Issue link: https://read.dmtmag.com/i/60637
COMMUNITY MANAGEMENT PERSPECTIVE There's no lending as attractive for manufac- tured home communities as conduit financing. Any community owner who is thinking about re- financing, or obtaining new financing on, their property needs to seriously consider the benefits – and few disadvantages – of this type of financing product. Although conduit loans disappeared from the manufactured home community mar- ketplace for a few years around 2008 and 2009, they have now returned. What is a "conduit loan"? A conduit loan is essentially a loan sold on Wall Street – after origination there is technically no bank involved, only a loan "servicer". Be- cause of this unusual design, you cannot pre-pay a conduit loan without paying a penalty called "defeasance". This is because the investors in the note pool were guaranteed a certain return level, and you cannot break this bond without essen- tially posting enough money to pay out the de- sired rate of return, as well as principal. This is probably the single biggest drawback to conduit lending. You'll find a free defeasance calculator at www.defeasewithease.com. But since the loans are assumable, there are still ways to get around this. What are the terms? The essential parts of a conduit loan are ex- tremely similar to a typical bank loan, but more attractive. Although every conduit loan is dif- ferent, right now the general terms are an inter- est rate of around 6%, a 10 year term, a 25 to 30 year amortization, and a coverage ratio of around 1.25. The loan amount is normally between 70% and 75% loan-to-value. Both the loan term and interest rate probably look more compelling than Conduit The Community Owner's Primer On Conduit Lending By Frank Rolfe the bank loan you just put together, right? Who qualifies? loans generally need to be $2,000,000 or more, although repeat borrowers can sometimes get loans approved that are slightly lower. Conduit lenders, like all lenders, are looking for stabilized product with at least 80% occupancy, and good pride of ownership. But the requirements are far easier than Fannie Mae and similar products. But this is not to say that con- duit lenders are looking for anything less than solid loans. They want to see good locations, goodmarkets, good infrastructure, stabilized oc- cupancy, and good pride of ownership – basi- cally, the loans that never go bad. Some states are easier than others Although there are manufactured home com- munities in 49 states (none in Hawaii), not all markets are created equally. The three states that receive the most scrutiny at this point areMichi- gan, Ohio and Florida. But each loan is on a case-by-case basis, so there is no state that is a cake-walk, and no state that is red-lined. Basi- cally, conduit lenders want to be involved in markets that have good diversity of employment, positive future projections – the same type of cri- teria that you would use if you were a lender. The loans are assumable One good thing about conduit loans is that they are normally assumable, in the event that you want to sell the property down the road. Be- cause of the often high cost of defeasance, if you want to sell during the termof the loan, it is very likely that you will face the issue of assumption. Conduit assumptions can be rigorous for the buyer, as the conduit will want tomake sure that the potential buyer is as strong as the borrower that they underwrote on the deal to begin with. They normally require the approval of several layers of loan servicers. While the requirements are not prohibitive, there is excruciating detail required to prove financial worth and track- record. But these loans are so attractive, that most buyers are willing to put forth the effort to score an assumption as opposed to trying to ob- tain a new loan. Like the NBA, most borrowers have to work up to conduit lending Conduit loans are the top of the lending pyra- mid. As a result, many people who apply for conduit loans only take that step after cutting their teeth on traditional bank lending and seller carry. Because of the larger size of these loans, as well as the complexity of the application process and documentation, they are not for amateurs. There is certainly nothing wrong with working up to conduit lending. It is also a good idea to con- sider a "loan broker" when taking a run at conduit lending. These folks are only compensated based on performance, and can often play a pivotal role in putting the deal together. Conclusion If you are thinking about obtaining a loan for a community you are buying, or refinancing a community you already own, you should defi- nitely give some consideration to conduit lend- ing. You may find that it is your most attractive option, and worth the effort. The return of con- duit lending has opened up new horizons for all community owners. APRIL 2012 11 THE JOURNAL