An MH industry publisher asked me to write an article on resident ownership and specifically highlight the differences in the ways group use to buy their park.
The publisher asked: Why they want to do it, what they expect, and what model they might choose – a Limited Equity Cooperative (LEC) (the ROCUSA model) or a Mutual Benefit Corporation (MBC).
The article is reproduced below (Remember it is directed toward park owners.)
Why should you (the park owners) care?
Same reasons as in the previous article – you might want to sell your park to the group, or, your residents may want to buy it on their own initiative and knowing what they are up to could be helpful to you.
Every park is different and I’m about to give you generalities and all generalities are sometimes false. (I, of course, think mine are less false).
These comments are my opinion. I closed one LEC in Minnesota in 2005 and then decided not to do any more. My comments about LECs are based upon observing LEC deals that have closed over the past few years. .
I’ll try to minimize my biases (or at least identify them). I have closed 40-50 MBC deals and I obviously prefer that model.
From the park seller’s point of view, both models can work but you need to know the significantly different factors involved.
I believe that resident ownership can be an attractive solution to some park owner’s problems. Think about it. The group is often a very viable buyer. They don’t want to buy some other park; they want to buy YOUR park. And the resident group, depending upon the model used (see below) can often pay a higher price than the market and will accept infrastructure problems that an investor buyer might force you to solve as part of the sale.
The trick for you is to determine if your resident group is, indeed, a viable buyer and which model (LEC or MBC) works best for your goals and your park.
LECs and MBCs are so different from a resident group standpoint and point of view, I’ll take each model in turn.
[Note: if you want to cut to the chase, you can go directly to What’s the Catch? at the end of each section.]
LIMITED EQUITY COOPERATIVES (LEC)
To refresh your memory from last month’s magazine, an LEC is characterized by lots of funding from community development lenders and minimal resident equity.
A hypothetical example:
If there is a 50-site park purchased for, say, $25,000 a site, the price is $1,250,000. The resident equity goal in the ROCUSA model is $500 per resident. This ‘equity’ is sometimes even loaned to the resident. If there is, say, 50% participation (25 sites), the resident equity total is $12,500, or 1%. No conventional lender would make (or be permitted to make by the regulators) a 99% loan.
So the group needs some help.
The LEC Process
Enter ROCUSA and their cadre of Technical Assistance Providers (TA). The TA typically identifies the project, contacts ROCUSA, organizes the resident group, negotiates the price for the park, arranges the community development funding and closes the deal. At the end of the day, the residents own the park, but the TA acts as advisor, management company and reserves the important decisions to itself.
Why does the TA do it? Well, at their heart, they are into resident empowerment, preserving affordable housing, and building home values. By the way, they also get grants and make fees to do the deal. They act as advisor and management company, also for fees. Fees and grants from originating projects and from ongoing advisory and management are the lifeblood of TAs.
Consequently, the resident group is often fairly passive during the process. Also, the residents usually are not well organized initially, and they rarely initiate the project themselves. They are typically good people and like the idea of resident ownership. And, they may decide that even if the TA is in charge, it’s better than a new park owner. But the heavy lifting is done by the TA.
From the resident point of view, using the LEC model, they can buy the park for virtually nothing and have their rents stay about the same. If the resident has borrowed the $500 (paid off when the home is sold), what’s not to love? (Except that they don’t really control the park operations.)
HOW DO YOU, THE PARK OWNER, EXPLORE A LEC?
There are two initial basic issues:
1) Getting the attention of the TA/ROCUSA folks, and,
2) The price.
Contacting the TA is easy. Go to the ROCUSA web site and look for their listing of TAs. Find one in your area and give them a call. Note that TAs vary widely in ability and expertise.
Once (or if) you have the attention of the TA, you are in a negotiation with them regarding price. If the TA can’t get a price that makes their deal model work, they quickly move on to the next deal. Your residents are left behind and may be somewhat disappointed but they are in about the same place as before the effort.
If the TA gets the price that works for their deal, the park is sold, and you move down the road, perhaps not as well off as you would like, but still able to look for other investments.
WHAT’S THE CATCH?
There are several:
You may not have a TA in your area, or the TA might not be interested in your park.
You are not likely to get the best price.
TAs are expensive and their annual fees impact site rents and, thus, reduce the price the group can pay for the park.
Some resident groups view the TAs as just a different form of landlord. The group might prefer to run the park themselves and balk at the deal.
MUTUAL BENEFIT CORPORATIONS (MBC)
A MBC is a resident-owned non-profit corporation that purchases the park. Conventional lenders will finance the purchase by making standard first mortgage real estate loans to the MBC. The equity in the deal is provided by the residents through the sale of corporation shares.
Resident groups in MBC projects are a decidedly different group than in LECs. They are typically already organized and usually initiate the transaction, either by contacting you or me directly. (However I am often contacted by park owners to evaluate their park as a potential project before the residents are notified that they might be able to buy it.) Resident groups seeking an MBC purchase are sufficiently cohesive that they want to do their own deal. They are reluctant to hand over control to a TA, if they have choice.
But if you think about it, you realize that ‘happy’ residents don’t usually initiate the purchase of their park.
If rents are reasonable, maintenance is OK, the park owner/management is somewhat benign, and everyone gathers on Saturday morning at the clubhouse with you to have pancakes and sing “Ku ba yah”, they are not motivated to go through the effort and expense required to try to purchase their park. And even if a few residents are motivated to buy the park, the chances of getting enough participation is ify.
To initiate a park purchase, the group usually has a ‘burr’ under their saddle. And the bigger the ‘burr’, the more they are motivated and the more they are likely to get the level of resident participation to close the deal. Most ‘burrs’ are obvious (rents, maintenance, etc.), but burrs can include fear of park closure, loss of rent control, an unknown new owner, or animosity toward the management company. This situation impacts my viewpoint (bias alert!) – I usually don’t get the happy resident groups; I get the ones who are upset.
Potential MBC projects require good resident leadership or the deal will flounder. So I evaluate the real estate, the financing, and the resident group BEFORE we get into the MBC process. Often, when I am contacted by an owner, I do the preliminary evaluation without the knowledge of the resident group.
THE MBC Process.
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 a lot of the organizational work themselves, with guidance from their attorney and me, 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 in the typical MBC deal. The non-participants stay in the park with the MBC as their new landlord.
Although there may sometimes be subordinate financing, residents provide larger amounts of equity, usually from $5,000 to $15,000 per share/per site. Financing is often available for these shares, which are secured by the share and NOT the home itself.
Because the group is motivated, they will often vote themselves a rent increase to support more first mortgage financing, especially in rent controlled areas, which makes the deal work better.
HOW DO YOU, THE PARK OWNER, EXPLORE A MBC?
Give me a call.
I have often discussed projects with owners on a confidential basis. I evaluate your situation and come up with a plan. I don’t contact the resident group unless you agree to the plan and allow such contact. Since I only get paid (and I am paid by the resident group) if the deal works as an MBC, I’m not bashful about letting you know that the park is either not a good candidate or if you should be talking to a TA for an LEC deal.
What’s the Catch?
MBCs typically take longer to close.
You can often get the best price, but getting there is complex and takes patience.
Participation levels matter and are usually higher than in LECs. So the deal needs to be sold to each resident, who may or may not decide to join the membership.
Getting Pre-Development funds (for appraisals, environmental reports, engineering reports and inspections) is more difficult and time consuming.
Deane Sargent runs PMC Financial Services and has been financing affordable housing for almost 40 years. He has worked with resident owned mobile home parks for the last 20 years. Deane has a BS in Economics and an MBA in Finance & Marketing. Deane is currently a California real estate broker, and, in the past, held licenses as a Certified Public Accountant with KPMG and an NASD Registered Securities Principal (including municipal bonds and general securities) with several investment banks. If you have questions, you can contact him directly. He can be reached at 541-708-5131, email@example.comfirstname.lastname@example.org. The 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.