buy the risk is minimized by the quality of the tenant/buyer. With Rent with Option to Buy, the seller has these benefits:

1) The title to the property stays in the seller's name until the option is exercised and the seller gets the money. If the worst case scenario occurs, and the buyer/tenant doesn't make the payments or adhere to the terms (keep community guidelines enforced, keep the occupancy at the same or higher as at the sale/lease commencement, etc.), the seller retains title. The seller has a lot of control. The lease is like a triple net lease (something that almost every seller wants to buy but can rarely find) with the buyer paying all the expenses for the community, collecting rents and giving the seller a rent check every month.

2) Capital gains are not reported until the option is exercised, so there is more time to plan for the use of the sale proceeds.

3) Due on sale clauses. Rent with Option to Buy as a financing vehicle was conceived in the down-economy of the 1980's when banks were enforcing due on sale clauses. It is a way to sell property without invoking the due on sale clause, but the concept works well for sellers who want to maximize the sale price and sell to a financially qualified and experienced operations buyer.

Pricing tends to be quite strong if the seller carries the financing. This is because interest rates are low and the demand for parks and communities is strong. In the past, when the economy went down, interest rates were higher, causing prices to be lower. Selling a park/community is about maximizing wealth. You can maximize your wealth by maximizing the price. It's even better if the contract only needs to be carried for 3 to 5 years.

The upshot is that you can still sell your park or community in this over "awfulized" economy. And, unlike some of the banks that are paralyzed with paranoia and distrusting even the best borrowers, you can offer to finance your property and act in a reasonable and realistic way to qualify the buyer and assess his strengths. The financier, J. P. Morgan, in 1912 (during another financial crisis) when testifying before congress on how he decided to make a loan or investment said, "The first thing is character."

THE MULTI-FAMILY BUSINESS AND TODAY'S REAL ESTATE MARKET
The winner in today's economy is multi-family, especially, parks and communities. Probably, the parks and communities are doing even a little better than apartments. The reason is cash flow and demand. Unlike industrial, retail and office properties which are impacted by job loss, the credit crunch and the "mood" of the economy, people need a roof over their heads, so the cash flow is seen as being more stable and predictable thus less risky than other real estate types.

A prediction about multi-family from the 2009 Emerging Trends by the Urban Land Institute is that there will be a flight to real estate by investors, especially for multi-family investments. Cash flow is king in this economy. This is not to say that all parks and communities will hold their value. To be sure, there are plenty of troubled parks and communities. But, over all, park and community investments should be stable in value during the downturn. Not all real estate is the same and neither are all markets. In talking to community owners, the annual rent increases seem to be occurring.

YES, PEOPLE BUY PARKS AND COMMUNITIES
IN A RECESSION
WHAT TO EXPECT WHEN YOU ARE
SELLING YOUR PARK OR COMMUNITY

The financing for commercial real estate started to slow in mid-2007, because the Commercial Mortgage Backed Securities (CMBS) that were sliced, diced, put into traunches and sold to Wall Street started unraveling. During the mid-2000's, Wall Street liked real estate! The exuberant, heated-up market for these securities steadily cooled, then froze during 2008. Now commercial lending in big, medium and small banks has reacted (even if they have few to no commercial loans in default) by raising rates, requiring higher down payments, and in general, being overly cautious in making new loans.

The potential problem is that large property loans that were made with 10% to 20% down payments and that are coming due may not be worth the amount owed on them. This assumes that commercial real estate has "dropped 35% to 45% in value" as the Wall Street Journal reported in late March. Really? For sure, there were no doubt some communities that were purchased with overly optimistic pro formas of big rent increases and slashed expenses. Capital was cheap and plentiful. It was a classic case of too much capital chasing too few properties. Also, when reports of falling commercial real estate prices are reported, the assumption is that income on the asset is falling, which usually isn't the case with communities.

But wait. Is it logical that banks will be taking back communities when loans come due? Yes and no. A few banks might, but most community owners with loans coming due in 2009 - 2013 will figure out a way to either work with their lender or find an alternate strategy. Don't expect to see many "bank-owned" communities for sale. And, bank owned communities will come with lots of issues, such as vacancy, deferred maintenance and tertiary market locations.

"DON'T WASTE THIS RECESSION"
is a quote from marketing maven Joan Brown, MIRM of Marketing Specifics, Inc., Atlanta, GA speaking at the Spring ULI Manufactured Housing Community Council. Joan's point is that new site-built housing is no longer an option for many Americans. Because of the slide of home values, which could be a 60% decline by the time the dust settles on this recession, people no longer think of a home as an investment. Today's consumers think of a home as "shelter". If this is so, it could help sell more homes in communities because the prospective community home buyer isn't so worried about the "appreciation" that they are losing out on by not buying a site-built house.

HUGGING EXISTING CUSTOMERS
Speaking at the spring Urban Land Institute meeting, a developer of luxury homes said that he is spending a lot more time "hugging existing customers", and for a couple of reasons. One is that he can no longer afford a big marketing budget because sales are so anemic; and secondly, the existing customers might recommend a friend, relative or business associate that would be a prospective home buyer. There's a message here for community owners because in the past a lot of park and community residents came by way of "referral" from existing residents, especially family members. Besides residents, some others to consider for a "hug" are:

Residential real estate agents
Chamber of Commerce members
Retailers
Installation companies

PARADIGM SHIFT
In the 1990's, many park and community residents moved from apartments to communities. To us, the reasons for preferring a manufactured home over an apartment are obvious, but many residents were sold on the fact that for about what they were paying for apartment rent, they could own their own home. (Lot rent and house payment.)

Nathan Smith, owner of SSK Communities, says that today's community monthly payment for the lot rent and the house payment needs to be $50 to $75 under apartment rent for the customer to justify making the move.
HIGH 5'S

To Bruce Simon of Park Advisors for hiring a former retail center manager tooversee the company's park-owned homes sales and rentals. There must be lots of talented but former managers of closed retail sales centers out there that could bring their skills and knowledge to communities.

To the Manufactured Housing Council of the Urban Land Institute for bringing in a marketing and public relations speaker to address the importance of targeting marketing messages to women (the decision maker), soft programming in communities and using social media to create new home buyers for communities

FHA Title I financing will be in place by summer. It is available for new and pre-owned homes in communities. For more details, go to the Manufactured Housing Institute website, www.mfghome.org. Preliminary information is that interest rates will be very competitive. It's not too soon to find an FHA Title I lender in your area. It is reported that the terms will be 3 1/2% down, 30 year amortization and competitive interest rates.

To Bruce Nell of PGP Appraisals and his wife, Melanie, on the birth of their son, Kevin on April 18, 2009.

To GE Capital's President Lew Grace, on loans due. GE will take the reasonable approach, assuming the loan is current, and the owner is a good operator. If this is the case, rather than taking the property back, GE Capital will work with the borrower to get through the financial crunch.
 

NAI Iowa Realty Commercial
Joanne Stevens, CCIM, ALC
Broker Associate

116 Third Street SE
Cedar Rapids, IA 52401 Phone 319-378-6818
Direct 319-378-6786
Fax 319-365-9833
www.JoanneMStevens.com
 

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