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Obtaining Permanent Financing for a
Manufactured Home Community
By Tony Petosa and
Nick Bertino
With interest rates at historic lows,
it is still an excellent time to obtain permanent
financing for a manufactured home community. Before
selecting a loan, however, it is important for a
property owner to assess investment goals and prepare a
business plan. Understanding the different types of
lending programs available and their related advantages
and disadvantages is also vital to the loan selection
process.
When
determining investment goals and putting together a
business plan, a community owner should ask himself or
herself the following questions: “What do I want to
achieve over both five and ten-year horizons? What is
my likelihood of selling the property during these time
frames? Am I comfortable taking interest-rate risk
with a floating rate loan, or would I prefer to lock in
a long-term interest rate? How important is it to me to
be able to obtain additional loan proceeds during this
time?” The answers to these questions will assist in
determining what type of loan would be appropriate.
Many lenders
offer floating rate (a.k.a. variable rate) and fixed
rate loan programs. There are also programs available
that start as a floating rate and offer the ability to
convert to a fixed rate in the future. There is an
inherent trade-off between floating and fixed rate
programs. While some floating rate programs offer
interest rate caps, there still exists the risk of an
interest rate increase in the future. Also, many
floating rate programs have shorter terms, often five
years or less. In pior years, the major advantage of a
floating rate loan was that it offered a lower interest
rate than a fixed rate loan. As floating rate indexes,
such as LIBOR, have continued to increase, however, this
is no longer the case. On the plus side, floating rate
loans usually offer the advantage of a lower prepayment
penalty when compared to fixed rate loans.
Fixed interest
rate loans have become increasingly attractive recently
as floating rates have continued their upward movement.
Fixed rates are not only typically lower than floating
rates currently, but they are also longer term, 10 years
most commonly. To achieve the lowest fixed rate,
however, lenders need to structure fixed rate loans with
a prepayment penalty that is usually more onerous than
the prepayment provision found on floating rate loans.
Prepayment penalties are, in part, the result of the
lender needing to fix the cost of capital for the entire
loan term (“match fund”). The lowest fixed rates are
achieved through either a defeasance or yield
maintenance type of prepayment penalty.
The actual
amount of a defeasance or yield maintenance penalty is a
function of where treasury rates are when the loan is
prepaid as well as the remaining loan term at the time
of prepayment. As a general statement, prepayment
penalties are typically vert large when a loan is paid
off in the early years of the loan term unless treasury
rates have increased substantially. It is important to
note, however, that most loans offer an assumption
provision, and a low fixed rate loan can be attractive
to a future buyer as long as the loan amount is
relatively high in proportion to purchase price.
In addition to
different types of loans, there are two different types
of lending structures to consider: securitized versus
portfolio. Once again, there are advantages and
trade-offs to consider. Further complicating this
question is that some lenders offer both securitized and
portfolio structures.
Securitized
lending, often referred to as “conduit” lending, now
accounts for a significant amount of the total
commercial lending volume in the U.S. A securitized
lender aggregates a large volume of loans and then teams
with others lenders to “securitize” the loans. This
involves forming a loan pool that becomes the collateral
for a series of rated and unrated bonds that are issued,
and typically sold to institutional investors. A
securitized loan pool is approximately $1 billion in
size and comprised of hundreds of individual property
loans.
These large
loan pools provide bond investors with a lower default
risk when compared to a lender that owns a whole loan.
This generally results in more favorable rates for
borrowers and often higher loan to value (“LTV”)
ratios--as high as 80%--than would be available from a
portfolio loan. Securitized loans are usually
non-recourse to the individual borrower because the
primary focus is on underwriting the cash flow from the
property.
A portfolio
loan, by contrast, is held by a lender on its balance
sheet during the loan term. This provides the lender
with the ability to modify certain aspects of a loan
during the loan term should that need arise. However,
there is no guarantee that a portfolio lender will agree
to modify a loan in the future, and on fixed rate loans
the lender may not be able to change the prepayment
penalty for reasons discussed above.
A general
disadvantage to portfolio loans versus securitized loans
is that interest rates are often higher, particularly on
fixed rate structures, and LTV’s are often lower.
Credit or underwriting issues may also be more
restrictive with portfolio lending programs. This would
include issues related to the borrower’s experience,
quality and location of the property, and types of
properties on which they will lend. Many portfolio
lenders still have a negative perception of manufactured
home communities and consequently may only lend on them
on a very conservative basis (or not at all). Also,
many portfolio lenders will require a personal guarantee
from the individual borrower.
While the
trade offs between different types of lending programs
may seem confusing, the good news is that there are more
financing options than ever for manufactured home
community owners. Regardless of the type of lending
program that is best for you, it is very important to
work with a lender or mortgage banker that has prior
experience and a good track record lending on
manufactured home communities.
_______________________________________________________________________
Tony
Petosa is Regional Director and Nick Bertino is
Associate Director for Wells Fargo Commercial Mortgage.
They specialize in arranging financing on manufactured
home communities and RV resorts, offering both direct
and correspondent lending programs. Petosa and Bertino
can be reached at 760/438-2153; 760/438-8710 fax; and
via email:
anthony.j.petosa@wellsfargo.com,
bertinn@wellsfargo.com.
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