The Very Serious Business of Higher Lot Rents By Frank Rolfe

It is well known in the industry that our lot rents are ridiculously low. Most owners are raising them annually in an attempt to get them up to economically justifiable levels. But as these rents go up, there’s a very serious obligation on the part of community owner to justify these rents on a macro level.

Why rents must go up
There are to side-effects of low lot rents – and both are punishing to the residents. The first is the simple fact that all property in the U.S. has the option of a variety of uses, and manufactured home communities that don’t provide healthy returns get bulldozed and converted into more profitable uses. How many communities can you think of that have been torn down over the past decade to make way for that new Home Depot or apartment complex? I can think of at least a hundred. Some of these – certainly not all – would still be there today if the lot rents had been higher. It’s just basis economics. The higher the net income the harder it would be to knock the community down and replace that income with a different land use. The other problem with low lot rents is that the community owner has no money (or reason) to inject significant capital into the
property to make needed capital repairs. If your community is struggling to pay the mortgage, it’s unlikely the owner is going to be able to afford a $200,000 road re-paving.

How we got in this mess in the first place
There are many reasons for lot rents in the U.S. to be ridiculously low. Probably the two best are 1) moms and pops never kept rents up with inflation (a $50 lot rent in 1960 would be equivalent to a $405 lot rent in today’s dollars – yet the U.S. average is maybe $250) and 2) since mobile home parks have not been built in any meaningful quantity since the 1970s, there’s no new construction to remind owners of what the rents should be. In the apartment industry, for example, there is a constant flow of new Class A apartments and the older Class B, C and D owners line up behind those rents with discounts for the age and desirability of their properties. They are given a constant market rent reminder of the going rents. Unfortunately, our industry lost its way when cities effectively banned new construction decades ago.

An idea of the scale of the problem
Charles Becker, an economist at Duke University, estimated in a recent paper that lot rents are roughly 20% or so too low. But that was based on rent information mostly from REITs and larger professional owners. When you factor in the initial lower rents of moms & pops, that number is more like 50% or more. Going back to the above example, a $50 lot rent from 1960 that’s now at $250 is about 40% lower than the inflation-adjusted base rentof $405 per month. It seems like a huge amount of money to fix, but the truth is that it’s simply having to make up for decades of inflation in a short amount of time. If the mom & pop owners had simply increased the rents annually in-line with inflation, there would be no issue at all.

How to justify higher rents
When the community owner raises the lot rents, they reach a certain level in which they must provide more value for the customer. We have found that most residents have no problem with higher lot rents if it means more professional management and maintenance of common areas. But there has to a be a healthy give-back by the owner in term of increasing the quality of life. Most conflicts with residents occur when the rents go up but the quality of the community does not. People want a safe, clean place to live that is also desirable and enjoyable – and they are willing to pay more for that type of environment.  A new entry sign and landscaping coupled with nice roads, clean common areas and strict rules enforcement creates the rationale behind higher rents.

The real safety valve that keeps rents in check
But what’s the limit on how high rents can go, and how fast? The answer is one that escapes many media outlets yet has been around for decades. And that’s simply that properties that offer a bad value to the residents frequently find themselves raided by other community owners. These neighboring owners will offer to move residents for free to their vacant lots. This – not any type of legislation – is what keeps communities in check on rent increases. And it’s the best way as it’s purely free-market. The concept that residents are “stuck” in any property is a complete fantasy. When people are unhappy with the value their community provides they will simply leave and the owner will realize their mistake.

Conclusion
The issue of higher lot rents in the U.S. is a thorny one. But if all sides realize the necessity of these increases, as well as the mandatory value enhancement that they require and the builtin safety valve, it should become more apparent that these increases need to be embraced for the good of the residents themselves. Every time I drive by a community that has been torn down I think “what would the lot rents have had to be to keep this community alive”? Hopefully the industry can begin a narrative on how to boost rents and value at the same time, as well as educate residents on the need for higher rents.

Frank Rolfe has been a manufactured home community owner for almost two decades,
and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank’s views on the manufactured home community
industry visit www.MobileHomeUniversity.com.

Comments