Obtaining Permanent Financing for a Manufactured Home Community

By Tony Petosa and Nick Bertino

With interest rates at historic lows, it is still an excellent time to obtain permanent financing for a manufactured home community.  Before selecting a loan, however, it is important for a property owner to assess investment goals and prepare a business plan.  Understanding the different types of lending programs available and their related advantages and disadvantages is also vital to the loan selection process.

When determining investment goals and putting together a business plan, a community owner should ask himself or herself the following questions:  "What do I want to achieve over both five and ten-year horizons?  What is my likelihood of selling the property during these time frames?   Am I comfortable taking interest-rate risk with a floating rate loan, or would I prefer to lock in a long-term interest rate?  How important is it to me to be able to obtain additional loan proceeds during this time?"  The answers to these questions will assist in determining what type of loan would be appropriate.

Many lenders offer floating rate (a.k.a. variable rate) and fixed rate loan programs.  There are also programs available that start as a floating rate and offer the ability to convert to a fixed rate in the future.  There is an inherent trade-off between floating and fixed rate programs.   While some floating rate programs offer interest rate caps, there still exists the risk of an interest rate increase in the future.  Also, many floating rate programs have shorter terms, often five years or less.  In pior years, the major advantage of a floating rate loan was that it offered a lower interest rate than a fixed rate loan.  As floating rate indexes, such as LIBOR, have continued to increase, however, this is no longer the case.  On the plus side, floating rate loans usually offer the advantage of a lower prepayment penalty when compared to fixed rate loans.

Fixed interest rate loans have become increasingly attractive recently as floating rates have continued their upward movement.  Fixed rates are not only typically lower than floating rates currently, but they are also longer term, 10 years most commonly.  To achieve the lowest fixed rate, however, lenders need to structure fixed rate loans with a prepayment penalty that is usually more onerous than the prepayment provision found on floating rate loans.  Prepayment penalties are, in part, the result of the lender needing to fix the cost of capital for the entire loan term ("match fund").  The lowest fixed rates are achieved through either a defeasance or yield maintenance type of prepayment penalty. 

The actual amount of a defeasance or yield maintenance penalty is a function of where treasury rates are when the loan is prepaid as well as the remaining loan term at the time of prepayment.  As a general statement, prepayment penalties are typically vert large when a loan is paid off in the early years of the loan term unless treasury rates have increased substantially.  It is important to note, however, that most loans offer an assumption provision, and a low fixed rate loan can be attractive to a future buyer as long as the loan amount is relatively high in proportion to purchase price.

In addition to different types of loans, there are two different types of lending structures to consider: securitized versus portfolio.  Once again, there are advantages and trade-offs to consider.  Further complicating this question is that some lenders offer both securitized and portfolio structures. 

Securitized lending, often referred to as "conduit" lending, now accounts for a significant amount of the total commercial lending volume in the U.S.  A securitized lender aggregates a large volume of loans and then teams with others lenders to "securitize" the loans.  This involves forming a loan pool that becomes the collateral for a series of rated and unrated bonds that are issued, and typically sold to institutional investors.  A securitized loan pool is approximately $1 billion in size and comprised of hundreds of individual property loans. 

These large loan pools provide bond investors with a lower default risk when compared to a lender that owns a whole loan.  This generally results in more favorable rates for borrowers and often higher loan to value ("LTV") ratios--as high as 80%--than would be available from a portfolio loan.  Securitized loans are usually non-recourse to the individual borrower because the primary focus is on underwriting the cash flow from the property.

A portfolio loan, by contrast, is held by a lender on its balance sheet during the loan term.  This provides the lender with the ability to modify certain aspects of a loan during the loan term should that need arise.  However, there is no guarantee that a portfolio lender will agree to modify a loan in the future, and on fixed rate loans the lender may not be able to change the prepayment penalty for reasons discussed above. 

A general disadvantage to portfolio loans versus securitized loans is that interest rates are often higher, particularly on fixed rate structures, and LTV's are often lower.  Credit or underwriting issues may also be more restrictive with portfolio lending programs.  This would include issues related to the borrower's experience, quality and location of the property, and types of properties on which they will lend.  Many portfolio lenders still have a negative perception of manufactured home communities and consequently may only lend on them on a very conservative basis (or not at all).  Also, many portfolio lenders will require a personal guarantee from the individual borrower.

While the trade offs between different types of lending programs may seem confusing, the good news is that there are more financing options than ever for manufactured home community owners.  Regardless of the type of lending program that is best for you, it is very important to work with a lender or mortgage banker that has prior experience and a good track record lending on manufactured home communities.

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.