Recently I visited with the resident refinancing committee for a park on the central California coast. The committee is planning for the refinance of the first mortgage debt they used to purchase the park about seven years ago, as a Mutual Benefit Corporation (MBC). They have about three years before they need to pay off the old loan. The committee asked me to stop by and visit with them to review the various alternatives facing them.
The normal ‘first stop’ in the refinancing arena — approaching their current lender to ‘rollover’ their debt — is no longer valid in the current lending environment. That lender no longer exists.
It is wise and prudent that the group start their process now. The financial world has changed. Although there many lenders and investors with money currently uninvested, they are making only the best loans, since they are facing a very uncertain, regulation-filled, closely supervised environment. Also, refinancing mobilehome parks owned by residents are a different type of loan from the normal loans that many lenders analyze.
I always like to review the big picture when discussing refinancing of a park.
First, the group needs to determine what they want to accomplish. Just what does the group want to do – refinance the easiest way possible, get a long term fully amortized loan, fix up the park, stabilize their finances, or some other group motive.
Second, they need to look under every (every) rock to make sure they are getting the best loan available and to assure their other park residents that the committee has done their proper due diligence.
Third, they must develop a workable plan for contacting a lender and getting their new loan.
This particular park is well maintained, with 76 sites and no vacancies. It presents itself well. [This is important since a lender has to be comfortable with the real estate itself before they can get comfortable with the borrower/resident group.] The fact that the park is well run and presentable supports the idea that a new lender should be comfortable making the group itself a loan.
Although each park is different and each situation unique, resident groups should typically look at six (6) refinancing alternatives. Some of these alternatives do NOT currently make loans to resident groups, but the financial markets are changing often and they might be appropriate lenders in the future.
The alternatives are:
Insurance company loans
Fannie Mae and Freddie Mac
Conduit lender loans
State or local government financing
I will talk about bank loans, insurance company loans, and Fannie Mae & Freddie Mac in this Blog.
I’ll discuss conduit lending, state & local government lending and HUD lending in Part 2.
Probably the first stop for a resident group seeking to refinance (if their existing lender is gone) is their local bank where they already have their deposit accounts and reserves. Also, check with other local banks that might be familiar with the park.
Bank loans may be easier to get than other alternatives, if you can find a bank interested. They will tend to be conservative, meaning you won’t get a large loan, your interest rate may be higher than you expect, and the amortization period (usually 20-25 years, if you actually can get a fully amortizing loan) with be shorter than other possible sources. Banks may have other features, such as short-term loans, variable interest rates, and loan interest rates based upon their prime rate. They also may have requirements that preclude resident projects, such a recourse back to individual residents.
Typical bank terms from a Midwest bank are:
100+ pads, 3 star or better
Interest rate is either a floating rate over their prime rate, or fixed for 1 to 5 years
Fees charged will depend upon the transaction
Most transactions require recourse to the owner (i.e., the residents) from 25% to 100%.
Term – up to five years (meaning a balloon payment in year five)
Some type of amortization, perhaps with an interest only period.
Unfortunately, many of these terms don’t work for a MBC. Thus, a local bank familiar with the park may be your best banking alternative.
Insurance Company Loans
Insurance companies constantly receive premium money from policyholders that must be invested in order to pay future claims and future annuities. They typically are seeking larger loans ($15 million up to and beyond $50 million) on first class commercial property. Many insurance companies reduced or restricted their loan terms as the financial markets deteriorated, but are now beginning to get back into the lending market. They typically do not make MBC mobilehome park loans, so you may have to talk to a lot of them to find someone interested in your park.
In the past their terms have been a maximum of 75% loan-to-value; relatively low interest rates (say 1% over the comparable treasury rate), full amortization with a 25-year term, maybe a 10-year interest adjustment option. Their terms are likely less attractive today.
Bottom line is that an insurance company might do a large, attractive property loan with a relatively long amortization and a relatively low interest rate. Start looking.
Fannie Mae & Freddie Mac
Fannie Mae and Freddie Mac are the nation’s affordable housing lenders. They are currently under great scrutiny because their leadership tended to make lots (lots) of bad home loans that, although creating high salaries for the leadership, cost the taxpayers Billions (with a “B”). Not pretty.
However, Fannie Mae and Freddie Mac also make commercial housing loans such as multifamily housing (apartment) loans and mobile home park loans.
They are currently making a lot of mobile home park loans through their Delegated Underwriting & Servicing (DUS) program.
Unfortunately, neither Fannie Mae nor Freddie Mac will make loans to MBC owned mobilehome parks. There are, they say, lots of technical reasons, but the bottom line is that Fannie and Freddie are ‘hunkered down’ trying to survive and unlikely to change any policy that would help an MBC for the foreseeable future.
Looks kinda’ bleak doesn’t it.
That’s why your group should start looking for a financing alternative now.
We will discuss Conduit lender loans, State or local government financing, and HUD/FHA loans in Part 2. Stay tuned.
Deane Sargent and PMC Financial Services have been helping mobile home park resident groups and cooperatives to organize and find financing to buy their parks for over 20 years.