December 2006

This issue of the MobileHomeParkStore.com Newsletter includes: 

1. Important updates, news, and new features of MobileHomeParkStore.com
2. New Service: Due Diligence For Mobile Home Park Investors
3. Get the Dirt on Investing in Mobile Home Parks, by Anita Bruckner, Commercial Real Estate Consultant, CHARTER Real Estate Brokerage
4. Overcoming Financing Obstacles: by Tony Petosa and Nick Bertino of Wells Fargo Commercial Mortgage
5. Tell us what you think!

Due Diligence on Mobile Home Parks

Gorial Realty LLC will respond with terms, conditions and a flat fee for a professional bullet proof due diligence  service.  In the case of due diligence, no one performs a more thorough study. We approach the project as if it was our own. We currently manage several communities of all sorts, shapes and sizes. We understand them all. We will uncover everything, the good, bad and everything in between. For each problem we will propose a remedy and solution to the problem if there is one. We will perform a preliminary due diligence within the first week to ten days. In the event the property does not pass the initial test we will make a recommendation to turn your back and run and never look back. In this case you will have the opportunity to identify up to three more properties at no additional cost. At this point you will have up to a total of three preliminary due diligence studies and one full due diligence study. You may identify multiple deals simultaneously, both in the case of time constraints related to 1031 exchange guidelines and or purchasing a multiple income producing property package. Due diligence can be performed rapidly as we know which questions to ask and when to ask them. We can perform the due diligence at the speed which information is delivered to us. We are proud to say we have an overwhelming wealth of experience with respect to Mobile Home Communities. We will use our experience from real deals that have closed and that have not closed. Our efforts in due diligence  will qualify or disqualify your transaction.  We will save you a ton of time and stress. Your due diligence will include Financial, Physical, Demographical, Ease of Operation, Economical, Future Value, Market Saturation and Vacancy Rate Sustainability Studies and much more. We are happy to negotiate on your behalf as the result of what is discovered from our due diligence may require some price negotiation. You may elect to negotiate on your own or with the assistance of legal council. In any event you will be satisfied, that's our promise to you. For More Information on this Service

Get the Dirt on Investing in Mobile Home Parks

By Anita Bruckner

 It may be a great time to invest in Mobile Home Parks.  Why?  As interest rates continue to rise, many experts expect the need for affordable housing to increase.  Have you considered adding one to your investment portfolio?  Many investors, when considering an investment in multi-family, will typically think only of apartments.  Mobile Home Parks have come along way from the stereotypical “trailer parks”.  In fact, the standards of factory built housing units have evolved from a “mobile home,” which is a unit built prior to June 15, 1976 before the Housing and Urban Development (HUD) code came into effect, to the “manufactured home” of today. From an investment point of view, owning a Mobile Home Park or Manufactured Home Community may be more appealing than owning an Apartment Project for a number of reasons: 

• Manage the Land. This is one of the most appealing aspects to investors.  Basically, Mobile Home Parks and Manufactured Home Communities provide land leasing in the housing market providing for ease of ownership for the resident.  As a result, for the landlord there are no walls to paint, stoves and bathrooms to clean and so on.

It should be noted that a number of parks do include park owned “rental units.”  This works for some; however, most would agree that the ultimate goal is to manage the “dirt.”  In fact, a high number of rental units may increase the transient nature of a park which is an ongoing concern with apartment ownership. 

• Pride of Ownership. Definitely, a major plus for an investor versus owning an apartment project.  Residents that own their own home will tend to take better care of their personal investment and its surroundings.  In fact, many residents take pride in “their community” and may assist in “overseeing” the park as they also have a vested interest in maintaining “your investment.”  Comparatively, some apartment owners continue to struggle with the issues associated with tenants who could care less about a unit that they do not own.
• Management.  If the investor does not want to self-manage, for the smaller parks they can often engage an on-site park manager compensated by free lot rent and/or a salary for handling the day-to-day duties.  For larger parks, multi-family fee management firms are the recommended choice as they have the systems, resources, expertise and back-up to provide the owners piece of mind that their investment is being properly protected.  The former will tend to involve more owner oversight than the latter.
• Zoning.  Quite frankly, there are some local municipalities that just do not like Mobile Home Parks or Manufactured Home Communities.  They may not promote the establishment of new parks or expanding existing ones by enforcing strict zoning ordinances.  From an investor’s point of view, there may be an advantage to local governments having tough zoning ordinances.  Basically, in many municipalities where there is opposition to new parks, the competition is typically limited to the parks that are already established versus new parks coming on line in the future.
• Stability.  Due to the cost of transporting and setting up a home, the residents remain in the community for a longer period of time versus an apartment’s average tenancy.  If the resident desires to relocate, typically, the home will be sold to another individual providing an uninterrupted income stream to the park owner.
• Affordability.  From the tenant’s perspective, due to the rising cost of living, this housing type provides an opportunity for home ownership.  This type of affordable housing is attractive to those on a limited budget ranging from the first time home buyers to the senior citizens investing in a “summer home.”

This can be achieved by conventional financing or the park owner could provide financing utilizing a “rent to own” program.  By acting as the “Bank”, the park owners use this program to provide a reasonable payment plan to a prospective resident in which to purchase their home.  This is a win-win scenario for the owner as this increases occupancy while providing a reasonable return on the initial investment of the home. 

• Return On Investment.  From the perspective of the investor/owner, the entry cost to invest will appear palatable as per lot prices are dramatically lower than per unit apartment costs, yet the returns are generally higher.

Mobile Home Parks and Manufactured Home Communities may be an investment to be considered for your portfolio.  Now that you have the “dirt” on these investments, there are qualified professional brokers available to help you “dig” for the right park for your investment needs.   Anita Bruckner Commercial Real Estate Consultant CHARTER Real Estate Brokerage 130 Linden Oaks Rochester, NY 14625 Ph: (585) 419-7000 Fax: (585) 381-1895 Email: AB@CharterBrokerage.com

Overcoming Financing Obstacles

By Tony Petosa and Nick Bertino

Just as you prepare to take advantage of the low interest rate environment and decide to refinance your existing property or pursue an acquisition with debt, you find that obtaining the level of financing necessary isn’t as neat and simple as initially imagined.  As you start to dig deeper into the transaction, you find that there are potential obstacles to your financing objectives.  You may find that there is a lack of cash flow sufficient to support the necessary debt, that the existing loan has a prepayment penalty attached to it, or that the property you wish to purchase sits on leased land. Though each of these obstacles can be daunting, options are available to a borrower that may help you reach your financing objective.  The best way to address these obstacles is to understand what they are, how they affect the financing process and then explore the various ways to deal with them. Insufficient Cash Flow During a financing transaction, you discover that the net operating income of the property is not sufficient to service the desired debt.  You wish to proceed with the financing, however, and do not want to (or may not be able to) wait until the property reaches a stabilized or optimum income level before financing.  The reasons for this may vary:  maturation of an existing loan; locking in an attractive interest rate; expansion or renovation to compete with other properties; repositioning of the property for sale or increased lease rates/rent; or other capital requirements. Knowing this, the capital markets have developed several bridge-financing programs for properties that have upside potential in the near future.  These are often referred to as structured loans and are usually loan amounts of $3 million and above.  The three structures discussed below are just some of the methods the capital markets are utilizing to help “bridge the gap” from current financing needs until the property reaches a stabilized level whereby permanent long-term financing can be placed on it. Interest-only Financing during the initial years of the term allows an owner to have a more reasonable monthly payment that can provide the property with a sufficient debt service coverage ratio while it re-stabilizes. A Debt Service Reserve is a fund in which moneys are set aside by a borrower to make entire or partial loan payments in the event that cash generated by operations is insufficient to satisfy the debt service payments.  The debt service reserve fund is usually funded at the close of the loan or it can be structured as an accrual that increases the loan balance.  Debt service reserves are common with construction loans but may also be used with renovation or expansion properties that have not stabilized. A Holdback is an effective way to lock in an attractive interest rate and a full loan amount.  The lender commits to the full loan amount but only funds that portion of the loan that is supported by the current net operating income of the property.  As the performance of the property improves and begins to reach or surpass certain performance tests, such as debt service coverage ratios or loan-to-value thresholds, the lender begins to fund the remaining debt until the full loan amount has been issued. With interest rates remaining relatively low and an abundance of available capital, you have many different options to pursue in order to secure an attractive loan.  However, in order to get the lender comfortable with doing the loan and finally securing it, the borrower must be able document and support the loan request with operating statements, projections, improvement plans, market and economy information, sponsorship information and a well-defined exit strategy. Prepayment Premiums In this low interest rate environment, you are faced with a dilemma:  should you refinance now and pay the prepayment penalty on an existing loan, or should you wait until the end of the prepayment penalty period and hope that interest rates are still attractive when you refinance at that point in time?  To better answer this question, you need to understand a common prepayment penalty: yield maintenance as well as what type of loan normally has yield maintenance, how to overcome it, and how it can benefit a borrower to pay the prepayment premium. What is Yield Maintenance?  Yield Maintenance is a prepayment penalty that allows a lender to attain the same yield on a loan as if the borrower had made all scheduled mortgage payments until maturity in the event the borrower pays off the loan before maturity.  Yield maintenance premiums are designed to make lenders whole in the event of an early prepayment by a borrower.  What type of loan requires Yield Maintenance?  Generally speaking, fixed rate loans are the loans that require yield maintenance or its proxy, defeasance.  These types of loans are often pooled with other loans and then “securitized”, meaning that there has been an issuance of a new publicly traded financial instrument, such as bonds, which are secured by the pooled assets.  This process allows these loans to often provide more aggressive terms than traditional portfolio loans.  These loans are popular due to favorable fixed interest rates, longer amortization, higher leverage/less required equity, and limited personal liability.  In exchange for these favorable traits, these loans require that they attain the yield that was originally agreed upon at the inception of the loan. How to overcome yield maintenance?  There are a couple of methods that can help you overcome the prepayment penalty.  The penalty could be added to a new loan and spread out over the term of the new loan, or a new loan could be structured where the interest rate is locked in advance to match the maturity of the prepayment period. What are the benefits of financing before the Yield Maintenance period expires?  Not every financing transaction that has a prepayment penalty should be automatically viewed as a non-starter.  It generally makes sense to prepay a loan if the borrower is extending the loan term and/or refinancing at higher loan proceeds.  You may find it to be in your best interest, literally, to refinance in the current low interest rate environment and pay the prepayment penalty.  Refinancing while interest rates are low may result in a short recapture period of the prepayment penalty.  You may be able to generate equity retrieval, while reducing annual debt service, thereby providing cash out and additional cash flow.  With some analysis and a little due diligence, you may find that it is worthwhile to go forward with the financing process and secure a new, long-term, low interest rate loan. Ground Leases Once you have identified a property and decide to purchase it, you may find that the property sits on a ground lease.  In a conventional commercial real estate loan transaction, a borrower is the fee simple owner of a piece of property and a lender agrees to lend money to the borrower.  A ground lease, in addition to the various obstacles previously mentioned, can complicate a mortgage loan. What is a Ground Lease?  Typically, a ground lease is a lease whereby the owner of the land (ground lessor) leases or gives the right of use of land to a tenant (ground lessee) for a long period of time (usually more than 30 years) to develop the land in an agreed upon fashion so that both the ground lessor and ground lessee share in the resulting cash flows. Why is it so important to understand leasehold issues?  To begin with, it may affect your decision to buy.  For example, you should know the length of the remaining lease term, what happens to the improvements at the end of the lease term, and how increases in the ground lease payments are determined.  These are the main issues an investor should understand before deciding to buy. A leasehold may also affect your ability to obtain financing on the property.  Lease provisions regarding such matters as future rent increases and the expiration date of the lease may impact the willingness of a lender to finance the proposed acquisition, or, at the very least, affect the loan terms.  Generally, lenders prefer leases that provide certainty as to what the future lease payments will be.  For example, a stated percentage increase is preferred to an increase based on future reappraisal. Loan terms such as the amortization period are also a function of the length of the ground lease, as the loan needs to fully amortize prior to lease termination.  Lease provisions such as lender notification on default are also important to loan underwriters. Lease terms may also affect the investor’s ability to resell the property in the future as sale capitalization rates can rise substantially as leasehold properties near lease termination. How to overcome leasehold issues?  There are a few methods to address leasehold issues.  You could investigate the option of obtaining a shorter-term, fully amortizing loan to pay the loan off prior to the lease expiration date.  Or, the investor may approach the ground lessee/seller about financing the purchase with a seller carryback in which the seller, in essence, acts as the lender.  The investor can also inquire whether the ground lessor is willing to extend the lease term.  Finally, the investor can inquire whether it is possible to purchase the fee interest and “merge” the leasehold interest in a single transaction. The situations described previously are just a few of a myriad of potential obstacles that may hinder your financing objectives.  Before deciding not to pursue the process, we recommend that you consult with a mortgage professional to see what options are available to you.  With some analysis, you may find financing alternatives that, though they may be different from your initial goal, may end up fulfilling your ultimate financing objective.   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.