Sometimes The Answer Is Bad.

Sometimes The Answer Is Bad.

I get many of calls from resident groups seeking to purchase their mobile home park.

They all want to know what it takes to buy it, how they can go about it, what will it cost, how long will it take, and, bottom line, do I think their park could do it?

Make no mistake. I want to do resident purchase transactions. But I don’t want to work on one for a couple of years only to fail for reasons that we all knew about at the start.

I don’t want to organize a parade only to have to disband the marchers before reaching the end of the parade route.

So sometimes I have to give answers that are bad.

“I’m sorry, but it is not likely you will ever be able to buy the park.”

But folks who want to buy their park are desperately seeking a path, and often attempt to kill (or wound) the messenger (i.e, me) when getting the bad news. And sometimes the reason they can’t buy the park is not one they anticipated.

An Example:

I was recently asked by a resident purchase committee (PC) to review information and visit a large park (300+ sites) in Southern California. The park has been owned by an affordable housing non-profit for about 10 years. When the park was originally purchased, the non-profit granted the resident group a purchase option after 10 years at a stipulated price. The PC of course knew about this option and was excited about purchasing their park.

So what’s not to love:

We were looking at an attractive transaction with an owner committed to selling, a very reasonable albeit large price (meaning more lenders might be interested), and resident group leadership (or least some of them) excited about moving forward.

The situation:

When groups purchase their park, the deal usually requires a lot of resident participation (minimum 70% of the sites and usually 80% or more). There are lots of reasons for this which I am happy to discuss off-line if you want. But trust me, you really do need lots of participation.

Resident participation means coming up with cash (say, $10,000 to $20,000 from each member), agreeing to have a site rent increase (say, 20%-50%), and banding together in this adventure with other residents (many of whom you don’t know very well).

One might think that getting a large group residents to do all this is hard, and it is. But other groups have done it, so why can’t they.

Well, residents usually make an individual decision to buy into the purchase for specific reasons: they hate the landlord, they hate the park management, they hate egregious annual rent increases, they want security stability and control, and/or finally, they think that their homes will increase in value.

So what’s the problem?

When the non-profit bought the park in this example, the local city threw some money in the pot to help the purchase. When local cities do this, they always want something in return, usually some requirement relating to affordable housing. In this case, the city deal is a 35 year restriction (recorded by deed on the real estate) requiring that the park ALWAYS remain on rent control, and that 50% of the home sites would ALWAYS be restricted to occupancy only by low and very low income persons. That means that site rents are not likely to increase significantly over the years, and, since one half of the homes must be sold to persons of low and very low income, market forces will significantly limit the potential home price increase on those houses.

The impact of this (however advantageous this is for the city) is that half the park residents will get no real benefit by becoming members and, thus, have no incentive (zero, zilch, nada, etc.) to participate in the resident purchase. When the membership process starts out that far in the hole, the chances of getting enough participation are remote. At best the PC is maybe going to get interest from 40%+. That would require, for the 40%+ possible members, a share price that is huge, combined with a very large rent increase.

Further, no lender is going to make a large enough loan on a property where 50% of the rents are artificially restricted.

I only get paid if the transaction closes, so my interests are, more or less, aligned with the resident group. So I try to tell the group exactly what I think, even if they think the answer is bad.

So, “I’m sorry, but it is not likely you will ever be able to buy the park.”

I’ll be in touch.

Deane