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DON’T MISS THE MOBILE HOME PARK BOOT CAMP,
APRIL 23 - 25
UNLESS YOU STILL BELIEVE IN THE EASTER BUNNY!
Back by popular demand, the Mobile Home Park Boot Camp, brought to
you by Mobilehomeparkstore.com, will be held in Denver on April 23rd
through 25th. This is the event in which we pack everyone up in two
vans and walk park after park, teaching you everything you need to
know about picking out good parks from bad parks. We also spend 2
more full days imparting everything we possibly know about buying
parks and understanding the differences between successful parks and
unsuccessful parks, and how to negotiate the former and stay away
from the latter.
The Boot Camp creates a unique atmosphere as we eat every meal
together – a couple of which are pretty lavish – and talk about
nothing but the mobile home park business and answer all of your
questions non-stop.
You may not know that we offer a very attractive multi-payment plan
on this course – the Frank & Dave version of a layaway, only you get
everything up front.
The only way most people will ever get comfortable with buying a
mobile home park – or even succeed at it – is by knowing everything
there is about the business. This course offers that. The Easter
Bunny will not bring you a great mobile home park that provides
financial security to you and your family. But this course will.
Unless you believe in the Easter Bunny, you should make your
reservation today. You can call (800) 950-1364 or sign up online at
www.mobilehomeparkstore.com.
This class is limited to 20 people, and we have only a few spaces
left. So if you are interested, you should call for more information
now. Perry or Trish can give you as much additional data as you
would ever want.
We hope to see you there!
Frank & Dave
YOU CAN FOLLOW SAM ZELL’S LEAD AND INVEST
IN AFFORDABLE HOUSING BY BUYING A MOBILE HOME PARK IN THE U.S.
Sam Zell is making a major investment in affordable housing in
Brazil. You don’t have to cross the border to make a similar bet
on affordable housing right here in the U.S. And the best bet
for affordable housing is the same one that Zell made almost 30
years ago – to buy and operate mobile home parks. His are held
in a real estate investment trust called Equity Lifestyle.
Why is affordable housing a good strategy in a terrible economy?
Well, it’s basically housing for poor people. And poor people
are always going to be around. In a recession, their ranks
swell. But even in the best of times, there are a huge number of
U.S. employees that earn only the minimum wage – which is about
$15,000 per year.
Minimum wage employees are one of the few industry segments in
this recession that are going unscathed. That’s probably because
minimum-paying jobs are so basic that they can’t be disposed of.
Cooks and cleaning people and waiters are not something that the
average company can layoff. It’s a lot easier to fire the CEO of
GM than the people who clean the bathrooms. So despite the worst
unemployment in years, there is still very low unemployment in
minimum wage jobs.
Another, extremely important benefit of mobile home park
ownership is the inability of tenants, even in the worst of
times, to afford to move their homes. The only thing “mobile”
about “mobile homes” is the name. It costs around $3,000 to move
a mobile home from point A to point B – assuming point B is only
about 100 miles from point A. So when you lose a customer, you
normally keep the house on-site, and it ultimately becomes
re-sold as abandoned property. The inability to move homes also
comes in handy when raising rents. You can pretty much raise
them as high and as often as you’d like (except in states with
rent controls), and nobody can afford to do much about it.
The final reason to invest in a mobile home park right now is
the availability of owner financing. With the credit markets at
their worst in decades, and commercial real estate lending
impossibly difficult, the availability of seller carry allows
you to sidestep this entire problem and focus your energy
instead on finding a negotiating a good deal. Since the majority
of mobile home parks are still owned by “moms and pops”, they
have little or no debt on their parks and, therefore, have the
ability to carry as much paper as they want. Although zero down
deals are few and far between, there are many deals out there
based on 10% to 20% down.
Zell believes that affordable housing is going to be strong in
Brazil. We think it’s going to be strong everywhere – especially
here in the U.S. So if you want to get involved in something
counter-cyclical that is on the right side of the trends, then
consider buying a mobile home
park. It may look nasty on the outside, but it has a very
profitable core.
Read the Wall Street Journal Article Here.
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THE BEST FINANCING FOR A MANUFACTURED HOME COMMUNITY
So you’re buying a manufactured home community and you don’t know where to get
the money. From a bank? From a credit union? From a hard-money lender? Well, the
answer is a whole lot more simple. And it doesn’t require a loan committee
meeting, or even a financial statement and credit report. The answer is having
the seller provide the financing – a concept called “seller carry”. It’s not
only the best type of financing, it’s also the easiest to get and truly a
win/win for all parties involved.
Not all sellers can offer this type of financing. To do so, they have to own the
property free and clear of all liens, or at least with such a small loan on the
property that your down payment pays it off and then the seller has no liens on
the property. Someone with an 80% loan to value mortgage is not a player, so
there is no point in attempting to construct seller carry in that instance. The
typical seller who is a player for this type of financing arrangement is
normally an older “mom and pop” seller who paid off their loan many years ago.
Why should a seller agree to carry the paper?
The first, and most important reason is that, in the absence of seller carry,
their property will not sell. Particularly in cases where the property has lousy
cosmetics that would be a turn off to a regular bank, or produces insufficient
income to qualify for a bank loan due to poor management, or excessive vacancy
beyond the lender’s comfort zone, or an abundance of rentals – any situation
that precludes regular bank lending. In those cases, if the seller refuses to
carry paper, they might as well take the community off the market, because the
odds of it selling are zero.
The second reason, and this is the one that you have to learn how to persuade
the seller, is that their income will be roughly twice as much from the note on
the community as it will from investing the cash proceeds. This argument is
simple to prove out. If the seller receives cash for their property, they will
have to pay income tax (and remember that most mom and pop’s have used up all
their depreciation on the community, so they have to pay hefty recapture tax,
not just capital gains tax) and then put that in a CD at, say, 3%. If they
instead carry the paper, they will have more attractive tax implications, and
they will get 6% interest – roughly twice as much monthly income. It’s not hard
math to understand.
For most sellers who are older and own the community free and clear, their key
interest is in the monthly income they will receive. They are trying to fund
their retirement – not reinvest in building a new empire. Most are extremely
receptive to this “doubling” concept.
It’s a different type of loan qualification process.
Many buyers do not understand that a key component in obtaining seller carry is
for the owner to become “comfortable” with you as the borrower. It’s not that
they care a whole lot for your financial statement, or coverage ratios, or that
unpaid Master Card payment from when you got out of college. What they are
worried about is simply this: will you screw up their property so that, if they
get it back, it is in worse condition than when they handed it off to you? This
is the issue you have to overcome. The only way to give them this comfort zone
is to meet with them in person and convince them that you are going to take good
care of their community. They want to hear about your values and experience. But
most of all, they want to hear in great detail what your plans are for the
property. The more detail you can give them over your plans for stewardship, the
better. And it pretty much has to be done in person.
What’s so great about seller carry?
I can’t believe you’d even ask that, but the benefits are numerous, and
significant.
First of all, it’s cheaper money than a bank offers. You have no up-front fees.
You have no third party reports, other than a survey update and a phase I. And
you normally have a below market interest rate. Any way you cut it, seller carry
is the always the least expensive financing option.
Secondly, it is non-recourse. That means that, worst case, you can give the
property back to the seller and walk away free. Most banks are going to require
“personal recourse”, which means that they are going to come after you for the
deficiency if the community goes back to the bank.
Third, seller carry is an excellent hedge against seller fraud. If the seller
has committed fraud in their dealings with you, you have a huge club over their
head in the unpaid balance. You can often negotiate down the balance instead of
going to court.
Finally, there is nothing easier and quicker than seller carry. There is no
proposal to write for the bank, no committee meeting, no endless request for
personal financial information. In fact, the entire loan approval process is
instant gratification.
So why doesn’t everyone use seller carry?
If they can, they should. Of course, not all properties qualify. And not all
sellers will agree to it. But many will. And those are some of the best deals in
the manufactured home community business.
In a time of unparalleled uncertainty in commercial lending, can you afford not
to seek seller carry? So start aggressively asking for it. You’ll be glad you
did.
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Your loan is coming due: What now?
By Tony Petosa and Nick Bertino
As the credit crunch continues, lending options for commercial real estate,
including manufactured home communities, have become increasingly scarce.
Conduit loans are still not being originated, life companies are lending on a
highly selective basis, traditional banks are experiencing financial challenges
causing them to pursue new loans only at lower leverage levels, if at all, and
the agencies (Fannie Mae and Freddie Mac) have become more selective. Adding to
this problem of lack of available capital is one sobering fact: a lot of
commercial real estate loans will be maturing in the coming years.
Over the past decade commercial real estate owners enjoyed some of the most
favorable lending programs ever experienced. Aggressive underwriting parameters,
low interest rates, and a bounty of lenders hungry for volume all factored in to
borrowers being able to obtain attractive loans on their properties. In today’s
credit market, many of these lenders and loan structures simply don't exist, and
many borrowers will face difficulties in refinancing their properties in the
coming years. Examples of properties that will face financing challenges include
properties located in secondary and tertiary markets; properties that have
experienced flat or declining occupancy and cash flow streams in recent years;
and properties financed at high leverage levels with minimal amortization and
loan terms of 5 years or less. Properties that will mirror the problems suffered
by the local and regional economies present corresponding problems for
refinancing. Does your property fit any of the characteristics described above?
The answer may bring you to another question: “What happens if I can’t refinance
or pay off my loan when it comes due?”
Even if you are current on your loan payments, you will be in “monetary default”
if you cannot pay off your loan balance when the loan matures. As a first step,
we recommend that you dust off and review the loan documents (particularly the
promissory note, deed of trust/mortgage and guaranty) from your current loan. At
the outset, you should at a minimum have a clear understanding of the following
topics:
1. Is Your Loan a Conduit Loan? This is a vital fact that must be determined at
the outset. Conduit loans have typical features, and are much more difficult to
modify. Balance sheet (non-conduit) loans potentially present greater
flexibility as your loan approaches maturity.
2. Maturity and Default. Do you have a specific "balloon" maturity date versus a
fully amortizing loan term that may have periodic interest rate adjustments? If
your loan was a conduit loan, it is possible that it has "hyperamortizing"
features that essentially provide an automatic "workout" once the "anticipated
repayment date" (essentially what would have been the maturity date if this
feature was not added) has passed. However, in any event, if your loan has
matured, it is likely to be accelerated unless you can work something out with
your lender.
3. What is Your "Default Interest Rate"? Most commonly, when a loan goes into
default, the current interest rate will adjust to the “default” interest rate.
This is typically the lesser of the current interest rate plus an additional
margin (often 4%-5%) or the maximum interest rate allowable by law. The bottom
line is that the interest rate you will be charged when your loan is in default
will be substantially higher than what your rate had been throughout the loan
term. To put this in perspective, imagine that five years ago you obtained a $5
million conduit loan at 80% loan-to-value amortized over 30 years with a 6%
fixed interest rate. During those five years, the cash flow of your property was
flat. You try to refinance your property at loan maturity, but because
underwriting parameters are now more conservative and because your property has
not increased in value, you are unable to obtain a new loan for your property,
and the loan goes into monetary default. Your interest rate would then adjust to
11%. If the lender doesn't accelerate the loan balance, and you are permitted to
continue monthly payments, in this particular circumstance the default rate
alone would increase your monthly loan payment by more than $17,000. As you can
see, the purpose of implementing the default interest rate is to motivate the
property owner to refinance or pay off the loan.
4. Personal Liability. This issue may strongly shape your course of action. Was
your loan made on a recourse or non-recourse basis? Are you a carveout guarantor
or fully or partially responsible for repayment of the loan indebtedness? These
are extremely important facts to ascertain. Recourse loans (for which the
guarantors are fully liable for repayment of the entire loan) are typically
non-conduit and made by banks when the loan is to be held on its balance sheet.
Nonrecourse loans are made with limited and specific "carveouts", and virtually
all conduit loans follow this pattern. For a nonrecourse loan, the lender agrees
to look only to your property for repayment, except: (i) for losses it may
sustain for certain "bad boy" acts, such as fraud, diversion of rents or
insurance proceeds, waste and environmental conditions; and (ii) for your full
liability for the entire loan in the event of bankruptcy, an unpermitted
transfer of the property or equity interests in the borrower, or violations of
loan covenants that assure the lender that your borrowing entity will remain a
"single purpose, bankruptcy remote entity". If you are only a "carveout"
guarantor on a nonrecourse loan, be absolutely certain that you don't do
anything (unless you determine that to be the best course of action, on balance)
that will trigger that full (springing) personal liability and be aware of what
the scope of your "carveout" liability will be for losses and damages as well.
5. Is There a Prepayment Penalty/Premium? Payment of your loan prior to maturity
almost always carries with it a prepayment penalty or premium (there is no
practical difference in the term used). For conduit loans, this typically takes
the form of "defeasance" or "yield maintenance.” Defeasance is a complicated and
costly process that involves assembly of a basket of U.S. Treasury securities to
replace your property as security, and for which you will require an expert to
put the pieces together. Yield maintenance premiums (measuring the loss of yield
over a U.S. Treasury security, as if your prepayment proceeds were to only be
invested in such a security, but typically never less than 1% of your
prepayment) are determined by your lender, are far less complicated, and don't
require outside experts and their related fees. Other loans (most often bank
balance sheet loans) may require a "stepped prepayment premium" or a fixed
percentage of the prepaid amount. In short, know what is required, and determine
the impact against your available capital and refinancing proceeds.
6. Is There an Open Prepayment Window? If you do decide you are going to pay
your existing loan off prior to its maturity, check your loan documents in
further detail to determine whether there is an open prepay window, as well as
whether there are any restrictions pertaining to what day of the month you will
need to pay off your loan. For conduit loans, as well as many bank balance sheet
loans, the "window" is the last 3 months (some longer, some shorter) prior to
maturity when the loan can be prepaid without a prepayment penalty. In
additional, some loan documents may require that the loan be paid off on the
first or last day of the month, or you will be charged the full month of
interest for the month in which the loan is paid off. If you are processing a
new loan, you will want your new lender to be aware of this so that you avoid
paying double interest during that month. Additionally, your existing loan
documents may require that you give the existing lender written notice of at
least 30-60 days prior to paying off you loan. Again, this is a point you should
be aware of if you are processing a new loan.
Even if your existing loan does not mature for another 12-24 months, it is only
prudent, and strongly recommended, to start exploring your options for
refinancing now. Remember, lenders hate surprises, so you should manage the
expectations of your current lender. If your loan is a balance sheet (not a
conduit) loan, you may have greater flexibility in working directly with that
lender to extend the term of your loan prior to hitting the wall at maturity,
although this will most likely require full personal liability if that is not
already the case. If you have a conduit loan, be aware that loan modifications
cannot typically be made unless the loan is in default. This presents material
issues to working something out and virtually assures that you'll have to be on
the "brink" in order to do so. Thus, for a conduit loan in this environment, you
cannot begin looking too soon for refinancing alternatives and setting realistic
goals in that regard.
If an extension is offered to your loan, request a written outline of any
additional items the lender may require to grant the loan extension. You may
find, for example, that the lender will require a partial pay down, shorter
amortization, full recourse, an extension fee and/or re-setting of the interest
rate as part of the loan extension.
In this economic environment it is critical to understand your specific loan
terms and any default risks they may pose so you can plan accordingly. The
“friendly banker” you knew five years ago may not be the one you will be dealing
with tomorrow. Please feel free to give us a call to discuss your particular
situation.
Tony Petosa is Senior Vice President and Nick Bertino is Vice President of Wells
Fargo Commercial Mortgage. They specialize in arranging financing on
manufactured home communities, offering both direct and correspondent lending
programs. If you would like to receive future newsletters from Petosa and
Bertino, or would like to receive a copy of their Manufactured Home Community
Financing Handbook, they can be reached at 760/438-2153; 760/438-8710 fax; and
via email: tpetosa@wellsfargo.com and nick.bertino@wellsfargo.com. You can also
visit their website at www.wellsfargo.com/mhc. Special thanks to Jim Simpson,
Principal with the law firm of Miller Canfield, for his contribution to this
article.
WELLS FARGO RELEASES
THIRD EDITION OF ITS MANUFACTURED HOME COMMUNITY FINANCING HANDBOOK
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Lower Occupancy Mobile Home Parks
Many mobile home park investors are looking for parks with a lower than
stabilized occupancy in order to take advantage of the infrastructure in place
and increase the value of the property with their own efforts. Purchasing mobile
homes and either renting them or selling to tenants is the most common approach.
This strategy makes sense where there is a demand for these units and the
investor has a supply of mobile homes and a means to pay for them. Many lenders
will not consider financing a park like this, but we have worked with several
clients accomplishing this goal.
Parks where stabilized occupancy has never been achieved or due to a variety of
circumstances, the current vacancy exceeds the 10% maximum many lenders consider
stabilized can be financed through both a real estate loan and a credit line on
the homes. Investors are typically negotiating purchase prices for parks based
on their current cash-flow and paying a reasonable CAP rate regardless of the
number of pads on site. As mobile home parks are different from any other type
of income producing property, the vacant pad sites do have value, but no ability
to generate income without a mobile home in place so they would not have
equivalent value to an occupied pad. Vacancy issues with other property types
are remedied with improved management or improvements to the existing structure.
In the case of parks, there is no structure to better manage or improve if the
pad site is vacant. The financing for the parks is determined by the appraised
value and limited by the debt-service-coverage. At a typical loan-to-value of
75% on the real estate, the price of the park needs to be based on the current
income to support the debt. The lender will amortize the loan on the park up to
20 years (25 year case-by-case) and charge an interest rate around 7%. Many
times the first two years of the loan can be paid as interest-only.
The least expensive mobile homes to purchase are either repossessed or in
another park that may be restructuring or changing use. The costs involved
include the purchase price of these homes, transporting them to your site, and
any improvements to the homes. On average we see investors using a figure of
$15,000 per home for their estimates. Once these homes are in place, the plan is
to either rent these units, sell them to the tenants by financing them, or
selling them on a rent-to-own program. The terms offered to the tenants vary as
to the market demand for the units. Most park investors want the cost to
maintain these homes passed on to the tenants. Renting them and maintaining the
repairs can, at times, be more costly than a vacant site.
The financing for these homes is available at minimum credit lines of $500,000.
The loan is amortized over 10 years with a 5 year term. The loan floats at WSJ
Prime + 2% with a floor rate of 7%. The repayment of this loan is based on the
amount drawn from the line. The minimum increment that can be drawn at one time
is $50,000. The release of the funds is based on 75% of the cost of the homes to
included purchase price, transportation, set-up, and any improvements. The
mobile home needs to be in place and leased or sold with a tenant in the unit in
order for the bank to release funds. To make this financing work, the investor
would need to make certain the tenant is paying a rate of interest or rent that
will off-set the cost of the line.
There are few changes to a mobile home park that will significantly improve its
value. The main improvements are increasing pad rents, separately metering
utilities and passing the cost to the tenants and improving occupancy. With the
limited amount of chattel financing available, advertising for tenants to move
their homes into your park or to purchase a new home from a dealer and moving to
your park are rare occurrences. A park owner willing to purchase the units and
make them available to tenants is now the standard in improving occupancy.
Financing is always an issue and with funds available to purchase the park and
fill it with homes, there is a tremendous opportunity for creating a great
amount of additional value.
As an example, a park owner recently purchased a park with 312 pads at 70%
occupancy. The acquisition price was based on the net operating income from the
occupied pads at a CAP rate of 9%. The park was financed at 75% of the purchase
price and a line of credit for the mobile homes set up for $1,000,000. This not
only allowed the investor to acquire the park, but also have an immediate avenue
to improve value. The park is located in area with a high demand for these homes
and he plans to add approximately three homes per month. This would allow for
full occupancy within three years. This improvement should increase the value by
close to $2,000,000.
This financing can be for park acquisitions or refinancing a park currently
owned that is in need of additional units. If there are existing units in a
park, the credit line can be drawn at closing to cover up to 75% of their value.
When a park is being purchased with park-owned homes, this can be very helpful
in maximizing the amount of financing and lower out-of-pocket costs as well as
eliminating the need for a seller to carry financing on the homes.
Steve Murden
Star Capital Corp
(540) 342-6520
(703) 991-0072 (fax)
stevemortgage@aol.com
www.starcapitalcorporation.com
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