Issue link: https://read.dmtmag.com/i/469624
MARCH 2015 22 THE JOURNAL Any manufactured home community owner knows that many banks require "reserves" as part of their mortgage. These are typically flat amounts per lot that the bank holds in your ac- count, ready in the event of an expensive capi- tal improvement project. Reserves can also be large amounts that are escrowed at the front end, on purchase of the property, to make what are thought to be needed repairs. But the truth is that these amount pile up and rarely get used, or get completed at a fraction of the cost that the bank assumed. The fact is that manufactured home communities don't work like banks think. Here's the truth about community capital re- serves and improvements. Roads Most communities have asphalt roads. To build an asphalt road, you have a layer of asphalt over a whole bunch of road base. The asphalt does not do the heavy lifting, the road base does. A property with great road base has few potholes, even if the streets are 50 years old. Many con- sultants tell banks that roads need to be generi- cally "re-built" when, in fact, they just need a new layer of asphalt. That's why banks get it wrong frequently – they think that community owners should rip out all that perfectly good road base and put it back down again. Nobody does that. This causes many estimates to be a multi- ple of the real cost. Water Lines There are probably no pure galvanized water line systems left these days. Most every commu- nity owner has been patching those lines together using PVC every time there is a rupture or major leak. So most every community water system is a hybrid of galvanized and PVC. Just like Johnny Cash's "One Piece at a Time" – in which an auto worker builds a complete car from parts stolen off an assembly line – most community owners are on the path to a new PVC system with every line break. We don't do the entire system at one time, we do it gradually. In over 200 communi- ties, we have only replaced the water lines once. And, to be honest, if we had to replace an en- tire galvanized system today, we would use new re-lining technologies that cost around half of full replacement, anyway. Sewer Lines Sewage is not pressurized and, as a result, as long as sewage is making it out to the city's main line, no community owner is much concerned about leaks in the pipe. The fact that you have to call Roto-Rooter frequently is not due to line problems, but cultural issues of the residents. They tend to cook with a bunch of grease which they pour right down the drain, and then couple that with non-working disposals that inject large items into the sewer, on top of that. When you combine the two, you get giant grease balls that snowball until they block the line. We bought a community a while back that had gone into REO and had $100,000 per year in repair bills on the sewer line, under the receiver's management. We simply cleared out all the grease and debris and have not had a single call to a plumber in eighteen months. An estimated $300,000 capi- tal item avoided. Structures Any structure inside of a manufactured home community is typically of little importance to the overall operation. Clubhouses and laundry rooms – even if left open to the tenants – have few ac- tual users. As a result, they do not need to be held to a high standard. We had a clubhouse once that, although open to rental from the ten- ants, had only one user in a year. While these need to be kept looking nice from the outside, there is little point in investing large sums into something that is never seen on the inside. In many cases, community owners shut these down the day they purchase the property, so they rep- resent nothing more than Hollywood set design. Phone and Cable TV Lines The introduction of the cell phone and DISH and DirecTV spelled a death sentence for tele- phone and cable providers in most manufactured home communities. There's not much worry about those lines today. Our intended capital in- vestment in upgrading phone or cable is zero. Amenities Swimming pools present the largest capital risk of any amenity. That's why community owners have been shutting them down at the speed of light – they represent nothing but continual cost, coupled with liability and then topped off with less than 10% of the property's population using them. There really is no amenity that is worth the cost, as most every city and town has state- of-the-art playgrounds, pools and recreational centers at little or no charge. Who would want to mess with a 3' tall slide when there's a virtual Disneyland right around the corner? Conclusion Folks who write "Condition Reports" for banks make good money. To justify their cost, they have to throw in a bunch of items to satisfy the lender. But the truth is that most of these items are unnecessary and horribly overestimated in cost and value. This disconnect between theory and reality results in escrow accounts that are far too large and could be better spent buying homes to fill vacant lots or in other, more productive uses that enhance cash flow and, therefore, greater security for the loan. Banks need to pro- tect themselves against future capital calls – no- body would disagree with that tenet. However, those costs should be reasonable and justifiable, and not just a way to fill a report. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 10th largest community owner in the United States, with more than 13,000 lots in 20 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniversity.com. The Truth About Manufactured Home Community Capital Reserves BY FRANK ROLFE COMMUNITY CONSULTANT T J