You Can Do It!

In November, I was asked to talk with a resident group which just found out their owner was selling their park to a new investor.  The HOA President took notes, which I reproduce below.

Excerpts From HOA SPEAKER’S SPEECH *
Wjschlegel

The following are excerpts from a talk given by Deane Sargent, from PMC Financial Services, at the November 20, 2012 HOA meeting. The excerpts were transcribed by Bill Schlegel  (HOA President)

Deane:
“I’ve worked on 40 successful park closings, and nearly 400 that weren’t successful. If they weren’t successful, it’s usually because the park owner/seller doesn’t pay any attention to you. He doesn’t think of you as serious buyers, he doesn’t think you can get organized and he doesn’t think you can get the money. He will sell to whomever he believes can buy the park the fastest.

“I don’t have a formal presentation for you tonight. I’ll talk about what I do, but, for the most part, I would be happy to answer your questions. My ground rules are pretty simple. I will tell you exactly what I think, although it may not be what you want to hear. I don’t mean to be harsh, but this is complicated stuff, and, it’s likely stuff you’ve never encountered before. And above all, you need to understand what happens when mobilehome residents want to buy their park. I try to be as fair as possible. I’ll try to present in advance the things you will need to know and fill in the gaps as we go along. I’ll stay as long as you have questions.

“To start with, I am usually contacted by a resident leader or a homeowners group in a park. My company, PMC Financial Services can be found on the Internet (www.pmcfinancialservices.com) or, often, we have been recommended by a former client.

“The reality of resident ownership of a manufactured home park is: If everybody ‘s happy and if your rents are reasonable, and your park owner is a humanitarian, you’re not motivated to buy your park.  

“It’s only when something changes in the equation that a problem arises and motivates action.

“Usually it’s a new owner, sometimes it’s the old owner getting ready to sell.

“Normally the way parks are evaluated, the way an owner gets the most money for a park, is to get the net operating income as high as possible. Then the next thing a seller does is to create an expectation in the buyer that his net operating income will be even higher than it is today. The way the owner gets your net operating income higher is to maximize your rent increases, and cut your expenses. Which means he cuts back on maintenance and does everything he can to make the bottom line look better. This may be what you have been experiencing here in your park.

“The other thing that may have happened in your city is that you’ve had serious changes in your rent control ordinance. And those changes have impacted your park. They have even more impact on what the owner can tell the prospective buyer. “Wow! It’s going to be great…Look at it! It’s got all these people that live here today that pay at this level and are going to move or die soon, and new people will be moving in and they are going to pay a lot more in rent.” So that’s the spiel that he will use.

“I don’t want you to feel that you have been singled out or that yours is a particularly unusual situation. This is what normally happens.

“So, let’s say you have an opportunity to buy your park, what do you do?

“Usually you have been organized into a Home Owners Association for some period of time. And you have to get enough residents to agree to participate.  Now, you have about 194 sites in this park. I don’t think in most manufactured home parks you could get 194 homeowners to agree that today is Tuesday, which it is, let alone to sign up to participate in a buy out. You don’t even know many of your neighbors….”Why should I do this?”

“The answer is, without meaning an offense, but I think that the parks that succeed, need a mind-set similar to Custer’s at Little Bighorn, It’s, kind of, you and the 7th Cavalry and there’s a whole bunch of bad things out there. And, if you don’t band together, in force, you’re going to get beat up.

“In your case, it looks like the heirs of the family who built this park some time ago are refusing to respond to your efforts to buy. Maybe you weren’t particularly well organized, or, at least they didn’t perceive that you were. Owners don’t tend to think of residents as people they really want or have to deal with, especially in any business activity. They do whatever they want, and seldom view you as potential buyers.

“You’ve got to change that perception. Right now, with a prospective buyer already identified, I wouldn’t say your opportunity is dead, but nearly. Yet there is always the possibility that this deal could fall out of escrow. I don’t know about your rent control law; I’ve never studied it. But, most rent control ordinances allow a new owner to pass through property tax increases. When you have a park that has been owned by a family for a long time, chances are their Prop 13 tax base is really low. The new guy gets a step-up in taxes and is likely pass a very healthy increase on to you. Brace yourselves.

“I went on line just before the sales information was withdrawn. They want a fairly good price for this park. Why would anyone pay this much? The only reason is that they think they are going to be able to raise your rents down the road, then take their profits and go buy another park with a larger rate of return.

“They are trading off on the size, location and rent control. Over a period of time they can make a good deal of profit on their money. That’s the name of the game.

“The Real Estate broker that responded to the offer you made the owner outlined timing and deposit terms that you could NOT have met. It’s likely these terms were already tailored to the would-be buyer. There’s always someone out there with a lot of money. My instincts are that the owner also wants to get it done quickly, because he knows that Capital Gains tax rates are going up, starting January 1st.

“How does a home owner group buy a park?

“A lot of people probably think, “well gee, with X-millions of dollars, and 194 sites, worth so much a site, I probably need to come up with about $70,000 in order to participate”. No, that’s never going to happen. [Note: There are some owners who want to convert their parks to sub-divisions. In theory, you can to buy your lot. In practice, this NEVER works for most residents.  In my judgement, owner driven subdivisions are just a scam to get the park off of rent control.]

“In a park with 194 lots to be sub-divided, I would estimate between 10-15% of home owners could come up with the dough to pay $125,000 a site. Another 15% would have little or no hope of having that amount. There is a chunk in the middle that might have the where-with-all to borrow some money.

“But the real question is why would you want to do that?

“One of the great things is that you are an owner in a mobile home park, and its your community. So why take the community and slice it up into 194 units, and then everyone is on his own? Your strength is in working and sticking together. The best way to proceed is to form a non-profit mutual benefit corporation. You get a permit from the state of California that gives your corporation a right to issue shares (a security with a special State exemption) to issue one share per site. So you’ve got a 194 shares. Guess what, you’ll never get a 194 people to participate from day one. Maybe 65%-70%. My most recent sale had 75% and the one before that, 85%

“The whole thing might depend on how mad you are, how mistreated you’ve been, all kinds of such things that it takes to galvanize people to action.

“You try to be as inclusive as possible. Which means you don’t want to split the park into groups of people who can afford to buy and those who can’t afford to participate. But we can and will figure out a way to complete the purchase without isolating those who can’t or don’t want to join.

“So now you have a corporation that has the potential to issue 194 shares. And that corporation is going to borrow money. It’s going to buy the park and borrow money on a first mortgage loan for the bulk of the dollars needed. Various people and business will make that kind of a loan: banks, insurance companies, private parties or groups, as well as HUD. The issue is how much money will they lend you, with what terms for how long.

“Also, can you, as a group, afford to make the down payment to buy a share and can you afford the monthly payments. If everyone here had a pile of money, then its real easy to buy a park. But realistically all of you don’t have that kind of money. Some of you don’t have any money. But the ones that have money need the ones who don’t have money. It means that you have got to do it together.

“You’ve got your corporation, but the process is complicated because you’ve got to know where you’re trying to get to without knowing all the facts.

“Resident deals are like a big super-oil tanker. When they set out on a trip, it takes a long time to build up momentum…that’s the good news. The bad news is that once you’re pointed at its destination, it’s very hard to turn it into another direction. Resident groups move in a similar way. It takes a long time to get moving, and, you pretty much have to know that you are going to be success-ful in reaching the port you’re headed for. You can’t reverse course or get a 2nd chance to deliver.

“Usually the HOA of a park does the communicating and organizes a Park Purchasing Committee to focus on and carry out the actual process to buy the park.  I work with that Committee, primarily.  I know a lot about how to buy a park and the answers to financing them. But, I don’t know much about your park. You do. We use the Committee to gather information about who is here and what is reasonable and necessary to create a structural transaction that makes sense.

“All this effort made is to try put together an offer a park owner can live with. Generally speaking you can do anything that an investor can do. What works for the investor will work for you. Your disadvantage is you are harder to organize with more moving parts and it usually takes longer.  A purchase can be achieved. It can be done by you, satisfactorily and successfully, if you are united.

I would be happy to answer any questions:

Question: You say that we should get and stay organized. That takes time, but the reality is that many of us in our 70’s and 80’s and won’t be around to participate. Regardless of who owns the park, should we proceed?

Good question. I’d like to make some suggestions:
     1. Let’s say whoever this party is trying to buy the park….normally people who buy parks don’t’ buy them and keep them forever. They keep them about 5 years, jack up the rents, lower the expenses, depreciate everything they can, and then they sell them to some guy down the road.
     2. You may have missed this opportunity, but you won’t necessarily miss the next one, if you stay prepared.
     3. The other thing I’d like to remind you that the current offer could fall through and your current owner may decide it’s worthwhile to talk to you.
     4. Additionally, you don’t know what is motivating the new guy. He may have buyer’s remorse or find something better to do with his time and money. You may even be in a position to come up with a little extra money and get him out of here.
     5. Something we talked about earlier: Prop 13. If I remember right: that if you could buy the park from the new owner before 18 months pass, you could gain back your real estate tax position.
     6. Even if you are not in the park to enjoy the benefits of resident ownership, your home with be more valuable because potential home buyers want YOUR sense of security and community.

“Your other residents who are not here tonight need to know these things before they decide to sit on the side lines.

Question: Well does that mean we should get out and survey every homeowner and get their opinions right away?　

Well. Maybe.  Yes, that’s a good and attractive undertaking. But the real answer is your HOA and PC have to make the assumption that it will be attractive deal even before you’ve got a deal. Look, the people who are sitting on the sidelines aren’t going to give you the time of day until they know you got something to offer. If you get to that point, they’ll want to talk to you, believe me.

Question: Can you give an estimate of a final cost to each resident if we buy the park?

“The short answer is that I can’t. You don’t have a deal, a price, know how many residents will join in. The real answer is that until we can make an offer that is reasonable and sensible, the residents won’t know if they can afford it. A rule of thumb tends to say that a monthly “rent” increase, exclusive of any share financing payment, can’t be more than 10% – 15%. You simply won’t get enough participants. (Remember,however, even though your monthly outlay might increase at first, it becomes more stable from there on out.)

“The next thing is, I can get you a 90% 1st mortgage, but that will require a down payment from the group.  You get that down payment from selling shares, usually for cash but sometimes financed.  Usually the down payment, if you borrow to buy your share, can’t be much more than 2 month’s rent.

Question: I’m 70. I’m not going to be around for 30 years. Does that make my relatives responsible for the debt I’ve incurred?

“No! If a park is resident owned, you are less concerned about the debt because it’s going to be paid by whomever buys the home when you leave.

“Let’s say your share cost you $10,000. (This was the initial value established with the State permit.) But your group, after the park is resident owned, makes a study and concludes that the value of the park is increasing. They obtain a new permit from the State declaring the share is now worth, say, $25,000. which is pretty typical.  Anyone buying your home will be required to buy your house  and the overall price will reflect that increase in share value.

“I’ve made share loans that typically require no credit check, no income requirements and are pre-payable and assumable. The last one was 8% for 30 years. I made a similar loan  for a 96 year old woman. She’s not going to pay off that loan.  However, the next person who buys her home assumes the loan. She’s a happy camper. Her kids are happy campers, because they can convert what is a real hassle with investor-owned parks into something of value.

Question: In your experience, how long does it take a park like this to sell to us or somebody else.

I think it takes about 60 to 90 days to sell to an investor who either already has financing lined up, or doesn’t need it since he has cash.

For you, it would take up to a year.

The message I want to leave you with you tonight is get yourselves organized, get politically active (it’s your quality life that is at stake), plan for the next time around, and believe that YOU CAN DO IT.

Deane