Buying and selling mobile home parks in NY can be an intimidating process for a myriad of reasons. This article should help address the realities and misconceptions. It may also provide you with a roadmap to making the transaction successful for all the individuals involved. If you’re in need of more in-depth industry guidance, IRE Investment offers investment consulting services for manufactured housing communities.
Funding-New Money Financing for the different grades of communities
I think it’s helpful to start with the funding topic. We’ll start with new money financing, typically financed but not limited to banks, debt funds, and insurance companies. For this subject, I believe that it is also important to classify the different properties as well. I’ve made four categories for the different type of properties. I’ve classified the four tiers as Institutional grade, High grade, Mid-grade, and Bolt-on or personal investment grade. The grades are based on the size (site count & gross revenues), quality, infrastructure makeup and location of the properties. These different characteristics will help give you a sense of what type of financing will be typical.
Institutional Grade manufactured housing communities
We’ll start with the most desirable type of manufactured housing communities, large class A communities in highly populated and wealthy communities. This type of property would ideally be a 200+ site community, with paved roads, most tenant owned double wide homes, amenity filled community, and public water & sewer. If it’s a 55+ community, that is the cherry on top. These communities will qualify for the best financing opportunities out there (Fannie Mae, CMBS, etc.). Mortgage brokers will be licking their chops over this. This type of community is typically purchased by organizations with at least 10 properties under management and have access to capital from investment markets that normal investors will not have access to. If you own this type of property, funding for your property will not be an issue. But capitalization rates will be impacted greatly by rate fluctuations because of the low cap rates these are typically traded at.
High Grade Manufactured Housing Communities
The next grouping of manufactured housing communities we’ll talk about is the 50-200 site communities with class A or B community characteristics in strong markets. While these properties may not be on the top of the list, they are still extremely desirable. If they have characteristics of a class A property, even better. Mortgage brokers will still be excited to help with these. These can still qualify for agency paper if they meet all their requirements. Select groups or individuals may find that sourcing financing yourself may help with some of the loan fees. We’ve noticed regional lenders become a source of competitive rates and terms for these communities. While still observing several CMBS loans with attractive rates & terms. Please note that the pre-payment on these CMBS loans can be expensive. If an operator plans to have a shorter ownership period, CMBS loans can present unfavorable circumstances. One scenario is if the transaction includes a mortgage assumption to avoid a prepayment penalty, it can create a situation where the loan to value is very low. Which typically leads to low cash returns for the new buyer. Which ultimately makes the property less marketable.
Mid-Grade Manufactured Housing Communities
The mid-grade grouping is the widest range of communities, in my opinion. This is the 30-100 site communities that may have characteristics of class C or D communities and may not be in the best metro areas. Many communities fall into this category, and they are still good investments. Brokers will still work on these deals if the loan size is over $1,000,000, but the best option always seems to be banks that are local to the community. We typically find these types of properties that have on-site management and paved roads being treated like high grade communities. They’re also targeted as value-add properties for many investors, so CMBS loans can present issues if they include a pre-payment penalty.
Bolt-on/Personal Investment Grade Communities
The bolt-on/personal investment grade communities are communities under 30 sites. Investors who own more than one community will sometimes look to acquire these because of their proximity to another community. Individual investors who are looking for an alternative investment also look to these properties frequently. These types of communities are usually difficult for mortgage brokers or too small for them because the loan size will be under $1,000,000. These are typically financed by local banks that have an appetite for commercial lending. They typically require a personal guarantee. If the property is a bolt-on, we will see them encumbered with a blanket mortgage.
Mobile Home Park Property Evaluation
If you’re looking to buy or sell a mobile home park and would like to learn more about the investment grade of the property, IRE Investment offers mobile home park property evaluations.
New Money Financing
It’s important to understand that communities are unique for several reasons, and certain lenders may get comfortable with parks that don’t always fit into certain boxes. Lenders also may get comfortable with certain deals because of the financial strength of a buyer. But the misconception from the market that I receive is that the parks are not financeable, that’s simply not true. The more common reality is the buyer is not qualified for a loan, but they can if they take steps to strengthen their personal financial statement. Or by bringing on a partner who can strengthen their application.
Seller Financing and Alternative Financing Options
This part of the article will be insightful for several readers because brokers and community owners get asked about this daily. If you’re a broker or community owner, you have probably been sent several proposals for creative financing and owner carry. Here’s my take on it.
Owner Financed Deals
I understand real estate investors are concerned about paying capital gains taxes. But I think it’s also important to understand who you’re giving a loan to and what they have to lose if they default on the loan. The typical owner-financed deal that we do at our firm usually has a minimum of 30% down and has a balloon payment of 2-5 years. They also typically require a personal guarantee from the buyer. We also look to see if they have substantial assets to make sure we can recover losses in the case of a default.
Surprisingly we don’t see a lot of lease options or land contracts. UPREITs typically go to portfolios that consist of several Institutional and high-grade properties. We have been offered “swap and drop” deals, but we have yet to find a seller comfortable enough to do one. That being said, I’m sure they are out there.
Wrap Around Loans
We have done a few wrap around loans (2nd mortgages) to help with the purchase of chattel (mobile homes) during a transaction, but typically there is traditional new money financing for the community in these instances.
If you need help with financing to purchase or refinance a manufactured housing community, we can help you source, negotiate and obtain the financing options.
Due diligence for buying a mobile home park
We’ve encountered checklists for due diligence that have been over 50 items long and so exhaustive that the best operators in the business wouldn’t be able to deliver all the items. I’ve also worked in deals where the seller wouldn’t deliver anything. My belief is the risk will dictate the cap rate.
But for now, we will speak about what is typical to be investigated in a normal transaction. So, let’s think about what a community offers its residents.
Municipal and Well Water
If the property is on municipal water, you want to make sure that the water lines don’t have leaks. Leaks will lead to expensive bills. If the property is on well, you want to review the water testing results submitted to New York State. Have a well inspector look it over as well.
If the property is on municipal sewer, review the billing to make sure everything is in order. If the property is on septic tanks, dry well, or sewage treatment plants, you will want to get these inspected. A lot of information about the systems in these parks can be obtained through a phase 1 environmental report and by speaking with the local department of health.
It’s also wise to have the electric tested at any vacant sites.
Check the boundary lines to see if any trailers are encroaching on the boundary lines.
NY State and Rent Control
In NY, if rent raises were above 3%, you should check to see what the capital expenditures are. With the rent control that was implemented in 2019, you may run into some issues.
As a part of the due diligence process, you will want to review the financial records (P&L, income statement, income taxes, etc.). You will also want to look at a rent roll and payment history.
Due Diligence Process Unique to New York State
This list can go on and on. The items unique to NY to review will surround the water testing and rent increases, in my opinion. You may also want to review RPL 233, which is the Manufactured Homes Program set by New York State
New York Mobile Home Parks
We like New York communities even though the market has been leaning more toward red states that are more landlord friendly such as Texas, Florida, Georgia, and North Carolina. Even with the 3% rent control legislation (6% if you have the capital improvements), we find value in these communities. Lots that are vacant or occupied with park owned homes have the availability to be brought to market rent, as well as homes once tenants move out. We have reservations about large rental rate increases because of the striking similarities to the sub-prime mortgage meltdown, where payment shock created delinquency issues. Community home sales are still typically lower than the median home sales in most markets, and demand for affordable housing is still strong.
If you’re looking to get a better idea of the market, you can check out our New York Mobile Home Parks listings.