Community Financing: Interest Rates Still Near Historic Lows, Despite Volatile Markets

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The financial markets thus far in 2016 have proven unpredictable, yet have simultaneously offered very attractive opportunities for income property owners looking for capital. While the stock market and oil prices have continued to plunge over the past several weeks, very few experts predicted that major interest rate indices would be retesting historic lows as they have.

The marketplace for income property financing has benefited greatly from shifts in the economy. Volatility forces commercial lenders to gravitate towards lower risk, stable, income-producing real estate. Manufactured home communities are increasingly high on their lists, since the cash flow is consistent and demand for affordable housing is strong.

Numerous institutional and private owners of manufactured home communities and other commercial real estate have taken advantage by locking in historically low fixed rate loans. In several cases, refinancing existing loans with prepayment penalties still made economic sense given the savings realized with today's low interest rate financing. If you've been considering a refinance to lower expenses, access additional capital to fund overdue projects, or facilitate additional acquisitions, it's a unique time to take another look at the programs available in today's market.

Most fixed rate lenders price their loans based on US Treasury yields. Many borrowers may be focusing on rising benchmark interest rates, however US Treasury yields today are lower than on January 1, 2016, and at the same time last year. As of March 2, 2016 the 10 year US Treasury yield was 1.84%, compared to one month prior at 1.97%. The average during 2015 was 2.14%. The 10 year US Treasury yield began 2014 at 3.00%. To provide some perspective, below is the average yield on the 10 year US Treasury during the last 5 decades:

1961 - 1969: 4.73%

1970 - 1979: 7.50%

1980 - 1989: 10.59%

1990 - 1999: 6.67%

2000 - 2009: 4.46%

If you believe that ultimately Treasury yields have to return to these averages, today's low interest rate environment offers an extraordinary opportunity to evaluate your long term financing objectives.

Having endured the various economic ups and downs over the past 15 years while working in finance, I can attest that the capital markets for commercial real estate today are healthy and more judicious than prior to the credit crisis of 2008-2009. The pool of varying capital sources is deep, and lender and investor demand for real estate transactions is as strong as we've seen. According to Mortgage Bankers Association, total US commercial real estate loan origination volume reached $497 Billion in 2015, up 24% over the $400 Billion originated in 2014. Over $1 Billion in commercial real estate loans will be maturing daily from 2016 through 2018, and the necessary lender appetite is present to service this need. Owners of manufactured home communities will benefit from this activity, as the debt market for MHC's has expanded in recent years and lenders are seeking to deploy capital on lower risk housing assets.

An Overview of Today's Community Financing Options:

The vast majority of commercial real estate lenders are seeking to meet or exceed their 2015 loan originations volume in 2016. Real estate capital sources in the marketplace are generally very optimistic about lending prospects in the US. More lenders are coming to the realization that manufactured home communities provide a highly stable cash flow superior to other asset classes, with returns that are typically more favorable when compared to conventional multi-housing properties in most markets.

Fannie Mae and Freddie Mac are both Government Sponsored Enterprises, or GSE's, and are charged with ensuring that capital is available to providers of multifamily housing, including manufactured housing. The GSE's are established, reliable providers of non-recourse financing for higher quality MHC's. Fannie Mae can offer fixed rates as long as 20 years, whereas Freddie Mac typically offers fixed rates of five, sever, or 10 years, with up to 30 year amortizations. Both GSE's have the ability to offer supplemental financing, or additional loan proceeds, to their own existing loans as the property's cash flow increases.

Life insurance companies continue to be an excellent source of non-recourse financing for MHC's, often beating out the GSE's on pricing and flexibility of lean structure. Since they are "on-book" or "portfolio" lenders, life companies can offer unique capabilities such as locking your interest rate at application, as well as various customized combinations of loan terms, amortizations, and prepayment options. Similar to the GSE's, life companies can offer forward rate lock options, allowing a borrower to lock in a loan commitment and fixed rate as far out as 12 months in advance of funding.

Both the GSE's and life insurance companies are offering interest-only payment periods, up to the full loan term for more moderate leverage.

An increasing number of commercial and regional banks are also targeting MHC lending. Bank loan features for MHC's include 30 year fully-amortizing loan terms, with low fixed rates for three to 10 years. Some banks can offer non-recourse financing on MHC's at lower leverage points.

CMBS/Conduit lenders provide a non-recourse financing option for owners with communities that would not be considered by the GSE's or life insurance companies. Another alternative is the emergence of several new Debt Funds. These are portfolio lenders that offer higher-leverage specialty and bridge financing, and are best suited for non-stabilized assets and short term turnaround transactions.

So which lender is right for your specific needs? Your selections depends on the profile, age, quality, and location of your community, as well as your loan feature preferences and financing objectives. The good news is that the number of "go-to" sources for MHC financing continues to deepen, as more lenders have taken note that MHC's provide a reliable, low-risk investment.

Zach Koucos is a Director at HFF and is responsible for originating commercial real estate financing throughout the U.S., with a specialized practice in MHC and RV Resort financing. Zach can be reached at: 858-812-2351 Phone; 858-552-7695 fax; and email: He can also be reached on the web at

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