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“Preparing Your Manufactured Home Community for
Financing”
By Tony Petosa and Nick Bertino, Wells Fargo Commercial Mortgage
You recognize that interest rates are
near historical lows and you have decided that you are going to refinance your
manufactured home community. Or, perhaps you have identified a property you
want to purchase. Whichever the case may be, you are going to need a loan. But
before calling your mortgage banker or lender, the first step you should take is
to assess and prepare your property for financing. This article will outline
questions you should consider before seeking financing, the various items that
you will need to provide, and the manner in which information should be
presented in order to insure that you receive timely and reliable loan quotes.
To begin with, take a step back and
assess the overall asset quality, or “curb appeal”, of your project. Is the
landscaping adequate and well maintained? Do the homes reflect pride of
ownership and are community regulations being enforced? Are the age of the
homes, density of the community, and amenities in line with the competitive
properties in the market?
These are all questions that a lender will consider when pre-screening a
property to determine not only whether the property qualifies for financing, but
also at what loan-to-value ratio and at what pricing level (i.e. interest rate
spread) it qualifies. It is always helpful when you can provide recent, good
quality property photos.
You should also have a good handle on
the market conditions where your property is located. Is your property situated
in an in-fill market with barriers to entry? Are your rents at market when
compared to nearby manufactured home communities? What is the general
demographic profile of your market and how does your property successfully
compete for residents?
While
assessing the condition of the property and its market, it is likely that you
will encounter some shortcomings. At the very least, you should have a plan for
mitigating any potential concerns. For example, perhaps the community you are
purchasing has several older homes. Your business plan, then, may be to upgrade
or replace these homes over time. You should make the lender aware of this
business plan and detail how you will incorporate it. If you have been
successful in completing upgrades to homes on a community you currently own, you
should draw the lender’s attention to that fact.
The next step
is to evaluate the financial operations of the property. Most typically, a
lender will ask you to provide a current rent roll along with property operating
statements (income and expenses) for the most recent three years. When
examining the rent roll, the lender will be looking for any repossessed, lender
owned, or investor owned homes in the community. While the property owner will
realize additional cash flow when renting out both the home and the lot, from a
lending perspective, the fewer third party owned homes, the better. In most
cases, the lender will discount any additional rental income derived from a
third party owned home and underwrite solely to the lot rent. Keep in mind that
you may be required to provide bank statements for the prior 6 to 12 months that
reflect deposits that are in line with your most recent monthly rent rolls from
the same time period.
In addition
to the income stream from the lot rents, lenders will also look to see how much
of the overall income is attributable to “other income” items. It is important
that you are able to break out other income items on the historical statements
as specifically as possible. On separate line items, you should be able to
identify income from utility reimbursements, laundry facilities, vending
machines, late fees, etc. A loan underwriter will be trying to determine
whether this “other” income is sustainable through the foreseeable future.
Typically, as long as you can demonstrate a good history of collecting these
other income items, lenders should be able to include this income in their
underwriting.
In your
evaluation of the property’s historical income and expense statements, you
should look to identify any large fluctuations in the numbers on either the
income or expense side. If there was a significant increase in overall rental
income, for example, from 2004 to 2005, you should be able to explain why. Did
the property experience a high vacancy rate in 2004? Does the 2005 rental
income figure reflect a fixed rent increase on all of the lots, or perhaps lease
up of vacant lots? The same kind of analysis and explanations should take place
on the expense side, particularly with respect to expenses that may be unique to
your ownership operations. If you allocate “home office” overhead to your
property in lieu of a management fee, for example, be sure to identify that
expense, as a lender will automatically input a management fee even if you do
not charge one.
While it is
very common for property owners to expense as many items as possible on their
operating statements for tax purposes, it is of great benefit to the property
owner to identify and explain any expenses that are not directly related to the
property’s on-going operation. An underwriter only needs to include expenses
that lender would incur when operating the property, so, whenever possible, you
should provide an itemized breakdown of any capital or non-recurring expense
items that are embedded within the operating statements (such as paving or
clubhouse improvements). If you identify these expenditures for the lender,
they can be removed from the underwritten expenses. Because the lender will
already be including a “replacement reserve” deduction to account for long-term
improvements, you should make sure that capital expenditures are not being
double counted. The goal is to maximize the underwritten net operating income
because this will typically translate into higher loan proceeds and/or a lower
interest rate spread on the loan.
After you
have provided the necessary information on your property, you should provide a
general overview of yourself, the borrower. What is your background and real
estate experience and how many other properties do you own? What is your
financial strength in terms of net worth and liquidity? What is your business
plan for the asset you are refinancing or purchasing? The lender will be
looking at you not only as a borrower, but also as a business partner, so you
will want to demonstrate why you are someone with whom the lender should be
doing business.
Believe it or
not, what can often times be just as important as the information being
presented is the manner in which it is presented. Is your management and
accounting computerized, or do you handle it manually in a notebook?
Computerized management and accounting is always the preference as this gives
the borrower the image of being an experienced, professional owner/manager
rather than a less sophisticated property owner. Your rent roll should be clear
and accurate, arranged by unit number, and no more than one month old.
Operating statements should provide separate line items for various revenue
sources as well as expense items. You should also have the ability to create a
trailing operating statement for the most recent 12 months, as many lenders will
want to receive this just prior to loan closing. You will find that
computerized accounting not only looks more professional, but that it also
reduces the chance of having mathematical errors, which you may encounter when
performing calculations manually.
In
conclusion, if you take the time to prepare your investment property for
financing as discussed above, your mortgage banker or lender should be able to
provide you with deliverable loan quotes within 24 to 48 hours, and to ensure
that you are obtaining the best terms available for your asset. Furthermore, by
providing accurate and detailed information in the beginning, you will help to
create a much smoother loan approval and closing process down the road.
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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