Financing Options for Manufactured Home Communities

By Joe Evans and Jeff Meierhofer Mobile home communities are a hot commodity on the investment property market today. We have seen a demand for financing this property type as buyers and investors have been purchasing these properties for as low as a 5% cap rate in some markets. The appeal of a mobile home community is that maintenance expenses can be low and cash-on-cash return can be extremely profitable.  Plus now is a great time to refinance as rates are at an all-time low. Finding a right lender to provide financing for this property type can be tough without having expertise and contacts in this market.  That’s where working with an experienced team like The Madison Group can help you navigate the system and get you the loan terms to meet your financial goals. Here are some examples of the many lending programs available for manufactured home communities: Local Bank or Credit Unions: Bank lending is usually limited geographically to the footprint of the bank’s network as they usually prefer to lend only to those local borrowers to whom they can provide additional banking services.  General loan terms: 3-5 year fixed pricing at a 5-6% interest rate with a loan to value of 60-75% and with a 15-25 year amortization. Pros:  Some local lenders are willing to work with the property having a higher percentage of park owned homes. Most lenders prefer that the parks are 90-100% “pad rental” and generally require that less than 20% of the total lots be “park owned homes”. Some banks can work with 30-40% of park owned homes.  Banks and credit unions offer low prepayment penalties, however you may get a shorter fixed rate in return.  A personal guarantee is almost always required. Some banks can offer a partial guarantee depending on LTV. Loan fees tend to be generally lower than nonrecourse loans. Cons:  Rates can be higher on these property types. Banks usually only like to write for a 15 to 20 amortization for manufactured home communities, so that can really restrict your projected proforma on your cash-on-cash return on the property.  Also, your rate might only be fixed for a period of 3 years, 5 years, or maybe a 7 year period.  Bank financing can sometimes take more time to underwrite and close. USDA or Rural loans Pros:   It is possible to get loans in a smaller city where most lenders aren’t otherwise willing to lend.  Often you don’t have to have the perfect looking property with smooth paved roads and beautiful facilities to get a USDA loan  The government wants to provide a means to finance affordable housing in smaller towns.  The loan does not have a call or balloon payment. Your rate is usually fixed for smaller interim periods of 1, 3, or even 5 years, and then it will just reprice over whatever index is predicated in the loan terms.  A 30-year amortization is available for Mobile Home Communitys. Cons: Fees - There is generally a government fee attached to doing this type of loan of 2-3% of the loan amount up front (similar to an SBA loan for a business) which helps covers government costs. Availability - The quantity of these loans made available can vary state-by-state and some state USDA offices are not always willing to lend to manufactured housing communities depending on what funds are allocated to their offices. Time – These loans generally take 75-90 days to fully underwrite, get approved by the state offices, and close. If you are planning to get a Mobile Home Community under contract in a smaller town, plan on making sure your seller is aware of extended closing deadlines. Fannie Mae Fannie Mae is willing to finance Mobile Home Communitys as well with a great rate. Some MHC requirements worth noting are as follows: • Minimum loan amount is usually over $1,000,000 • 50% or more of the sites can accommodate a doublewide • Amenity package is competitive in the marketplace • Physical occupancy is 85% or greater • Maximum density is 12 home sites per acre • Majority of the property, including the entrance, is not located in a flood zone Pros:   Nonrecourse loans are available with a 10-year fixed term, and a 30-year amortization with interest rates as low as 4.4% Cons:  These loans are generally reserved for only the 5-star, best quality, double wide, larger mobile home communities in large metropolitan areas. Generally, the park must have smooth paved roads, skirted homes with less than 10% of the community consisted of “park owned homes”. These loans are reserved for larger parks with a value of $1-3 million dollars or greater. CMBS or Conduit loans If a nonrecourse loan is what you need, then this type of lender may be the best option for you.  Nonrecourse loans are made to you and your investors and then are sold and traded on the investor market (secondary market as a security). General loan terms: Nonrecourse loans with a 10-year fixed rate with a 30-year amortization offered at rates of 4.5%-5.3% depending on the market rates with defeasance. Pros:  Nonrecourse loans are available with longer fixed terms with a 30 year amortization. These loans are assumable.   They are made directly to the LLC entity structure, with a “warm body carve-out signer”.  These loans are much easier to securitize than a Fannie Mae loan described above.   The loans is usually assumable to a qualified buyer, so if you lock in a low interest rate now and the rates go up, your loan can be assumed by a new qualified buyer in the future at today’s low rates! Cons: Deposits and Fees - Once your loan offer is made, the lender generally required a $8,000-$15,000 deposit for appraisal, site visit, environmental.  Also a deposit for Lender Legal fees and can range from $10,000-$25,000 range depending on the size of the loan being securitized. Defeasance – Since these loans are being sold as securities in the investor market, the lender doesn’t want their money back. If you choose a 10-year fixed, low interest rate loan, plan on being in that loan for 9 years and 9 months. Seller Financing: Look at the offering memorandum for any Mobile Home Community currently on the market and if seller financing is an option. General loan terms are 50-60% LTV with a 7-8% rate and a seller is willing to take your payment for a period of 3-10 years before they want to be paid in full. Pros:  Buyers do not have to qualify through a bank, which can help if your credit was damaged or other factors.  Sellers may want to receive a monthly check for a stretched out period of time instead of one lump cash sum, especially in situations where the occupancy is lower or there is a very high consistency of “park owned homes”. Cons:  Rates tend to be higher: usually 6-8% is the standard interest on seller financing.  The Seller will generally requires a large cash injection or down payment of 30-40% down on the purchase price. How to select the right loan program for you? There are an abundance of lenders in the marketplace for Manufactured Home Communities, but how do you determine who is the best fit for your unique situation?   It often takes extensive research to find out who to contact.  By working with a commercial loan broker, you can have access to many institutions and their programs.  An experience commercial loan broker works with the best lenders and already has a relationship with the Representatives on the inside. In addition, the broker can help you assemble your loan documents to make sure you present the best possible loan package.  With an attractive, complete package, you will have the best options for the optimal loan terms.  You are not only hiring a finance expert, but a whole team of associates that will work in your best interest. The broker submits your package to obtain offers to finance your property.  He will consult with you determine which scenario works best for your financial goals.  He will also help you negotiate with the lender, if needed, for prepayment penalties options, origination fees, amortizations, and an assortment of other loan terms. The broker and his team will partner with you every step along the way to the loan funding.  They work with the third party reports, and underwriting conditions, to ensure you have a success closing.  Often, unknown conditions pop up, and the team is invaluable to eliminate these potential deal breakers. I you are needing financing for you Mobile Home Community purchase or refinance, consider hiring a experience commercial loan broker like The Madison Group. About the authors:  Joe Evans and Jeff Meierhofer are Commercial Loan Specialists at The Madison Group. TMG have a proven track record for originating and funding MHC loans since 2001.   Joe and Jeff can be reached at 435-785-8350 or jeff.m@madisongroupfunding.com or joe@madisongroupfunding.com.  Visit www.madisongroupfunding.com to see the recent closed loans and client testimonials.