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Manufactured Housing Communities
Driving Consistent Cash Flow
Whether you call them mobile home parks or manufactured housing communities, lenders love them because of their reliable cash flow.
BY MICHAEL J. KLING
When it comes to stable cash flow, there's nothing that can beat mobile home parks.
Because moving mobile homes is difficult and expensive, once the pre-fabricated units are placed on their pads, they are rarely relocated. In fact, "mobile" home is a misnomer. The only time mobile home tenants move the homes is when they haul them to their pads which they rent from park owners.
The homes once moved to their pads with wheels but now are carried on flatbed trucks whether they're single units or multisectional homes known as doublewides and triplewides.
The new term the industry prefers, manufactured housing communities, may be more accurate.
Lenders and brokers see little difference in the names. Many say it's all a matter of perception.
Whatever you call them, they usually stay in place. Because of the high costs of moving the homes, if tenants do move, they usually prefer to sell their homes in place. If a tenant leaves and defaults, companies that finance the homes themselves may continue paying rent before selling the home.
Unlike other commercial property types, even multifamily, manufactured housing communities never see mass vacancies once they're leased up, notes Tom Houlihan, president of Sterling Financial Mortgage and Investment Inc. of Tempe, Ariz., a mortgage broker specializing in the property type. The worst case he recalls was a park that had a longer-than-expected lease up.
"Tenants tend to stay very loyal to their parks. It's a great product type. They tend to be very steady performers. A lot of lenders have woken up to RV and mobile home parks. I have no shortage of lenders wanting product," he says, citing conduits, life companies and pension funds.
When financing the parks, the lender's collateral is the ground improvements. Tenants finance or own outright their homes as personal property. Rent they pay for their spaces provides the park's cash flow.
Similar to multifamily
With strong cash flow, mobile home parks are underwritten much like multifamily with roughly similar loan-to-value and debt service requirements. LTV is typically up to about 75% or 80% and DSC as low as about 1.25 or 1.20. Rates and terms are also typically similar to multifamily, often for 10 years with 25 or 30-year amortization. However, compared to multifamily, mobile homes face relatively little maintenance.
"Once they're leased, they're pretty hard to unlease," says Ron Wechsler, managing director,
head of the commercial mortgage conduit for PaineWebber, New York. "Once they're leased, we find that they're a good asset to lend against."
The outlook for the property is excellent. They are not prone to overbuilding and do not face huge competition, he says, noting that the conduit has two parks in its current commercial mortgage-backed securities issuance on the market.
The company likes to see communities with a good percentage of doublewides, access to major roads and paved roads. The parks, he adds, should be "clean looking. You want it to be on the better side of town."
The risk and difficulty is in construction of the communities because of their long lease-up
periods which may extend for two years or more. Up front costs are high, and construction financing is hard to find, which may help contribute to shortages in some areas.
Construction lenders, including portfolio lenders such as banks protecting borrower relationships and mortgage companies, may hold the loan before providing permanent financing and taking it to the secondary market.
When considering construction loans, lenders examine the borrower's experience and the market's demand. Borrowers also usually need greater equity, perhaps 50%.
Obtaining zoning for new parks in desirable locations is a major obstacle. They furnish a low tax base, yet are high users of water, road and sewer services. Municipalities usually prefer brick and mortar single-family homes.
Despite the lingering image, the quality of homes has improved dramatically in recent years as the nomenclature demonstrates. The industry upgraded itself from trailer parks to mobile home parks to manufactured housing communities.
Today's larger manufactured homes are virtually indistinguishable from traditional single-family homes. People who lift their noses at trailer parks could be happy in current multi-sectional homes in parks with clubhouses and a host of other amenities.
Star ratings
The star system is important for measuring the quality of mobile home parks, says Kevin Byrne, CEO for NW LLC of University Place, Wash.
A five-star park is typically brand new with a clubhouse, street lights, paved roads, plenty of amenities and new doublewide or triplewide coaches.
A one-star, by comparison, has dirt streets, old coaches and no amenities. The middle ground, a three-star, has a mix of older singlewide and new doublewide coaches, paved streets, water, electricity, phone service and decent-looking coaches but no clubhouse or outside amenities and probably no sidewalks or street lights.
Some parks provide services such as water or garbage collection, and some regulate the type of coaches and landscaping, he adds. For instance, some may forbid metal on the outside skin of coaches.
Age of the parks is an important factor, he says. While new parks are mostly five-stars, older ones are unlikely to have doublewides or many amenities.
Lenders explain that although star ratings are widely used as references, they are unofficial and subjective, varying from one lender to another and from one market to another.
The differences between the high- and low-quality parks is great, according lenders. "It's a
different class of rent," Byrne notes. "A person looking for a five-star would never rent in a three-star park."
As with many properties, cash flow is key. "We're an income lender, so income and expenses are really where we start."
NW finances three-, four- and five-star parks, says Byrne. "We want paved streets, and we want reasonable-looking coaches," Byrne says. "If it's really a bunch of RVs or units from the '50s, those kind of things don't work."
Brokers typically furnish lenders photos, rent rolls and expenses, including taxes, insurance, and utilities. In addition, some parks have expenses for on-site managers, security and clubhouse maintenance.
NW offers unlimited assumptions, allowing buyers to assume mortgages. By comparison, most bank loans are due on sale, and conduits may offer one-time assumptions, according to Byrne.
For small loans, the company also offers reduced third-party reports, limited scope appraisals, environmental questionnaires and database searches and its own legal documents to save closing costs.
Different categories
The communities fall into two categories:
- Age-restricted parks for retirees, which are most common in Florida and the Southwest. Seniors receive pads for their coaches as well as activities and amenities, much like residents of congregate care facilities.
"They're kind of buying a lifestyle," Byrne notes.
- Family or all-age parks. Families can find lower costs and less maintenance than offered by traditional single-family homes and more space than offered by apartments.
The parks come in a wide range of quality, concurs Collins Powell, vice president for Union Capital Investments of Atlanta. In Florida, lenders often finance high-quality, retirement communities. In the Southeast, lenders must beware of lower quality, family properties that may deteriorate because of the quality of tenancy. "We can do them at all quality levels," he remarks.
Brokers should furnish historical income and expenses, a definition of how utilities are handled, complete property description and borrower background, he advises. Following rating agency conditions, lenders underwrite, but don't collect, reserves of $50 a pad a year.
While becoming overbuilt in some outlying areas in Florida, they are still in demand close to major metropolitan areas, Powell observes.
Their demand depends on the area, says Charlie Dahms, loan officer for Quaker City Federal
Savings and Loan, Whittier, Calif. "You can overbuild in any area. You really can't typify it."
The S&L, which finances acquisitions and refinances for mobile home parks with 50 or more units and three or more stars in California, has been seeing more parks this year. It likes to see a strong percentage of double-wide homes, paved roads and a community center. The communities "usually cash flow well," he notes.
But they may not always have strong cash flow. Dahms considered but ultimately rejected a park that fell short of the required debt service coverage due to vacancies prompted by poor management.
RV parks
RV parks are a different animal. Seasonal cash flow of RV parks - the real mobile home parks - can swing tremendously. But some parks have a mix of RVs and mobile homes, Dahms says. "We're willing to look at different situations," he says, noting that historical performance is the deciding factor.
RV parks are purely transient, much like a campground version of hotels. However, RV parks that collect annual rents, a growing trend, are more like manufactured housing communities.
Like manufactured communities, RV parks with annual rents - which guarantees income for park owners and park space for tenants - enjoy tenant loyalty and steady cash flow. They are often frequented by retirees who head south in their RVs and end up staying in one spot over the winter, especially in California and Arizona .
Lack of rent controls, common for mobile home parks, are absent on seasonal RV parks, notes
Powell. They're also safe for lenders since revenues are seasonal but consistent.
Many RV parks have amenities from golf courses, tennis courts to clubhouses, points out Sterling Financial's Houlihan.
"It's almost like a little country club. They're really buying the amenities and activities," he explains.
In another trend, tenants are acquiring parks by forming corporations, observes Jeff Toland, a partner at Industry Mortgage Associates, Laguna Hills, Calif. Purchasing the park through a corporation, they can freeze their rents. In that situation, the tenant-owned corporation may need a mortgage, he explains.
In the condominium model, the owner sells the lots separately to tenants who obtain individual mortgages.
Manufactured housing communities survived the recession better than other property types, he recalls. Their quality generally remains the same - five star communities with large lots and amenities usually retain the same lot sizes and amenities.
This article was previously published in the December 1999 Issue of Commercial Mortgage Insight.
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