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JANUARY 2016 12 THE JOURNAL In Praise Of Selling Your Community To The Residents BY FRANK ROLFE COMMUNITY CONSULTANT We recently sold one of our communities in Clarks Grove, Minnesota, to the residents. That's right, we didn't sell it to someone trying to make money with it. We sold it to someone who has no desire to profit from it at all. While this is not the exit strategy for every community owner, we believe that this is an exciting option under the right circumstances, and every com- munity owner should know how it works so they don't miss out on a potential opportunity. So here's what we learned from selling Clarks Grove. What are the steps and how long does it take? The process began with a conversation be- tween ourselves and ROC USA, which is a well- known facilitator of such transactions. ROC USA began with funding from the Ford Founda- tion and other non-profits, which was then aug- mented by financing from the Rockefeller Foundation, Bank of America, Wells Fargo and others. Its financing subsidiary, ROC USA Cap- ital, is a Community Development Financial In- stitution that's certified by the U.S. Treasury. Their other subsidiary is ROC USA Network, a network of affiliated organizations that are boots on the ground. We dealt with their Minnesota affiliate, NCF. After a discussion on price and their basic review of the property, we received an LOI. The concept was then announced by NCF to the tenants. The tenants then formed a legal corporation or non-profit for the sole purpose of buying the community, and ROC USA Capital provided them pre-development financing. After all due diligence was completed by third parties (Phase I, survey, title work, property condition report, etc.), and financing was obtained, the members had to obtain a 51% vote to move for- ward. From LOI to closing of the transaction took about 120 days, although there have been cases when the time has been as short as 90 days. What can go wrong and what does that cost the community owner? According to Paul Bradley, the President of ROC USA, in the rare instance when a deal de- rails, it's because of one of two occurrences: 1) large capital expenditures required, that are de- tected by the third-party reports or 2) bad re- ceivables. In most cases, you can get around these issues if you are straightforward on the front end as to what the challenges are and the plan to fix them. But regardless of what happens in the process, there is absolutely no cost to the seller. All cost is paid by ROC USA and the tenants. The benefits to the owner Having the residents buy the community they live in, rather than an outside party, has nu- merous benefits to the owner. The first is a great price. We sold Clarks Grove at around an 8% cap rate, which was a good price for a property in that location and condition. Cap rates on these deals tend to range from 6.5% to 9.5%, based entirely on the specifics – which is right in line with prices that can be achieved in the outside world. Another benefit is that you don't have to worry about the buyer changing their mind or walking away from the deal. Once the vote has been cast to buy it, the train seldom derails. It's also refreshing to work with a group like ROC USA who understands the process and does not require any hand-holding to get through the many steps of closing. Frankly, we can't come up with any reason why a community owner would not want to sell to the residents over an outside party. The human aspect Here's one big reason that we favored ROC USA over other options for Clarks Grove. The residents really wanted to buy the property they lived in. Who are we to deny them that right as long as they were willing to pay as much as the other buyers? We think that having the residents buy the land under their homes is a happy ending to the story. It might just be the correct cycle of life for many properties. To date, ROC USA has completed 178 of these buyouts, representing 10,600 home sites. To our thinking, that's a happy ending for a lot of households. What parts of the U.S. can I do this in? The concept applies nationwide, but if you want to use ROC USA, they are not in every state (yet). The regions they do not cover cur- rently are basically the southwest (other than Texas) and the southeast. Their general focus is the more northern states, such as Minnesota, where our property was located. ROC USA began in 2008, and we would assume that they will eventually be nationwide. Until then, you're going to have to work around the areas they focus on. Conclusion Our former residents in Clarks Grove, Min- nesota, no longer have a landlord. They now rent the land underneath their homes. They are now 100% owners of their property and 100% in control of their destiny. We are local heroes for giving them that opportunity, and we received a great price for doing so. In a world of nothing but bad news these days, maybe this is an important happy ending for these folks. Would we do an- other one of these transactions? We're already working on a few. If you're thinking of selling your community – and you think the residents have an interest – you might consider this ap- proach. We're glad we did. Frank Rolfe has been a manufactured home commu- nity owner for almost two decades, and currently ranks as part of the 6th largest community owner in the United States, with more than 17,000 lots in 20 states in the Great Plains and Midwest. His books and courses on community acquisitions and manage- ment are the top-selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniver- sity.com. T J