Financing Focus

Understand Lender Criteria to Finance Manufactured-Housing Communities

Manufactured housing is a niche that offers potentially strong returns for some investors. Once thought of as simply mobile home parks, today's manufactured-home communities are split into two primary categories -- landlease communities where residents own their homes and lease the land they occupy and site-owned communities where residents own both their homes and the land.

New trends in home design, construction materials, and amenities make manufactured-home communities a viable alternative to affordable multifamily housing in many areas of the country. Manufactured homes also appeal to a broadening range of purchasers, including first-time home buyers, those looking for second homes, and retirees. While the manufactured-home industry currently is experiencing a downturn, new design and construction techniques and a growing pool of potential owners offer a promise of growth in a few years.

Manufactured-home community buyers have two main financing choices: long-term loans from institutional or conduit lenders or short-term bank loans. To obtain the appropriate financing for these investments, commercial real estate professionals should understand lender criteria for each type.

Long-Term Institutional LoansLong-term loans typically are 10-year fixed-interest notes. Life insurance companies and conduit lenders usually price their loans over the 10-year Treasuries. In today's market, long-term loan interest rates are lower than bank loans. Institutional and conduit lenders aren't funding manufactured-home communities under development; however, communities that have been stabilized at about 85 percent occupancy for two to three years are likely to meet long-term lenders' criteria.

These usually are non-recourse loans, and the requirements are rigorous, since lenders rely on the property's cash flow to repay the debt. Generally, lenders require that all pad sites are owner-occupied, meaning that tenants own their own homes. Other criteria may include paved streets and separately metered utilities. Amenities such as swimming pools and club facilities add curb appeal but don't necessarily constitute a quality community in lenders' eyes.

Consistent cash flow to support the loan is a must. Long-term lenders generally require replacement reserves of $50 to $100 per pad for the purpose of future deferred maintenance. These reserves usually are escrowed with real estate taxes and property insurance. For loans larger than $1 million, most lenders also require a property survey, such as an American Land Title Association survey, which delineates a property's buildings, improvements, easements, and boundaries.

Long-term lenders examine all line expenses such as repairs and maintenance. They want to see proper vacancy and management fees and deferred maintenance that is not out of the ordinary for manufactured-home communities. For example, having a sewer treatment plant is likely to be a problem with a long-term lender, since it requires greater maintenance. They look into the manager's arrangement, specifically if the individual is paid or receives free rent and how that is factored into the community's income.

The capitalization rate is used to help set value, and it is determined by looking at the surrounding area and talking to local investors and appraisers. The loan amount is determined by the lesser of two amounts: a loan to value ratio of up to 80 percent of the loan or a debt service coverage of 1.20.

Many lenders specialize in financing manufactured-home communities. Column Financial, GE Capital, Wells Fargo, Aegon USA Realty Advisors, Bayview Financial, the Federal National Mortgage Association, and JP Morgan Mortgage Capital are just a few of the long-term lenders that offer manufactured-housing commercial loans.

Short-Term Bank LoansBanks usually offer one- to seven-year loans. Bank interest rates for manufactured-home community commercial loans are priced at a spread over the Treasuries. Generally banks use a benchmark of 250 basis points over the three- to five-year U.S. Treasuries, depending on the length of the fixed rate. In today's lending environment, banks usually won't fix an interest rate for longer than five years; the loans typically are in the three- to five-year range.

Bank requirements are not as stringent as institutional lenders' because the borrower or any majority partner must sign a personal guarantee. Thus, the bank is less interested in the quality of the property and more interested in the quality of the borrower. Banks may loan on lower-quality communities, such as older communities in which pad sizes are too small to accommodate newer, larger homes.

Although it can be difficult to obtain zoning approval for new manufactured-home community developments, short-term lenders will finance some new projects with terms depending on the borrower and his experience. Specifically, banks want to know if the borrower has completed similar projects and the performance of those projects. In some instances, new developments must be completed in phases to obtain financing; each phase must be stabilized before obtaining additional financing. The loan to cost ratio typically is 70 percent to 80 percent depending on the borrower's financial strength. Banks also may require additional equity above the normal requirements, since financing new developments is riskier than lending for established communities.

Banks usually don't perform as much due diligence as institutions and conduits, such as requiring replacement reserves or looking at repairs and maintenance. They also don't require tax and insurance escrows, and the closing time is shorter -- typically 30 to 45 days with fewer closing costs.

Banks may request additional collateral, but they usually finance larger amounts than long-term lenders simply because of the underwriting criteria.

Even though long-term lenders scrutinize harder, some institutional and conduit financing sources have criteria similar to bank criteria. Both require good credit from the borrowing sponsor. Both must have a certain DSC, usually 1.20 or better. LTV goes hand in hand with the DSC, as the net operating income is what determines value, along with a cap rate determined by current market conditions. If these ratios are in line with a lender's criteria and the property has a good operating history, borrowers should be successful in obtaining loans for manufactured-home communities.

Stephen V. Jacquemin, CCIM

Stephen V. Jacquemin, CCIM, is president of S.J. Financial Group in St. Louis . Contact him at (314) 965-4844 or sjacquemin@ccim.net.

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