Financing Your Community
By: J. DiMarco and Gerard D. DiMarco
Almost every community owner at some point in time will experience the need for financing of some kind. There have been many ups, downs, and complexities of the financial markets over the past 25 years, and the impact these fluctuations have had on available loans has been huge. In this article we will address some of the important issues that community owners may face during the lending process.
Lenders are back after the credit crunch of a few years ago
Since the financial crisis that began around 2007, the capital markets began to slowly re-emerge in late 2010 and early 201 for manufactured home community lending on a wide scale. Today’s lending market, combined with historically low interest rates, is the strongest it has been in years. Lenders are eager to provide long term fixed rate, non-recourse loans with 30 year amortizations on manufactured home communities. We are currently helping a customer refinance a five year commercial mortgage-backed security (CMBS) loan that closed in March 2010 (our records indicate it was one of the nation’s first CMBS loan post financial crisis) with a ten year fixed rate loan at less than 4.25%. The existing loan the borrower is paying off had a rate of 6.5%.
A few other real world examples include recently helping a client lock a ten year fixed rate loan at 3.51%! Additionally, another client just secured a 4.2% long term fixed rate, replacing a rate of 6.5% from the previous note. The market has improved dramatically!
There are currently numerous lending platforms and options available for community owners including conduit lenders (CMBS), life insurance companies, Fannie Mae, Freddie Mac, credit unions, and traditional bank loans. There are also a wide range of product options and features available in today’s financial market including bridge lending, short term floating rate debt, interest only, mezzanine debt, and flexible prepayment options. With so many options available, finding loan that suits your specific needs as a manufactured community owner is possible.
How to obtain a mortgage
There are two major components that lenders review when analyzing a loan request; the guarantor, and the property itself. On the guarantor side, most lenders look for an individual to have a credit score of at least 600 and a sufficient net worth. Even though most of the loans we offer are non-recourse, our lenders still look for those minimum requirements. On the property side, as a general rule, our lenders require a minimum loan amount of $500,000, a minimum debt service coverage ratio of 1.25x, and paved roads. There are also numerous aspects to manufactured home communities that make them unique compared to other asset classes.
Every community can qualify for a loan!
We have financed deals with low occupancies, private utilities, and low populations. However, having a better understanding of what lenders prefer can be helpful in assessing your property, or a potential acquisition, in preparation for a new loan. The type of loan and benefits of the mortgage depend on the “checklist” of items a lender reviews. Some of the key components that determine the rate and terms of a loan include:
- Community quality
- Borrower experience and equity
- Loan-to-value (LTV)
- Financial and occupancy trends of the property
- Infrastructure quality – roads, utilities, lots
The best case scenario from a lender’s perspective is a high quality community with an experienced borrower. However, most lenders are willing to look at all types of communities regardless of their quality, especially if there is a “story” to be told.
For example, we have provided long term fixed rate financing on two star communities with occupancy issues. Based on the buyer’s qualifications and track record, we were able to show that the park was being mismanaged and was in need of a new owner to improve deferred maintenance items, reduce expenses, and add occupancy. For the most part, one or two negative aspects of a property do not eliminate the property as a candidate for financing.
Lock in a long-term fixed rate
Interest rates are currently at all-time historic lows and it’s a great time to take advantage of these low rates by fixing the rate for the long term. As previously stated, we just locked rate for a client on a ten year fixed rate deal at 3.51%. On loan requests of at least $1,000,000, most of our lenders offer 10-15 year fixed rates with payments based on 30 year amortization schedules. For most acquisition loans, and for the refinance of high-quality communities, our lenders will even offer interest-only up to five years on a ten year deal. A long term fixed rate can help eliminate market rate risk for an entire decade and help create stability regarding debt repayment. If your loan request is below $1,000,000, most lenders can still provide five to seven year fixed rates with competitive pricing.
The differences between a refinance and an acquisition loan
For the most part, refinance and acquisition loans are very similar. For a qualified property, both loans would feature a maximum loan-to-value of 75%, the potential of a ten year fixed rate, and amortizations up to 30 years. The main difference comes down to seasoning and how quickly a refinance is requested. On a purchase, assuming the loan meets sufficient debt ratios, a loan up to 75% of total acquisition costs is available. On a refinance, most lenders look for at least two years of ownership and seasoning before they are willing to offer 75% of the property’s market value. If a borrower is seeking a refinance within two years of owning the property our lenders will focus on the purchase price paid plus the amount of value added and capital investments to determine the property’s maximum loan amount.
Financing for acquisitions that require improvements and value added work
Over the past few years with the strong resurgence and variety of lending platforms in the market, programs have become available for properties in need of stabilization. Lenders are willing to offer floating and short term lending options for borrowers seeking short term flexibility, including interest only. These programs are a perfect fit for properties that are in need of a turnaround or for guarantors that are seeking limited to no prepayment penalties based on their short term goals. With the interest only option, a borrower can buy a community, perform the necessary improvements to increase value, and then refinance into a long term fixed rate loan once the property is stabilized.
In summary, current interest rates for manufactured home community loans are at historic lows. Well qualified parks are seeing ten year non-recourse fixed rates at under 4%. Based on these rates, reviewing your community’s financial position maybe worth considering. In addition, to long term fixed rates, lenders can offer flexible rates and terms to fit a borrower’s specific strategy.
Anthony J. DiMarco and Gerald D. DiMarco are the managing directors of Security Mortgage Group. Their company has been providing commercial and manufactured home community financing since 1989. They may be contacted at 585-423-0230, or through their website: securitymortgagegroup.net.
WMA Reporter – March 2015