What are Lenders Looking for in a Tough Lending Market
Article
September 19, 2008
Location - Experience - Liquidity - Occupancy
Location
National commercial real estate lenders are now far more adverse to lending in rural markets. The typical minimum population size these lenders are willing to go into is 25,000 or more. Each lender has a specific criteria of what they will allow as far as proximity to a town this size or greater. For example, the town size would need to be at least 25,000 residents or within 25 miles of a town 100,000 or more. Another lender allows the property to be within 30 miles of a town 25,000 or more. The size of the loan and specifics with the property determine which lender would be interested in financing the park.
Rural markets limit the number of prospective tenants and in a foreclosure situation, limits the number of investors that would be interested in purchasing the property from the bank. This pushes these national lenders to lend in markets they feel have a better chance of reducing risk.
Some of the better deals on parks can many times be found in rural markets which are now financed either by the seller or a local bank. Sellers are becoming more and more interested in financing their parks for a buyer where their existing debt on the property makes sense. The difficulty with local banks is they are most interested in loaning to investors that reside in or relatively close to the town where the park is located. If the park is near where you live, a local bank can be a viable option. Also, if you have an existing banking or wealth management relationship with a bank that has a branch in or near the town where the park is located, the bank will consider your loan request.
Experience
Many mobile home park investors are purchasing their first property of this type. This does not necessarily rule them out of financing from a national lender. These lenders are looking for borrowers that either have owned or currently own mobile home parks or other types of commercial income producing properties. An investor that has owned apartments, self-storage, retail, or office buildings is considered to have the experience these lenders are looking for. Owning a second home or a few single-family residences is not always considered experienced enough to borrow on a mobile home park.
Where an investor is buying a park outside of their area or state where they reside, these lenders are looking for experience in owning other properties outside of their area or state. This demonstrates to a lender that the investor understands how to successfully deal with the issues associated with owning properties that are not within a fairly short driving distance. Lack of experience was not a significant issue in the past, but has become one as all of these lenders continue to tighten their lending standards.
Liquidity
"Cash is King" holds true through good times and bad. The stronger a borrower's financial statement, the more wiling a lender is to finance their park. Lenders want to see that if the park struggles, the borrower can continue to pay the mortgage out of liquid reserves. In the past, significant liquidity would off-set lack of experience and many times, the site location. Lenders were willing to take a chance on a property where the borrower could easily handle any down-side issues with the park with their cash reserves. In the current market conditions, liquidity is just one of the factors that must be in place. The minimum amount of cash after closing will vary with the size of the loan and the quality of the park. Many lenders are looking for 6 to 12 months of the mortgage principal and interest in liquid reserves after closing.
In addition to liquidity, lenders are now leery of loaning to investors where the subject property is their only source of income. If the loan-to-value is typically below 60%, this can be overcome. We are financing a park in California at 50% LTV where the borrower lives in the park and it is his only source of personal income. The bank is comfortable with the equity in the property and sees the risk as minimal.
Occupancy
We are now seeing a minimum acceptable occupancy of 75% for parks. This is considered the lowest end of a stabilized property. So many parks have lower occupancies below this threshold and are if they are priced based on the existing cash-flow, can be great deals. The problem with these is the availability of financing. I work with investors that do not want a high occupancy park in order to buy at a reasonable price and use their own funds to improve the occupancy and create their own increased value in the park.
The best option at this time for a low occupancy park is financing from the seller. This allows an investor to control the park and improve the occupancy. We have lending programs that will refinance this park after one year of ownership and base the value on the appraisal. If mobile homes are purchased at a reasonable price, the increase in value of the park can many times off-set their cost.
Summary
When lending is tough to obtain, sellers are more willing to negotiate if they need or truly want to sell. They are more flexible with their asking prices and provide their own financing. Pinpointing parks in an acceptable location to a national lender can narrow down the list of parks on the market you are considering. Understanding what is acceptable to a lender will save you a great deal of time when you are searching through the parks on the market. The maximum loan-to-value for parks has now dropped to 75%. We have programs that will allow up to a 10% seller-held second bring the combined loan-to-value to 85%. Having at least the 25% down payment and 6 to 12 months of the mortgage payment in liquid reserves will make you much more attractive to a lender.
Parks are a unique property type in that there are so many variables that lenders consider. Finding a park that meets what a lender is willing to lend on can be a challenge, but we are seeing these parks and even though the lending requirements are tighter, there are ample funds in the market to finance these them. We are also seeing hard-money lenders and hedge funds begin to fill the gaps as well. These funds are looking for a higher return than a bank loan and typically on a short-term basis, but they can be a great opportunity to purchase a park, improve the occupancy or condition, and refinance to traditional financing in 1 to 2 years.
Difficult times, create great opportunities!
Steve Murden, President Star Capital Corp 14 E. Campbell Avenue, Ste. 240 Roanoke, VA 24011 (540) 342-6520 (703) 991-0072 - fax