Resident group Boards (and the members) always need to be aware of the future needs of their community. One of the more important needs (for some parks) is the need to refinance their first mortgage.
Groups have financed the purchase of their park with a variety of loans – from banks, from community development groups, from conduit lenders, and from insurance companies.
There are two basic reasons for refinancing.
First, some loans have a term that is shorter than the amortization period. Meaning that their loan may amortize on the basis of a 30-year mortgage, but with a term in 10 or so years. That means there will be a amount at the end of the term that requires either paying off (which typically is unlikely) or rolling over into a new loan.
Second, the existing loan may have an interest rate (and loan terms) that are less attractive than the current market. Refinancing now can lower the interest rate, and perhaps lower the monthly membership payment.
The park current status.
The good news is that many (if not most) resident owned parks have a attractive loan profile. The park may have increased in value. Maintenance is usually pretty good. Occupancy is typically high. Many groups have built up reserves for future contingencies. And they will have a track record of some years of prudent ownership and management.
The less good news is that some parks will have infrastructure needs that have been deferred. Some will have oddball receivables on their balance sheet – rents in arrears, loans to members, debt to other institutions obtained for park upgrades and fix up, etc.
Facing a refinance for whatever reason, the Board should, with their financial advisors, review the balance sheet and park operations, with a view toward cleaning up the balance sheet BEFORE seeking refinancing.
Also, the Board should determine the proper amount to borrow. The new loan needs to be large enough to pay off the old loan and the costs and fees associated with the transaction. But they may also want to include additional funds to address park infrastructure needs.
Regarding the first reason – refinancing a term loan.
The present financial turmoil has caused many lenders to cease to exist. Since the group deals primarily with the monthly Loan Servicer, not the originating lender, the Board may or may not be aware that their old lender is not available to roll over the loan. Redoing your existing loan with the originating lender (if they are still around) is often the simplest method. On the other hand, new financial regulations have created confusion in the industry and may well have changed the available loan terms. For example, if the group has a bank loan, that bank may have been taken over by another bank, and the other bank may be subject to new (usually more stringent) rules, making the refinance more complex.
That means, if the loan must be refinanced in the next few years, the Board needs to start looking for a refinance lender NOW.
Regarding the second reason – refinancing to get a better interest rate (or terms).
In this case, the Board has more flexibility. The refinance may be optional depending upon what lenders are interested in the new loan. The Board still needs to start looking as soon as they have defined their goals, since the same financial turmoil mentioned above applies to their situation also. They just have a little more time and the option to either get a new better loan or stay with their existing loan.
Additional Factors
The “Holy Grail” for resident groups is to get a new loan with a long amortization and low interest rate, that will be fully paid off without a balloon payment. There are probably three options: banks, insurance companies and HUD/FHA. Banks are subject to more regulations lately and will likely offer a shorter amortization – 15, 20 or, maybe 25 years (meaning, all things being equal, their monthly payment will be higher). Their rates are also likely higher (and may change over time) than other options. Insurance companies like larger loans ($10-$15 million at a minimum) and will offer probably 25 year amortization and an interest rate lower than banks. HUD/FHA has a loan program with great terms – 40-year, full amortization, and pretty low fixed interest rates, but there are lots of requirements and the loan usually takes longer to close.
Various types of loans have some form of prepayment penalty. The current lender, enjoying a high interest rate, does not want the money back early and often requires a penalty to be paid by the borrower for the privilege of prepaying. The payment of the penalty needs to be figured into the overall cost and amount of the new transaction.
Finally, the market continues to improve. New lenders are moving off the sidelines. Previously they have limited their interest to high end, well-secured and attractive properties. Resident group loans have NOT been on the agenda. However, being somewhat greedy and needing to invest their funds, they will likely begin to look at other projects, including resident owned parks.
If you would like to discuss any of this, give me a call.
Deane
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.