Recently, I was asked by the publisher of an MH industry magazine to write an article about resident park purchases for park owners, since there are a lot of misconceptions about the process.
I have reproduced the article below. (Remember, the hardest thing about park purchases is getting the owner to pay attention, so this is written to emphasize the owner benefits.)
STOP! Don’t turn that page.
Because there are some things you should know about resident owned parks.
First, you might want to sell your park to the resident group.
Second, your resident group might want to buy your park and you might want to know what they’re up to.
This article is intended to be a ‘NO BS’ commentary on resident owned park purchases.
I’ll also compare and contrast the two prevailing resident purchase methods at the end of this article.
Let’s face it. Most deals come down to the money. And, believe it or not, residents can and will pay a market price (or a better than market price). They will often vote themselves a rent increase to buy the park. Ultimately, the lender’s appraisal will influence the loan amount and what they can pay (basically because the group can afford to buy what they can finance), but they don’t expect a ‘deal’. (Actually, occasionally there is the guy who thinks the owner should just give the park to the group. He is ignored.)
Determining if a park is a likely candidate for a resident purchase is NOT hard. I evaluate whatever financial information available (sometimes a broker package, sometimes actual park information after signing a Confidentiality Agreement), Google Earth the real estate, and prepare computer models on the various financing sources available. I then lay out the plan to show you how the deal would work. (Note that I get paid by the group ONLY if the deal closes, so, if it doesn’t work, I won’t be bashful about letting you know.) The resident group is NOT contacted unless and until you authorize it.
There are several specific financing sources available for resident groups, depending upon the deal size (number of sites, price), nature of the real estate, location, and type of resident group (low/moderate income, family, 55 & Over, etc.) Resident groups usually need a large first mortgage loan, maybe some subordinate financing, and financing for their individual participation. All those loans are available.
Yes, resident deals take longer than investor deals. And the group doesn’t have a big pot of money for a deposit, because they to pay for lender due diligence reports and fees. But usually you can tell if the deal is going to work fairly quickly. There are “milestones” showing progress: evaluating the plan I suggested to you, contacting the group, forming a purchase committee, having park-wide meetings to discuss the deal, getting indications from lenders about the financing, incorporating the group, negotiating the Purchase & Sale Agreement, paying for the due diligence reports, etc. You are kept advised as to the status of these milestones.
Like any deal, the park infrastructure will be evaluated. There will be engineering reports, an environmental report, and an appraisal. But the group already lives in the park, so they have a pretty fair idea of what they are buying, will often buy it “as is”, and will deal with the infrastructure issues as part of their process.
You are in charge. There is usually nothing that compels you to sell your park to the group. With rare exceptions, rights of first refusal, rights to notice, etc. are not effective and can be circumvented by any good attorney. You have to want to sell the park to the group and believe that the group represents the best (or at least a pretty good) solution to your problem. In some areas, park sellers can get favorable income tax treatment from the state, and sometimes get ‘friendly condemnation’ treatment (IRC Section 1033, not 1031) giving you additional time to invest the proceeds in another property.
Another interesting factor: The group has limited negotiating options – they don’t want to buy the park down the street, they want your/their park. (In a way, they are like the ‘plain’ kid standing against the wall at the high school prom. They are just so damned happy to be asked to “dance”, they will work like little beavers to get the deal done.) The goal is usually not to arm-wrestle you about the price and more to figure out how to get you the money.
FINALLY, WHY DO RESIDENTS WANT TO BUY THE PARK
Beyond the obvious reasons, they generally really like mobile home park living. They like the community, group activities, privacy of their own homes while someone else does the maintenance, etc. It’s just that, while they are committed to the park, they are seeking security – from a new unknown owner, from rent increases beyond what they can afford, from marginal park maintenance, and from arbitrary rules and management regulations. So they are motivated to get the deal closed.
TWO BASIC TYPES
The are two basic types of resident park ownership: a “Limited Equity Coop” (LEC) and a “Mutual Benefit Corporation” (MBC).
LIMITED EQUITY COOPERATIVE (LEC)
The Limited Equity Coop is basically the ROCUSA method.
Their program is targeted to low-moderate income parks. The parks tend to be smaller and residents often have limited life experiences needed to run a mobilehome park. That makes the key player the technical assistance (TA) nonprofit running the deal. The residents may end up owning the park, but the TA runs it and has control. An LEC deal is characterized by lots of community development money (first mortgage and subordinated loans) and minimal resident equity (maybe $500 a head, sometimes loaned to the individuals by the TA) and often minimal participation (as low as 40%).
ROCUSA generates a large amount of publicity, is well funded by the affordable housing industry through grants/loans etc., and provides a bunch of funding for the TAs under contract with them, and also funding to some national and state resident associations. Thus, ROCUSA can control their message. Resident groups in the areas where they operate are often not aware of any other park purchase alternatives.
ROCUSA targets parks that fit their profile. They also attempt to influence legislation to encourage park owners to sell to resident groups. They seem to operate mostly in New England (where they were an outgrowth of the New Hampshire Community Loan Fund – NHCLF), the Pacific Northwest, Minnesota, and a few other states.
Exclusive of the parks initially converted over a period of 20 years by NHCLF, they seem to close about 2-4 park purchases annually.
MUTUAL BENEFIT CORPORATION (MBC)
A mutual benefit corporation is a resident-owned non-profit corporation that purchases the park. Lenders will finance the purchase by making loans to the MBC. Residents provide the equity by purchasing a share in the MBC, usually for $5,000 to $15,000 per share/per site. Financing is available for these shares, which are secured by the share and NOT the home itself. The MBC is governed by a resident board elected by the participating members.
The hardest part of an MBC deal is getting the park owner to the bargaining table.
MBCs are generally larger deals, cover a wider range of resident groups (from lower income affordable housing to higher income retirement communities), and have resident groups with higher level of life experience (i.e., they do the deals themselves, with guidance, rather than relying on a TA). Participation levels matter. The more participation, the better the deal works (meaning lower share prices and smaller rent increases). Usually there is 65% to 85% membership. The non-participants stay in the park with the MBC as their new landlord.
Project financing is available from conventional sources. I have used bank loans, conduits, HUD, community development lenders, life companies, etc. Most loans are fixed rate long-term loans with long amortization schedules. Most of these lenders are NOT ‘great humanitarians’ – they care only if the deal fits their program and if the numbers work for their loan terms. As such, funding is fairly unlimited, but the lenders have to be approached as part of the process. Lower income parks can combine a conventional loan with a community development subordinated loan to keep share prices down and monthly payments reasonable. The group will always have a management company (reporting to the board), an attorney and a financial advisor. (Note that the attorneys I use get paid the same way I do – by the group only if the deal gets closed.)
You can do these deals about anywhere, although my team works mostly on the West Coast and Pacific Northwest.
If you have questions, you can contact me. I can be reached at 541-708-5131, firstname.lastname@example.orgemail@example.com. My web site is www.pmcfinancialservices.com
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.