November 2006

This issue of the MobileHomeParkStore.com Newsletter includes: 

1. Important updates, news, and new features of MobileHomeParkStore.com
2. 10 Ways to Increase the Value of Your Mobile Home Community.
3. Risk Management Guidelines, by Jay Zandman, Manning and Nozick Insurance Agency.
4. Land-lease Community Financing:   Challenges and Solutions, by Tony Petosa and Nick Bertino of Wells Fargo Commercial Mortgage
5. Tell us what you think!

In the past 30 days, there have been over 60 new mobile home parks listed for sale on mobilehomeparkstore.com and at least 15 confirmed sales.  We have secured a new domain name for MobileHomeParkStore.com which is MHPS.com.  Much easier to type into your browser! Do you have a website?  If so, feel free to link to our site or to any of the articles or other resources you feel would benefit your visitors.  The last month we have been very busy updating and redesigning RVParkStore.com and MHBay.com.  Most of the updates are now completed and we now have easy to navigate and use sites.  

• MHBay.com allows you to buy, sell, and rent manufactured homes and lots.  All listings for sale or rent are currently FREE!.  If your company provides services such as insurance, financing, etc to the home part of the industry this will be another great place to get additional exposure. 
• RVParkStore.com is basically the same as MobileHomeParkStore.com but for RV Parks. 

Here are some great articles by the professionals in our industry.  If you have an article and would like to have it included in a future issue let us know.

The first 2 articles are located on our website:

Rio Grande Valley Business Journal - September 18, 2006

Shopping For Insurance, How to Get the Best out of the Insurance Marketplace

10 Great Ways to Increase the Value of Your Mobile Home Community, By Dave Reynolds, MobileHomeParkstore.com

1.  Raise Rents:  A $10 per month rent increase at a valuation using a 10% capitalization rate, can increase the per lot value of $1,200. 2.  Submeter Water and Sewer and Trash:  By installing water meters and billing the residents back for water and sewer and trash you are in effect increasing your bottom line.  I often think this is one of the most equitable ways of to pass on expenses to the residents as they only pay for what they use.  In my experience when meters have been installed the master water and sewer bill is reduced by 30-40% as your residents become conscious about the amount of water going through the faucets.  Leaky faucets are fixed, toilets no longer run continually, cars are not washed every day, etc. 3.  Enforce Rules and Leases:  By enforcing reasonable rules and regulations your community will be regarded as a safe and comfortable environment.  Get rid of problem tenants.  If you are worried about losing the rent from one or two problem residents, consider that you may lose even more good residents and potential residents by keeping those that are causing problems and not obeying the rules. 4.  Reduce your Property Tax Expense:  Contact a company that specializes in going to bat for you with your county tax assessor to get your valuation and taxes reduced.  Many states and counties base the assessed value on the purchase price.  However, most mobile home parks should have a business value component that should not be taxed as property tax.  These companies often work for a % of the reduced taxes thus no money out of pocket. 5.  Reduced other ongoing expenses:  Get multiple insurance quotes, evaluate telephone costs and extras, negotiate with plumbers and electricians to get a lower hourly rate, etc. 6.  Fill vacant lots:  How much is a vacant lot worth?  In many cases, a vacant lot is actually costing you money to keep the grass mowed, the lot clean, and so on.  If your lot rent is $200 per month and based on a simple formula that a lot is worth 60 times the monthly rent, then an occupied lot is worth $12,000.  Would it make financial sense to spend $2,000 to cover the home moving costs of a potential resident?  I believe it does.  Other incentives I have used include, free or reduced rent for the first year or two, free installation of new skirting, free steps and decks, and the list goes on.  Be creative and stay ahead of your competitors.  It is much more effective to come up with 50 ways to market to one customer rather than 1 way to market to 50 customers. 7.  Buy homes for Resale or Rental.  Buying used homes and placing them in your community for resale or rental is another way to drastically increase the value of your community.  As mentioned before, each time you fill a vacant space, the value of your park increases.  As a community owner you have an advantage over most mobile home retailers in that you do not need to make a profit on the sale of new and used homes.  If you profit by $12,000 per space in equity each time you add a new home, you can sell the homes at breakeven and be way ahead. 8.  Increase the Curb Appeal:  Encourage residents to clean up their yards and property.  Hold clean up days on a monthly basis.  Have new and attractive signs installed at the entrances.  Repair roads and maintain adequate street lighting.  Have monthly rent discount incentives to the residents for things such as:  Property of the month, most improved property, etc.  Additionally, financing for your residents such things as new skirting, paint, wood siding,  and other outside improvements can get the homes looking better as well. 9.  Add additional income sources:  If you have some vacant land, consider adding some mini storage units, or fence it off and offer storage for RV's, Boats, and extra automobiles.  If you have highway frontage, look into placing billboards or selling easements to billboard companies.  Look into getting Cable TV or Wi-Fi for the entire park and in doing so, your residents will get a break on these costs and you should be able to profit as well.  10. Dedicate streets and utilities to the city.  Although is not too common for established communities, if you can talk your city into making this happen, you just reduced your exposure to street repairs, utility repairs and metering.

Land-lease Community Financing:   Challenges and Solutions

 By Tony Petosa and Nick Bertino

In recent months, land-lease community lenders and owners faced financing challenges in a rising interest rate environment.  The following paragraphs identify the challenges encountered and outline solutions that asset class savvy lenders have developed to address these issues. Challenge: Rising interest rates, combined with the lender's minimum debt service coverage ratio ("DSCR") requirements, restrict the maximum available loan proceeds an investor can achieve. Solution:     Lower minimum DSCR requirements. For several years, lenders have sized maximum loan amounts on most land-lease communities using a minimum DSCR requirement of 1.20:1.00.  For example, assume a land-lease community has an underwritten annual net operating income ("NOI") of $500,000.  The lender would require that the NOI divided by the annual loan payment be no less than 1.20.  Now, let us assume that the property qualifies for a loan that is priced at an interest rate of 6.00% on a 30-year amortization schedule.  The loan constant (the rate at which both principal and interest are paid) would then be approximately 7.19%.  When the lender applies the minimum DSCR requirement of 1.20, the resulting maximum loan amount would be approximately $5,795,000 (e.g. $500,000/1.20/.0719=$5,795,000).  Now assume interest rates have increased 50 basis points since the loan amount was originally sized, resulting in an interest rate of 6.50% and a loan constant of approximately 7.58%.  The original loan amount of $5,795,000 would then not meet the 1.20 minimum DSCR requirement (the DSCR would only be 1.14) and the loan amount would need to be reduced.  The simple solution, then, would be for the lender to reduce its minimum DSCR requirement, which many lenders are now showing a willingness to do on a case-by-case basis.  On well-located, high quality properties, we have been successful in getting lenders to reduce their minimum DSCR requirement from 1.20:1.00 to 1.15:1:00.  In the example above, this lower DSCR requirement would enable the borrower to achieve nearly the same level of loan proceeds at a 6.50% interest rate that he or she would have originally received at a 6.00% interest rate. Challenge: Purchasing a land-lease home community at an aggressive cap rate, resulting in low cash flow after debt service payment. Solution:      Interest only payments. In the fixed rate markets, maximum amortization schedules on land-lease communities typically have been 30 years. Assume, for example, the acquisition of a land-lease community producing an annual NOI of $375,000.  Assume the cap rate is 6.25%, which would result in a purchase price of $6,000,000 ($375,000 / 0.0625 = $6,000,000).  If the buyer were to borrower 75% of the purchase price ($4,500,000), at an interest rate of 6.00%, for a 10-year loan with a 30-year amortization schedule, the annual debt service would be approximately $324,000.  The resulting cash flow, after debt service, would be approximately $51,000.  Perhaps the buyer's business plan is to accept a low cash flow number during the first two years of ownership and then implement a rent increase after year two.  In order to improve the property's cash flow in the early years of ownership, it may make sense to ask if the lender would be willing to provide interest only payments for the first two years of the loan term with the 30-year amortization schedule to kick in thereafter.  This would provide the buyer with a healthier cash flow because the debt service during the first two years of the loan term would now be $270,000 ($4,500,000 X 6.00% = $270,000).  During the first year of ownership, the expected cash flow would more than double, increasing from $51,000 (based on a 30-year amortization schedule) to $105,000 (based on interest only payments).  The buyer can then implement the rent increase after year 2 (as well as continue to lease spaces if the community is not 100% occupied) to help offset, and perhaps even overcome, any decrease in cash flow that results when the 30-year amortization schedule goes into effect.  It is actually becoming customary on higher leveraged transactions for fixed rate lenders to offer interest only payments for up to the first 2 to 3 years of the loan term.  As a general rule, longer periods of interest only (up to 5 years) are more easily obtained on lower leveraged transactions.  In fact, we have successfully negotiated interest only terms for the entire 10-year loan period on some very low leverage transactions. Challenge: A property owner wants to refinance now in order to take advantage of low interest rates, but the current mortgage is subject to a defeasance or yield maintenance penalty for the next 12 months. Solution:     Forward rate lock. As many borrowers are aware, long term fixed interest rates typically come along with prepayment penalties that, in a lower interest rate environment, can be very expensive to pay off early.  As such, many borrowers will wait until very near the end of the loan term before they even consider refinancing.  We suggest considering a forward rate lock.  Despite the recent fluctuation in U.S. Treasury rates, interest rates are still very low by historical standards.  Furthermore, the cost to do a forward rate lock has declined so significantly that it may make sense to think about refinancing a property as early as 12 months prior to the loan maturing.  Typically, lenders will charge for a forward rate lock by simply adding basis points to the interest rate.  There was a time when doing a forward rate lock was quite expensive.  In fact, the longer out that a borrower wished to lock an interest rate, the more expensive the cost per month became.  For example, if the cost to lock an interest rate for 2 months was 0.04%, then the cost to lock for 3 months was 0.09%, the cost to lock for 4 months was 0.16%, and so on.  Today, some lenders have demonstrated the ability to lock rate for as long as 12 months at a cost of as little as 0.01% per month.  So, exploring the refinance of one's property well in advance may be well worth the time spent.  For example, if a property currently qualifies for an interest rate of 6.00%, but is subject to a prepayment penalty for 12 more months, the property owner can eliminate any upward interest rate movement by locking the interest rate 12 months advance, which would only increase the interest rate to 6.12%.  If that property owner were to wait 12 months before locking rate, the actual increase in Treasury rates could be much higher. Summary As the capital markets are constantly evolving, especially as it relates to land-lease community financing, it is always a good idea to be working with an experienced mortgage banker who is up to speed on the latest strategies that lenders and property owners employ to achieve more favorable financing alternatives.   Tony Petosa is Regional Director and Nick Bertino is Associate Director for Wells Fargo Commercial Mortgage.  They specialize in arranging financing on land-lease communities and RV resorts nationwide, offering securitized and on-book loan products through both direct and correspondent lending programs.  Petosa and Bertino can be reached at (760) 438-2153; (760) 438-8710 fax; and via email:  tpetosa@wellsfargo.com, bertinn@wellsfargo.com.

Risk Management GuidelinesThe following list contains recommendations from a number of agencies that are hired by insurance carriers to survey Mobile Home Parks.  By following their recommendations, hazards or potential hazards in a park can be reduced. 

• Distance between homes should be at least 15 feet.  Distance between frame structures in the park should be at least 40 feet.
• Trash should always be placed in the dumpster and not left to accumulate on the ground.
• Roofs, wiring and plumbing should be inspected annually and repaired as needed.  All aluminum wiring should be replaced with copper.
• All buildings should post maximum occupancy and have emergency lighting at each exit.
• Reflective tape/paint, should be used on areas such as steps, speed bumps, and post to prevent collisions and injuries.
• All buildings that require more than two steps for entry should have handrails.
• All buildings should have working smoke detectors.  A replacement program should be in place to test and replace when needed.
• Ground fault interrupt outlets installed near sinks or tubs.
• Carbon Monoxide detectors should be installed in all rental units.
• Fire extinguishers should be visible in all buildings and rental units.
• All flammable materials should be properly stored.
• Branches hanging over all buildings and homes should be removed.
• A maintenance program should be in place to correct problems.  For example, if your road begins to break up, have it repaired before you have potholes.  Areas to observe include:
  • Walkways
  • Parking areas
  • Fences
  • Yards
  • Landscaping
  • Storage areas
  • Furniture
  • Fixtures
  • Interior and exterior lighting
  • Public restrooms
  • Laundry areas
• All pools should be fenced.  Signs informing people that they are swimming at their own risk should be posted in large type and placed around the pool.  Water should also be tested daily. Owners should have detailed rules posted regarding use of the pool.  Area should also have:
  • Self closing, latching gate
  • Fences should be chain link and at least 6 feet in height
  • Depths marked in and around pool
  • No diving boards or slides
  • Pool chemicals stored properly
  • Proper live saving devices should be on hand
• All facilities should be inspected regularly, i.e., fitness rooms, game rooms, maintenance shop, golf course
• A first aid kit should be well stocked and easily available
• Owners who have managers should make sure that managers have a detailed procedures manual, including the phone numbers for the local police, fire and animal control.
• All weeds and brush should be cleared from around buildings.
• Playgrounds should have the following:
  • Adequate protective surfaces, minimum of 12" of sand, wood chips, or mulch.  Two thirds of all playground injuries are caused by falls. A primary way to lessen this hazard is to install proper fall cushioning material.
  • Play structures more than 30" high should have at least 9 feet separation between structures.
  • Elevated surfaces such as platforms should have adequate guardrails.
  • Playgrounds should be cleared of all trip and fall hazards i.e., concrete footings, tree stumps, rocks etc.
• Water quality and pressure should be checked regularly
• Precautions should be in place when large amounts of cash are on hand
• Speed limit signs of 10 miles per hour should be posted and speed bumps should be located throughout the park.
• LP fill station should be checked regularly for cracks or rust around tank(s)
• Maintain a hardbound complaint log to document all resident concerns.
• Management should enforce rules and regulations in the park
• Limit the types of dogs and size that are allowed in the park.  Have a set of rules for dog owners.
• Trampolines should never be allowed in parks
• All overhead wires should be at least 24 feet from the ground.
• Trampolines should never be allowed in a park
• Access to and from the park should be free of all obstructions

A good risk management program does not have to be expensive or time consuming.  It does need to be reviewed, updated and shared with your staff on a regular basis.  A risk management guide is available through the Small Business Administration.  http://www.sba.gov/library/pubs/mp-28.doc  Another free source of information is the Hartford Small Business Loss Control Department.  http://www.sb.thehartford.com/reduce_risk/loss_library/General_Safety/

Specializing in insurance for Mobile Home Park

Manning & Nozick Insurance Agency * 53 Perimeter Center E. Suite 120 * Atlanta, GA 30346 Phone 800-211-0468 ext 117 * fax 770-393-8302 * e-mail jayz@manning-nozick.com