Issue link: https://read.dmtmag.com/i/576094
OCTOBER 2015 24 THE JOURNAL Ask Eddie BY ED HICKS DEVELOPMENT MARKETING I am seeking to buy existing filled m/h land lease communities (aka mobile home parks). My objective is for a 10% capitalization rate (leveraged, cash on cash) during the first year on Seniors communities with 100 sites or more, and expect to be able to get regular yearly rent increases. Can you help me? Den- nis P., Stafford, TX Sorry Mr. P, but based on our further discus- sions, your also wanting no rental homes, or com- munities with obsolete homesites, you are way off the market in terms of the kind of returns in most parts of the US. To achieve those first year cash on cash returns, it will not only take a lot of searching, but may also be necessary to either lower your expectations, or be prepared for to consider properties which have substantial vacan- cies, a goodly percentage of rental homes, some rehabilitation or other characteristics, which may involve additional involvement on your part. It also means you may have to be prepared to sell and finance new or used homes to buyers, or get involved with the rehabilitation of the existing sites and/or expansion of additional homesites. Don't be fooled by those brokers out there who advertise outrageously low prices at unbelievably high "cap rates". Once you get into your due dili- gence, you will find several important missing or irregular expenses, limits on rent increases (watch out for FL, ME, VT, and NH parks). And, of course many may have sites in wetlands, RVs or otherwise homesites. which are not financeable by commercial lenders. In the case of communities in "good areas" which usually means a fair number of age-re- stricted or seniors communities, the cap rates for what you are looking for may range from a low of 7.0% to 8.5% or lower. And, many lenders won't accept a community for financing is there is more than 5% or 10% of the rental income being from homes owned by the community. So, in these cases, you may have to subtract the home rental amount from the total payment, which would represent the homesite portion of the in- come. For example, in a community where home with homesite is rented for $750 per month, and the homesite alone would have rented for $350 per month, the home rent (which is not included in the total rental income as far as the lender is con- cerned, is $400 per month. If they are a part of the sale, then the seller should produce an en- dorsed registration for the home, which is free of liens and encumbrances. This may take a separate action according to the Uniform Commercial Code documentation. It is not unusual for owners of m/h land lease communities for sale to provide documentation of operating expenses. which do not include (lender required) maintenance reserves, external man- agement fees, and adjustments for post closing property tax increases. So although the seller and/or their agent may advertise an attractive rate of return, by the time these lender required ex- penses are included, the advertised return may b e less than advertised or expected. It is also not un- common for sellers to co-mingle their personal ex- penses in with those of the community such as those which are purchased at stores which may have consumer goods included in their inventory of products sold. Matching deposits to the rent roll is mandatory, and may include some "hidden" income sources such as the sale of community owned homes, parts, "kickbacks" from suppliers or servicer providers, and not as often found: illegal referrals or fees from other home sales entities such as boulevard dealerships, or nearby communities, etc. Some states make what may seem like nor- mal referral fees illegal, and some do not. Best to find out first, since it is unlikely you will be able to repeat them after closing. Ask to review the leases or rental agreements from each lessee or renter. Who is on the agreement? Do the occupants match the agreement? What are the terms? Are there any conditions for escalation or other clauses for expenses or rents? It helps of course if the current rents are "below market" and there are no legal or practical limits to raising rents, or lowering operating expenses. This can happen in communities located in some states where leases are prevalent or required, and increases or decreases in expenses are prohibited. Some of these states are in New England and the state of Florida. I once worked for a client who had negotiated what was thought to be a "fair price" based on the information presented by the seller's agent. Upon due diligence I was informed by the City that there was as of the date of the sale, going to be a "cap- ital recapture" fee for expanded natural gas line service which included the costs of bringin g the utility to the area of the community. It has not yet been assessed but was imminent. Nevertheless, my client the buyer had to revalue the "deal" based on the new information I obtained. Other issues to be aware of include: non-grand- fathered zoning or land use regulations in force or scheduled to be implemented which may be trig- gered by a sale, illegally built homesites, homesite encroachment, non-conforming utility structure, residents first right (by contact) to purchase, local ordinances requiring capital improvements to the community upon sale which are not divulged dur- ing the sale, planned or contracted land use adja- cent to the property which could cause vacancies beyond the new owners control, and many other issues not normally made a part of seller or seller's agent' representations prior to closing. And, if you are assuming existing recorded or non-recorded debt, you will make sure you fully understand the terms: pre-payment fees or "de- feasance" clauses (who pays them), rates and terms, escalations, amortization period, property collateral requirements, rental homes allowed, etc. And, always use a qualified m/h land lease attorney to assist you. If you don't know any, you may want to check with the local or state Manufactured Housing Association for referrals. Edward "Eddie" Hicks, lic. RE Broker, and Lic. Mortgage Broker has been a manufactured housing community developer and indus- try consultant, retailer and home manufacturer since 1963, and is currently a manufactured home resident and the sales agent for a seniors Age 55+ m/h condominium homesite community in Cen- tral Florid a: Hidden Harbor on Lake Harris. He He may be reached at (813) 300-6150 and at easteddie@aol.com His websites are: www.mobilehomepark.com www.factorybuilthome.com T J