March 2009

This issue of the MobileHomeParkStore.com and MHBay.com Newsletter includes: 

1. April 2009 Bootcamp Update
2. You Can Follow Sam Zell, by Frank Rolfe
3. The Best Financing for a Mobile Home Community, by Frank Rolfe
4. Your Loan is Coming Due, Now What?, by Tony Petosa & Nick Bertino of Wells Fargo
5. Lower Occupancy Mobile Home Parks, by Steve Murden of Star Capital
6. Tell us what you think and send us your articles!

DON’T MISS THE MOBILE HOME PARK BOOT CAMP, APRIL 23 - 25 UNLESS YOU STILL BELIEVE IN THE EASTER BUNNY!

Back by popular demand, the Mobile Home Park Boot Camp, brought to you by Mobilehomeparkstore.com, will be held in Denver on April 23rd through 25th. This is the event in which we pack everyone up in two vans and walk park after park, teaching you everything you need to know about picking out good parks from bad parks. We also spend 2 more full days imparting everything we possibly know about buying parks and understanding the differences between successful parks and unsuccessful parks, and how to negotiate the former and stay away from the latter. The Boot Camp creates a unique atmosphere as we eat every meal together – a couple of which are pretty lavish – and talk about nothing but the mobile home park business and answer all of your questions non-stop. You may not know that we offer a very attractive multi-payment plan on this course – the Frank & Dave version of a layaway, only you get everything up front. The only way most people will ever get comfortable with buying a mobile home park – or even succeed at it – is by knowing everything there is about the business. This course offers that. The Easter Bunny will not bring you a great mobile home park that provides financial security to you and your family. But this course will. Unless you believe in the Easter Bunny, you should make your reservation today. You can call (800) 950-1364 or sign up online at www.mobilehomeparkstore.com. This class is limited to 20 people, and we have only a few spaces left. So if you are interested, you should call for more information now. Perry or Trish can give you as much additional data as you would ever want. We hope to see you there! Frank & Dave

YOU CAN FOLLOW SAM ZELL’S LEAD AND INVEST IN AFFORDABLE HOUSING BY BUYING A MOBILE HOME PARK IN THE U.S.

Sam Zell is making a major investment in affordable housing in Brazil. You don’t have to cross the border to make a similar bet on affordable housing right here in the U.S. And the best bet for affordable housing is the same one that Zell made almost 30 years ago – to buy and operate mobile home parks. His are held in a real estate investment trust called Equity Lifestyle. Why is affordable housing a good strategy in a terrible economy? Well, it’s basically housing for poor people. And poor people are always going to be around. In a recession, their ranks swell. But even in the best of times, there are a huge number of U.S. employees that earn only the minimum wage – which is about $15,000 per year. Minimum wage employees are one of the few industry segments in this recession that are going unscathed. That’s probably because minimum-paying jobs are so basic that they can’t be disposed of. Cooks and cleaning people and waiters are not something that the average company can layoff. It’s a lot easier to fire the CEO of GM than the people who clean the bathrooms. So despite the worst unemployment in years, there is still very low unemployment in minimum wage jobs. Another, extremely important benefit of mobile home park ownership is the inability of tenants, even in the worst of times, to afford to move their homes. The only thing “mobile” about “mobile homes” is the name. It costs around $3,000 to move a mobile home from point A to point B – assuming point B is only about 100 miles from point A. So when you lose a customer, you normally keep the house on-site, and it ultimately becomes re-sold as abandoned property. The inability to move homes also comes in handy when raising rents. You can pretty much raise them as high and as often as you’d like (except in states with rent controls), and nobody can afford to do much about it. The final reason to invest in a mobile home park right now is the availability of owner financing. With the credit markets at their worst in decades, and commercial real estate lending impossibly difficult, the availability of seller carry allows you to sidestep this entire problem and focus your energy instead on finding a negotiating a good deal. Since the majority of mobile home parks are still owned by “moms and pops”, they have little or no debt on their parks and, therefore, have the ability to carry as much paper as they want. Although zero down deals are few and far between, there are many deals out there based on 10% to 20% down. Zell believes that affordable housing is going to be strong in Brazil. We think it’s going to be strong everywhere – especially here in the U.S. So if you want to get involved in something counter-cyclical that is on the right side of the trends, then consider buying a mobile home park. It may look nasty on the outside, but it has a very profitable core. Read the Wall Street Journal Article Here 

THE BEST FINANCING FOR A MANUFACTURED HOME COMMUNITY

So you’re buying a manufactured home community and you don’t know where to get the money. From a bank? From a credit union? From a hard-money lender? Well, the answer is a whole lot more simple. And it doesn’t require a loan committee meeting, or even a financial statement and credit report. The answer is having the seller provide the financing – a concept called “seller carry”. It’s not only the best type of financing, it’s also the easiest to get and truly a win/win for all parties involved. Not all sellers can offer this type of financing. To do so, they have to own the property free and clear of all liens, or at least with such a small loan on the property that your down payment pays it off and then the seller has no liens on the property. Someone with an 80% loan to value mortgage is not a player, so there is no point in attempting to construct seller carry in that instance. The typical seller who is a player for this type of financing arrangement is normally an older “mom and pop” seller who paid off their loan many years ago. Why should a seller agree to carry the paper? The first, and most important reason is that, in the absence of seller carry, their property will not sell. Particularly in cases where the property has lousy cosmetics that would be a turn off to a regular bank, or produces insufficient income to qualify for a bank loan due to poor management, or excessive vacancy beyond the lender’s comfort zone, or an abundance of rentals – any situation that precludes regular bank lending. In those cases, if the seller refuses to carry paper, they might as well take the community off the market, because the odds of it selling are zero. The second reason, and this is the one that you have to learn how to persuade the seller, is that their income will be roughly twice as much from the note on the community as it will from investing the cash proceeds. This argument is simple to prove out. If the seller receives cash for their property, they will have to pay income tax (and remember that most mom and pop’s have used up all their depreciation on the community, so they have to pay hefty recapture tax, not just capital gains tax) and then put that in a CD at, say, 3%. If they instead carry the paper, they will have more attractive tax implications, and they will get 6% interest – roughly twice as much monthly income. It’s not hard math to understand. For most sellers who are older and own the community free and clear, their key interest is in the monthly income they will receive. They are trying to fund their retirement – not reinvest in building a new empire. Most are extremely receptive to this “doubling” concept. It’s a different type of loan qualification process. Many buyers do not understand that a key component in obtaining seller carry is for the owner to become “comfortable” with you as the borrower. It’s not that they care a whole lot for your financial statement, or coverage ratios, or that unpaid Master Card payment from when you got out of college. What they are worried about is simply this: will you screw up their property so that, if they get it back, it is in worse condition than when they handed it off to you? This is the issue you have to overcome. The only way to give them this comfort zone is to meet with them in person and convince them that you are going to take good care of their community. They want to hear about your values and experience. But most of all, they want to hear in great detail what your plans are for the property. The more detail you can give them over your plans for stewardship, the better. And it pretty much has to be done in person. What’s so great about seller carry? I can’t believe you’d even ask that, but the benefits are numerous, and significant. First of all, it’s cheaper money than a bank offers. You have no up-front fees. You have no third party reports, other than a survey update and a phase I. And you normally have a below market interest rate. Any way you cut it, seller carry is the always the least expensive financing option. Secondly, it is non-recourse. That means that, worst case, you can give the property back to the seller and walk away free. Most banks are going to require “personal recourse”, which means that they are going to come after you for the deficiency if the community goes back to the bank. Third, seller carry is an excellent hedge against seller fraud. If the seller has committed fraud in their dealings with you, you have a huge club over their head in the unpaid balance. You can often negotiate down the balance instead of going to court. Finally, there is nothing easier and quicker than seller carry. There is no proposal to write for the bank, no committee meeting, no endless request for personal financial information. In fact, the entire loan approval process is instant gratification. So why doesn’t everyone use seller carry? If they can, they should. Of course, not all properties qualify. And not all sellers will agree to it. But many will. And those are some of the best deals in the manufactured home community business. In a time of unparalleled uncertainty in commercial lending, can you afford not to seek seller carry? So start aggressively asking for it. You’ll be glad you did.

Your loan is coming due: What now?

By Tony Petosa and Nick Bertino

As the credit crunch continues, lending options for commercial real estate, including manufactured home communities, have become increasingly scarce. Conduit loans are still not being originated, life companies are lending on a highly selective basis, traditional banks are experiencing financial challenges causing them to pursue new loans only at lower leverage levels, if at all, and the agencies (Fannie Mae and Freddie Mac) have become more selective. Adding to this problem of lack of available capital is one sobering fact: a lot of commercial real estate loans will be maturing in the coming years. Over the past decade commercial real estate owners enjoyed some of the most favorable lending programs ever experienced. Aggressive underwriting parameters, low interest rates, and a bounty of lenders hungry for volume all factored in to borrowers being able to obtain attractive loans on their properties. In today’s credit market, many of these lenders and loan structures simply don't exist, and many borrowers will face difficulties in refinancing their properties in the coming years. Examples of properties that will face financing challenges include properties located in secondary and tertiary markets; properties that have experienced flat or declining occupancy and cash flow streams in recent years; and properties financed at high leverage levels with minimal amortization and loan terms of 5 years or less. Properties that will mirror the problems suffered by the local and regional economies present corresponding problems for refinancing. Does your property fit any of the characteristics described above? The answer may bring you to another question: “What happens if I can’t refinance or pay off my loan when it comes due?” Even if you are current on your loan payments, you will be in “monetary default” if you cannot pay off your loan balance when the loan matures. As a first step, we recommend that you dust off and review the loan documents (particularly the promissory note, deed of trust/mortgage and guaranty) from your current loan. At the outset, you should at a minimum have a clear understanding of the following topics: 1. Is Your Loan a Conduit Loan? This is a vital fact that must be determined at the outset. Conduit loans have typical features, and are much more difficult to modify. Balance sheet (non-conduit) loans potentially present greater flexibility as your loan approaches maturity. 2. Maturity and Default. Do you have a specific "balloon" maturity date versus a fully amortizing loan term that may have periodic interest rate adjustments? If your loan was a conduit loan, it is possible that it has "hyperamortizing" features that essentially provide an automatic "workout" once the "anticipated repayment date" (essentially what would have been the maturity date if this feature was not added) has passed. However, in any event, if your loan has matured, it is likely to be accelerated unless you can work something out with your lender. 3. What is Your "Default Interest Rate"? Most commonly, when a loan goes into default, the current interest rate will adjust to the “default” interest rate. This is typically the lesser of the current interest rate plus an additional margin (often 4%-5%) or the maximum interest rate allowable by law. The bottom line is that the interest rate you will be charged when your loan is in default will be substantially higher than what your rate had been throughout the loan term. To put this in perspective, imagine that five years ago you obtained a $5 million conduit loan at 80% loan-to-value amortized over 30 years with a 6% fixed interest rate. During those five years, the cash flow of your property was flat. You try to refinance your property at loan maturity, but because underwriting parameters are now more conservative and because your property has not increased in value, you are unable to obtain a new loan for your property, and the loan goes into monetary default. Your interest rate would then adjust to 11%. If the lender doesn't accelerate the loan balance, and you are permitted to continue monthly payments, in this particular circumstance the default rate alone would increase your monthly loan payment by more than $17,000. As you can see, the purpose of implementing the default interest rate is to motivate the property owner to refinance or pay off the loan. 4. Personal Liability. This issue may strongly shape your course of action. Was your loan made on a recourse or non-recourse basis? Are you a carveout guarantor or fully or partially responsible for repayment of the loan indebtedness? These are extremely important facts to ascertain. Recourse loans (for which the guarantors are fully liable for repayment of the entire loan) are typically non-conduit and made by banks when the loan is to be held on its balance sheet. Nonrecourse loans are made with limited and specific "carveouts", and virtually all conduit loans follow this pattern. For a nonrecourse loan, the lender agrees to look only to your property for repayment, except: (i) for losses it may sustain for certain "bad boy" acts, such as fraud, diversion of rents or insurance proceeds, waste and environmental conditions; and (ii) for your full liability for the entire loan in the event of bankruptcy, an unpermitted transfer of the property or equity interests in the borrower, or violations of loan covenants that assure the lender that your borrowing entity will remain a "single purpose, bankruptcy remote entity". If you are only a "carveout" guarantor on a nonrecourse loan, be absolutely certain that you don't do anything (unless you determine that to be the best course of action, on balance) that will trigger that full (springing) personal liability and be aware of what the scope of your "carveout" liability will be for losses and damages as well. 5. Is There a Prepayment Penalty/Premium? Payment of your loan prior to maturity almost always carries with it a prepayment penalty or premium (there is no practical difference in the term used). For conduit loans, this typically takes the form of "defeasance" or "yield maintenance.” Defeasance is a complicated and costly process that involves assembly of a basket of U.S. Treasury securities to replace your property as security, and for which you will require an expert to put the pieces together. Yield maintenance premiums (measuring the loss of yield over a U.S. Treasury security, as if your prepayment proceeds were to only be invested in such a security, but typically never less than 1% of your prepayment) are determined by your lender, are far less complicated, and don't require outside experts and their related fees. Other loans (most often bank balance sheet loans) may require a "stepped prepayment premium" or a fixed percentage of the prepaid amount. In short, know what is required, and determine the impact against your available capital and refinancing proceeds. 6. Is There an Open Prepayment Window? If you do decide you are going to pay your existing loan off prior to its maturity, check your loan documents in further detail to determine whether there is an open prepay window, as well as whether there are any restrictions pertaining to what day of the month you will need to pay off your loan. For conduit loans, as well as many bank balance sheet loans, the "window" is the last 3 months (some longer, some shorter) prior to maturity when the loan can be prepaid without a prepayment penalty. In additional, some loan documents may require that the loan be paid off on the first or last day of the month, or you will be charged the full month of interest for the month in which the loan is paid off. If you are processing a new loan, you will want your new lender to be aware of this so that you avoid paying double interest during that month. Additionally, your existing loan documents may require that you give the existing lender written notice of at least 30-60 days prior to paying off you loan. Again, this is a point you should be aware of if you are processing a new loan. Even if your existing loan does not mature for another 12-24 months, it is only prudent, and strongly recommended, to start exploring your options for refinancing now. Remember, lenders hate surprises, so you should manage the expectations of your current lender. If your loan is a balance sheet (not a conduit) loan, you may have greater flexibility in working directly with that lender to extend the term of your loan prior to hitting the wall at maturity, although this will most likely require full personal liability if that is not already the case. If you have a conduit loan, be aware that loan modifications cannot typically be made unless the loan is in default. This presents material issues to working something out and virtually assures that you'll have to be on the "brink" in order to do so. Thus, for a conduit loan in this environment, you cannot begin looking too soon for refinancing alternatives and setting realistic goals in that regard. If an extension is offered to your loan, request a written outline of any additional items the lender may require to grant the loan extension. You may find, for example, that the lender will require a partial pay down, shorter amortization, full recourse, an extension fee and/or re-setting of the interest rate as part of the loan extension. In this economic environment it is critical to understand your specific loan terms and any default risks they may pose so you can plan accordingly. The “friendly banker” you knew five years ago may not be the one you will be dealing with tomorrow. Please feel free to give us a call to discuss your particular situation.   Tony Petosa is Senior Vice President and Nick Bertino is Vice President of Wells Fargo Commercial Mortgage. They specialize in arranging financing on manufactured home communities, offering both direct and correspondent lending programs. If you would like to receive future newsletters from Petosa and Bertino, or would like to receive a copy of their Manufactured Home Community Financing Handbook, they can be reached at 760/438-2153; 760/438-8710 fax; and via email: tpetosa@wellsfargo.com and nick.bertino@wellsfargo.com. You can also visit their website at www.wellsfargo.com/mhc. Special thanks to Jim Simpson, Principal with the law firm of Miller Canfield, for his contribution to this article. WELLS FARGO RELEASES THIRD EDITION OF ITS MANUFACTURED HOME COMMUNITY FINANCING HANDBOOK 

Lower Occupancy Mobile Home Parks

Many mobile home park investors are looking for parks with a lower than stabilized occupancy in order to take advantage of the infrastructure in place and increase the value of the property with their own efforts. Purchasing mobile homes and either renting them or selling to tenants is the most common approach. This strategy makes sense where there is a demand for these units and the investor has a supply of mobile homes and a means to pay for them. Many lenders will not consider financing a park like this, but we have worked with several clients accomplishing this goal. Parks where stabilized occupancy has never been achieved or due to a variety of circumstances, the current vacancy exceeds the 10% maximum many lenders consider stabilized can be financed through both a real estate loan and a credit line on the homes. Investors are typically negotiating purchase prices for parks based on their current cash-flow and paying a reasonable CAP rate regardless of the number of pads on site. As mobile home parks are different from any other type of income producing property, the vacant pad sites do have value, but no ability to generate income without a mobile home in place so they would not have equivalent value to an occupied pad. Vacancy issues with other property types are remedied with improved management or improvements to the existing structure. In the case of parks, there is no structure to better manage or improve if the pad site is vacant. The financing for the parks is determined by the appraised value and limited by the debt-service-coverage. At a typical loan-to-value of 75% on the real estate, the price of the park needs to be based on the current income to support the debt. The lender will amortize the loan on the park up to 20 years (25 year case-by-case) and charge an interest rate around 7%. Many times the first two years of the loan can be paid as interest-only. The least expensive mobile homes to purchase are either repossessed or in another park that may be restructuring or changing use. The costs involved include the purchase price of these homes, transporting them to your site, and any improvements to the homes. On average we see investors using a figure of $15,000 per home for their estimates. Once these homes are in place, the plan is to either rent these units, sell them to the tenants by financing them, or selling them on a rent-to-own program. The terms offered to the tenants vary as to the market demand for the units. Most park investors want the cost to maintain these homes passed on to the tenants. Renting them and maintaining the repairs can, at times, be more costly than a vacant site. The financing for these homes is available at minimum credit lines of $500,000. The loan is amortized over 10 years with a 5 year term. The loan floats at WSJ Prime + 2% with a floor rate of 7%. The repayment of this loan is based on the amount drawn from the line. The minimum increment that can be drawn at one time is $50,000. The release of the funds is based on 75% of the cost of the homes to included purchase price, transportation, set-up, and any improvements. The mobile home needs to be in place and leased or sold with a tenant in the unit in order for the bank to release funds. To make this financing work, the investor would need to make certain the tenant is paying a rate of interest or rent that will off-set the cost of the line. There are few changes to a mobile home park that will significantly improve its value. The main improvements are increasing pad rents, separately metering utilities and passing the cost to the tenants and improving occupancy. With the limited amount of chattel financing available, advertising for tenants to move their homes into your park or to purchase a new home from a dealer and moving to your park are rare occurrences. A park owner willing to purchase the units and make them available to tenants is now the standard in improving occupancy. Financing is always an issue and with funds available to purchase the park and fill it with homes, there is a tremendous opportunity for creating a great amount of additional value. As an example, a park owner recently purchased a park with 312 pads at 70% occupancy. The acquisition price was based on the net operating income from the occupied pads at a CAP rate of 9%. The park was financed at 75% of the purchase price and a line of credit for the mobile homes set up for $1,000,000. This not only allowed the investor to acquire the park, but also have an immediate avenue to improve value. The park is located in area with a high demand for these homes and he plans to add approximately three homes per month. This would allow for full occupancy within three years. This improvement should increase the value by close to $2,000,000. This financing can be for park acquisitions or refinancing a park currently owned that is in need of additional units. If there are existing units in a park, the credit line can be drawn at closing to cover up to 75% of their value. When a park is being purchased with park-owned homes, this can be very helpful in maximizing the amount of financing and lower out-of-pocket costs as well as eliminating the need for a seller to carry financing on the homes.   Steve Murden Star Capital Corp (540) 342-6520 (703) 991-0072 (fax) stevemortgage@aol.com www.starcapitalcorporation.com

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