Attacks on MHP Rent Stabilization – Part 2

Attacks on MHP Rent Stabilization – Part 2 (Rev 5.28).

 

The GSMOL Board of Directors thinks California’s mobilehome park rent stabilization ordinances (RSO’s) are under attack.

They are right.

They’ve asked me to write a three-part article on the situation. I covered “1) What is going on?” in the first installment. If you missed it, you can find it on the GSMOL website.

Now, it’s time for Part 2) “What might happen (or is already happening) to YOUR park?”. Part 3) “What YOU can do about it” will be in the next issue.

My name is Deane Sargent, and I am a finance guy who helps resident groups purchase their mobilehome parks. I’m not an attorney (no legal advice or judgments here), but I have been called as an Expert Witness for residents in rent control disputes (meaning I hang around with attorneys). These are my opinions/guesses (only), and do not represent any position of GSMOL, or any attorney, for that matter.

BIG PICTURE ( 2. What might be going on in YOUR park?)

 

As I have worked with resident groups over the years, I have found that most folks who live in mobilehome parks just want to live their lives – work their job, take care of their family and have, what I call, ‘quiet enjoyment of their lifestyle.’ Unless someone was ‘scammed’ when they moved in, residents bought their home, knew the park rules, knew that there was an RSO, knew what their site rent was and what it was expected to be in the future. They got to know their neighbors and became part of the community.

But, sometimes, things changed.

Maybe the park owner dies, the kids (or his ex-wife) want more money; investors show up with bags of cash, and suddenly there is a new sheriff in town, who wants to ‘improve’ the revenue of the park.

So what does the new owner do?

Well, he basically has three (3) options: 1) He can recognize that he made a brilliant investment and keep everything the same, working within the guidelines of the RSO (Ha Ha), or 2) He can attack the RSO, or 3) He can try to ‘reposition’ the park. The owner may actually combine options 2) & 3).

The owner will likely ignore option 1, but with options 2 & 3, he, along with his lawyers and accountants, will begin a program of increasing his revenue. (Remember however, when owners are dealing with RSOs, they know they will have to appeal to some RSO authority. So the game (that they play with the RSO authorities) is to INCREASE EXPENSES AND DECREASE REVENUE. So, you say, that’s some neat trick – increase the park owners ‘real’ revenue, while showing the RSO authorities that the revenue ‘declined’. How does the owner do that?

Option 2: Attack the RSO.

The initial move an owner makes can suggest his PLAN. For example, if he throws some money at the park entrance (curb appeal), fixes the streets cosmetically, and touches up the landscaping, he may be positioning the park for an attack on the RSO.

• The new owner (and his attorneys/accountants) will study the RSO and make a claim that he isn’t getting a ‘Fair Return’ on his investment, ignoring the fact that he just bought the park at what he probably told his investors was a ‘great deal’, with an outstanding rate of return. (Making this case to his investors justifies the park owner’s fees and proves to his investors what an astute businessman he is.)
  • He may make the claim that depreciation (a non-cash item) and mortgage interest on the loan he used to buy the park should be allowed as deductions to show he isn’t getting a fair deal. Most RSO don’t allow these costs when determining a fair return.
  • He may try to ‘pass-through’ the increase in property taxes resulting from the purchase of the park. Some RSOs allow this and some do not.
  • He may attempt to ‘remove’ income from the RSO analysis. Usually, the RSO states that ALL income from park operations must be included in the RSO analysis. This presents the owner with a challenge. He wants to reduce income for the RSO analysis, but retain or increase his income in reality (and for his investors). The solution for the park owner is to, maybe, play ‘hanky panky’. He might do this by working with ‘affiliated companies’, which the park owner controls. For example, if the management company (MC) is controlled by the park owner, he can inflate the management fee and bill separately for services normally included in the mangement fee. The effect of this is to pad the owner’s pocket at the MC while increasing expenses for RSO purposes. He may also acquire homes in the park, transfer title to them to another affiliated company, fix up the homes (booking the expenses to the park for RSO purposes), and sell the homes through the affiliated company showing NO profit in the RSO operations.
  • He might also manipulate site vacancies to falsely claim lower revenue.
  • He might book the rentals on Park Owned Homes on the records of an affiliated company.
  • [Note that ‘hanky panky’ could present the park owner with (really) big problems in other areas. If he is removing income from park operations, the RSO folks may never know. (However, as a non-attorney layperson, I would call that ”fraud”.) However, he probably has to somehow return that revenue to the park books for purposes of reporting to his investors. If he DOES return the revenue, he may be ‘admitting’ to fraud with regard to the RSO. If he DOES NOT return the revenue, he may be in violation of the Securites & Exchange (SEC) regulations and committing fraud on his investors. That could destroy his entire multi-park business. In addition, depending upon how he reports the income, he could be committing TAX fraud, and have to deal with the Internal Revenue Service (IRS). That all, of course, is why park owners pay lots of money for attorneys and accountants.]
  • When the affiliated company sells the homes in the park to new, unsuspecting residents, the MC, controlled by the owner, may convince the new home owner (‘scam’ alert) that a ‘lease’ (at a higher rent) is better than the RSO rents available to that site.
  • Some park owners have multiple parks, some in rent controlled areas and some in non-rent controlled areas. Because he can get vendor quotes covering multiple parks, he can get a better deal, but he has to allocate those costs among all the ‘covered’ parks. He may attempt to increase expenses in the ‘RSO covered park’ by allocating expenses, such as insurance, park maintenance labor, park equipment, etc., from other parks he owns that are in non-rent controlled areas. That increases expenses for RSO purposes and increases income in the other parks, not subject to an RSO. Hard to detect and hard to prove. The only folks who are harmed are the RSO tenants (oh ya, and his investors).
  • Many years ago, there was a guy in LA named Vega, who owned a park. He didn’t raise site rents for years. Then, a RSO was passed and Vega realized his low site rents would be locked up forever. So he sued for an adjustment and won. Although his situation was really unique, every park owner’s attorney in the State leaped on that court decision like flys in a dog park. So YOUR park owner may seek a “VEGA” adjustment. To anyone other than attorneys, this is a bogus argument that, 20 or so years ago, when the RSO was adopted, YOUR park’s rents were too low. In the owner’s opinion, this requires a RSO adjustment, including inflation, to make up for the rents he didn’t charge. It doesn’t make any difference that he didn’t apply for a VEGA adjustment sooner, or that the money NOT collected over the years really belonged to the prior owner. He will get an appraiser and his accountant to make his case. Go figure.
  • OR, he might try ALL of this stuff, like a demented chef throwing spaghetti against the wall, hoping something will ‘stick’ with the RSO enforcement agency or, at least, confuse everyone, so the owner gets awarded something.
  • Finally, remember, if the owner prevails, even a little bit, in an RSO action and gets ‘something’, the owner will also attempt to have the residents pay HIS legal fees. He will try to get a ‘pass-through’ so that every resident pays something every month for the owner’s attorneys/accountants. That’s like the Ol’ West – “I’ma’ gonna’ hang you in that thar tree, but I’ma’ gonna’ need you to pay for my rope.”

   

  Option 3: Re-Position the Park.

   

  “Re-Positioning the Park” is the current MH Industry phrase for trying to change the character and/or residents in the park for more revenue. The closest non-MH analogy is the outdated (I think/hope) Military Concept: “We had to destroy the village in order to save it.” That may have been great for the folks doing the destroying, but not so great for the villagers.

At this point, you can’t really be sure of his PLAN – does he just want some of you gone? Or does he want to vacate the park and build a shopping mall? (Check your park zoning as to what is allowed. Also, check in with the City to determine their attitude.)

• The first indication that the new owner is trying to ‘re-position’ the park is that he will do NOTHING. (Why do ‘something’ when you are just going to run it into the ground.)
  • The entrance won’t get cleaned up, the signage won’t get changed, the park phone numbers won’t get corrected, trash pickup will be shoddy, maintenance will be spotty and slow.
  • There might be a new park manager, possibly on ‘work release’.
  • There might be a program of intimidation to get folks to leave – notices that the park is being converted from a ’55&Older’ to an ‘All-ages’ park, arbitrary rule changes, notices to residents to fix up their unit (he doesn’t really want them fixed up; he wants to scare you), eviction notices sent about minor infractions, new rules about pets (how big they can be; when and where you can walk them.)
  • Vacant homes will be acquired cheap, and often moved out and not replaced.
  • There might be little or no attempt to ‘market’ the park to new residents. Site vacancies are ‘good’.
  • He might lock down the club house. The pool, if any, might be allowed to become a ‘wetlands’.
  • He might change/enforce the rules about parking, including towing vehicles.
  • Any infrastructure issues (water, sewer, electrical, streets, etc.) will be, essentially, ignored.

So, what’s the plan now? He may, after running off some folks, start bringing in new homes, fixing up the entrance, changing the signage, etc. to attract new residents more suitable to his vision. Or he may throw himself on the mercy of the City and plead that the park is ‘dying’ and needs to be closed (shopping mall). Or he may blame the conditions in the park on the RSO and demand changes to benefit his investment. He may declare bankruptcy to further complicate the issues.

We are going to discuss, in Part 3, what you might be able to do about all this.

[IMPORTANT NOTE:

If you already have an RSO, get yourself a copy of it and READ it. Find out who in your local government administers the mobilehome park RSO. Get to know them and figure out what support you might be able to get from them.

If you don’t have an RSO, locate your Regional GSMOL representative (list on page ___ of this Californian). Contact them and find out WHY YOU DON’T.]

Deane

(deane.f.sargent@gmail.com)

415-271-3919