Due Diligence

The Financing of Resident Park Purchases
by David Loop

Lately, a good idea seems to be spreading around California’s mobilehome parks.

That idea is…mobilehome park resident groups can buy the parks where they live.

I recently helped with the legal aspects of two successful resident park purchases in the Santa Cruz area. Since then, leaders in parks from around the state have contacted me. They all ask the same question: “How can we buy our park?”

The benefits of resident park ownership are clear to them, but how to achieve it is not.

My answer is… to make a proper attempt to buy the park where you live, you need to Get Organized.

Also, you must perform “due diligence” regarding the financial aspects of the purchase. I’ll cover the topic of “Getting Organized” in a future article.

Today, I’d like to discuss Due Diligence. This is the process of gathering information about anyone who tells you, “I can arrange the financing for your park purchase.”

Resident leaders need to understand that acquisition of a mobilehome park is a significant business decision for all of the park’s homeowners. Unless your park is very small, millions of dollars are at stake. Finding money to cover most of the cost of the park and the purchase transaction is absolutely necessary. If you don’t find it, your group will never own the park.

Your chance of owning the park improves greatly if you hire an experienced “park purchase financial consultant.” In California, there are various financial consultants who offer this specialized service. It is not likely that you will find a suitable consultant in a bank, mortgage loan company or public agency, however.

As leaders, you need to ask important business questions of anyone who offers to help you find financing to buy the park. You need to investigate these consultants to determine if they can “do what they say.” You cannot take any consultant at “face value.” Questioning and investigating a consultant is called “due diligence.”

As a resident leader, you owe a responsibility to every homeowner in the park to do this.

Beware of consultants who say: “sign my contract… don’t worry – I’ll handle everything.” Beware, as well, of consultants who are vague about where the park purchase money will come from. The consultant needs to prove to you, before you hire them, that they have had substantial past success in getting mortgage financing for resident associations. They should be happy to reveal their financing sources to you.

I am frequently amazed how resident leaders in some parks hire a park purchase consultant without doing any due diligence. They ask no “business questions.” They don’t bother to investigate the consultant’s professional background (though it’s easy to do). Instead, they simply believe everything the consultant says – often to their great regret.

Remember, your group will probably have one chance to find financing to buy the park. If you don’t succeed on your “first try,” it’s unlikely that the park owner will give you a second chance. It’s essential to get it right the “first time.”

After their attempt to buy the park failed, some resident groups have discovered the consultant actually had no chance of putting together the required financial package. The resident group’s opportunity to buy the park was lost. This unhappy ending might have been avoided by asking the right questions early on – and before hiring that financial consultant.

A “park purchase” consultant should be hired only if they can give satisfactory and verifiable answers to “business” questions, and after the resident group has thoroughly investigated their business history and practices.

Here are some important questions you should ask any consultant who wants to help with your resident park purchase. Do not accept vague or incomplete answers to these questions:

  • How long have you been a “park purchase consultant” to mobilehome park resident groups?
  • How many parks have you helped convert to resident ownership?
  • Who owned these parks at the completion of the purchase? Were they owned by the residents themselves, or by some “outside” corporation?
  • Where are these parks? Please name them, so that we can contact residents there to learn how things have worked out.
  • When was your most recent park purchase completed? (Deals the consultant is trying to complete at the moment don’t count). Describe generally how mortgage financing was accomplished for that transaction. (If the consultant has not completed a deal lately, they may have problems arranging a mortgage loan in the current market).
  • Show us the specifics of how our park purchase would be financed. How much will need to be borrowed? Where will that money come from? Will it come from “private” or “public” sources?
  • How much money would come from each source? Have you successfully arranged mortgage loans from these sources before? Give us some specific examples.
  • Can you provide us with “expression of interest” letters from the lenders who would potentially finance our park purchase?

Resident leaders should insist that before hiring him or her, the consultant produces accounting spreadsheets showing how the deal would work.You have a right to know – and need to understand this information.

The consultant should be ready to explain “purchase financing” for your park in detail. At the very least, the spreadsheets should include:

  • The price to be paid for the park (and an explanation of how the price was calculated);
  • Source(s), amounts, estimated interest rates and terms for mortgage financing;
  • Minimum number of residents who need to participate for the purchase to succeed;
  • Amount each household would pay as a “down payment” (if any);
  • Any financing plans available for a resident’s down payment;
  • Total amount of equity required from the resident group;
  • Estimated new monthly “rent” payment for households that participate in the park purchase;
  • Estimated new monthly “rent” payment for those households that don’t participate in the park purchase;
  • Income and Expense schedule for park operations after the residents own it;
  • Amount of cash reserves the residents will have for repairs, emergencies, etc. after they own the park;
  • Closing costs for the transaction, including all fees or commissions to be paid.

Let me emphasize – the park’s resident leaders and homeowners deserve this detailed financial information before signing any contract with the consultant. After all, YOU are the folks that will be paying for the park!

You need to be informed consumers when you attempt to buy your park. Early in the purchase process, you must ask the right questions and do some investigation. As resident leaders, “due diligence” is not optional. It is part of your job.

David Loop is a real estate attorney and past homeowners’ association president at resident owned Aptos Knoll Park, near Santa Cruz. You can ask him questions by sending an e-mail to deloop1, or calling 831-688-1293.