Blog # 533 @ 14 May 2019; Copyright 2019; www.educatemhc.com
Perspective. ‘Land lease communities, previously manufactured home communities, and earlier, ‘mobile home parks’, comprise the real estate component of manufactured housing
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INTRODUCTION: They to run in pairs, questions businessmen & women in manufactured housing & land lease communities ask from time to time. Today, the most frequent ones are:
• What’s with private equity firms overpaying for land lease communities, then greatly jacking rental homesite rates? Will there be a day of reckoning when they realize homeowners/site lessees will no longer put up with greed devaluing of their manufactured homes, and simply ‘walk away’?
• OK, I really like being fully informed about the, in this dual case, ‘industry & realty asset class’ in and with which I – and our firm, are invested and involved. What should I be reading each week, month, and quarter, to stay fully informed?
I
Best of Times & Worst of Times.
Land Lease Communities (a.k.a. manufactured home communities) in the Spotlight of Investor Interest, Homeowner/site lessee Concern, & Landlord/Tenant Legislation
From coast to coast; starting in the Pacific Northwest, via upper Midwest, and through to New York state, land lease community matters are the focus of much attention these days. How so? Here’s a sampling of contemporary attention-getters:
• It’s a historically extravagant Sellers’ Market among institutional investment grade land lease communities nationwide – with no immediate end in sight!
• When overvalued land lease communities ‘sell’, expect inordinate rental homesite rate increases to soon follow! Likewise, no immediate end in sight to this practice either.
• Unintended consequences, or not, of mostly out-of-state acquisitions of these unique, income-producing properties, plus the continuing and elusive search for chattel capital pursuant to on-site sale of new HUD-Code manufactured housing, have precipitated an uptick in regulatory legislation and the enforcement thereof….
During 40 years as an owner/operator of land lease communities, I’ve not seen a more exaggerated Sellers’ Market than the one playing-out today. Gone, for now anyway, are the days when an ‘average’ (i.e. 10 percent income capitalization rate) 100% occupied land lease community sold for say $14,000 per rental homesite (e.g. New Rule of 72: 200 sites X $200/month rent X 72 = $2,880,000 divided by 200 sites = $14,400/site).*1 Today, expect the same investment property to sell for multiples of the $14,400 per rental homesite! For example: 3 X $14,400 = 43,200/site X 200 sites = $8,640,000.00. Yes, that’s where we are today.
Why? Here’re ’10 Good Reasons to Own a Land Lease Community’. These are quoted from page # 151 of SWAN SONG, the first published history of the realty asset class, & official record of MH shipments from 1955 to the present day.*2
1. Relative scarcity! Due to land use regulations, i.e. NIMBY, LULU, BANANA*3
2. Low annual (home & tenant) turnover @ 5 & 10% respectively!
3. Stable, competitive site rent! (When in 3:1 sync in local housing market.*4
4. Lower operating expense ratio (OER @ 40+/-%) than apartment communities
5. Economy of scale! (100+ sites = institutional investment grade properties)
6. Affordable home ownership & equity, when monthly PITI & site rent align
7. Recession proof! No other more economically-priced housing in U.S. today!
8. More opportunities to ‘add value’ via home sales, rental units, parts & services
9. More versatility! Up to seven types of shelter now sited therein.*5
10. Opportunity to serve society by providing truly affordable housing!
Then, all too often these days, comes the inordinate rental homesite rate increase, especially when the just-acquired land lease community has been charging a ‘below market’ rate before the ‘closing’ of the transaction.
And because the new, often out-of-state, and frequently private equity investor has overvalued said land lease community to motivate seller to sell, a significantly increased income stream, to pay for operating expenses and new debt service, has to come from ‘somewhere’; that somewhere being from homeowners/site lessees already in place. Sometimes the buyer pressures the seller to raise site rents before ‘closing’ occurs, and sometimes the seller refuses, leaving the task for the buyer. In any event, the management and tenant environment changes. Not only that, if on-site salaried management has been in place for a decade or longer, expect an immediate significant $ savings to be made in administrative labor cost, as they are replaced.
It seems attempts to regulate rent rate adjustments and loan financing among land lease communities is all the rage these days, as social activist organizations seek remedies to what they view as injustices foisted on land lease community homeowner/site lessees.
With all that said, what’s the most frequent question I’m asked these days?
When will the next Great Shakeout occur throughout the land lease community realty asset class? I don’t know, but a review of past ‘shakeouts’ provides hints as to a reasonable answer:
• Mid-1970s. Remember 1973, when 579,940+/- new ‘mobile homes’ were shipped nationwide?*6 Well, for good reason(s), the industry became federally regulated via HUD-Code enacted in 1974 and implemented in 1976. Results? Shipments plunged to 221,091+/- new manufactured homes by year 1980! Another immediate consequence? Tens of thousands of new ‘mobile home parks’ were developed during that time frame; but the source of new homes was effectively halved. So, thousands of newly developed, partially-filled mobile home parks went into foreclosure, not fully recovering until the late 1980s and early 1990s, during resolution of the…
• Savings & Loan Crisis of 1980s. Between 1989 & 1995, the Resolution Trust Corporation (‘RTC’) a federal government entity, sold the realty assets of 747 thrifts – including many many mobile home parks cum manufactured home communities. These ‘pennies on the dollar’ acquisitions – often by limited partnerships, followed by a major federal tax law change in 1986, effectively prepared the way for a…
• Mini REIT Wave of 1994, that continues to this day, via ELS, Inc., Sun Communities, Inc., & UMH Properties, Inc. REIT holdings have grown substantially, from 88,450 rental homesites during 1994, to 300,566 sites by year end 2018!*7
• Turn of the Century Shakeout & Paradigm Shift. Began with a short renascence of 372,943 new HUD-Code homes shipped during 1998, followed by industry’s loss of easy access to chattel capital – for on-site loans on new HUD-Code homes installed in land lease communities, plummeting to only 49,789+/- homes shipped during 2009. Results? 300,000+/- repossessed manufactured homes, loss of 10,000+/- independent (street) MHRetailers, & realization that land lease communities, to survive and thrive, must buy new homes (i.e. Community Series Homes & other models) directly from factories, sell, and often seller-finance them on-site.*8 This paradigm shift continues to this day.
So, with all that said, what might we expect to occur going forward into years 2019 & 2020?
Right now, your GUESS is as good as mine. Already I hear sounds (reports) of structural weakness and strain as some hired guns (high salaried, but not PM credentialed executives) struggle with the basics and nuances of new HUD-Code housing installation, marketing & sales, as well as recource-secure seller-financing. So watch and listen carefully going forward!
End Notes.
1. For those unfamiliar with the New Rule of 72; the $2,880,000 capitalized income valuation is the same as one computes using the ‘long hand method’ as follows: 200 sites X $200/month site rent X 12 months X .6 (reciprocal of 40% Allen Model OER for land lease communities), divided by .1 (i.e. 10% cap rate) = $2,880,000.
2. SWAN SONG available for purchase via www.educatemhc.com
3. 3:1 Rule: 3BR2B apartment rent = $900/month? Then LLCommunity = $300+/-month
4. ‘Not in my back yard!’ & ‘Locally Unwanted Land Use!’ & ‘Build Absolutely Nothing Anywhere Near Anyone!’
5. Pre-1976 ‘mobile homes’, post-1976 manufactured homes, modular homes, ‘park model RVs’, RVs for a season, stick-built homes fabricated on site to imitate manufactured homes, & of late, Tiny Houses.
6. ‘+/-‘ notation after most annual MH shipment volume totals. Once again the necessity of having to explain something that should not occur. HUD’s contractor, the Institute for Building Technology & Safety (‘IBTS’) publishes monthly shipment volumes of HUD-Code manufactured homes nationwide. These figures are reported, as published by IBTS, by HUD, MHARR, NAMHCO, & EducateMHC. Only MHI deletes the number of DESTINATION PENDING units one month and adds them back the following month, ‘changing’ the monthly total reported by HUD’s contractor.
7. 30th annual ALLEN REPORT, a.k.a. ‘Who’s Who Among Land Lease Community Portfolio Owners/operators Located Throughout North America!’ Available only via www.educatemhc.com
8. Community Series Home (design) agreed upon by HUD-Code manufacturers and land lease community owners/operators on 28 February 2009 during a MHInitiative ‘think tank’ gathering at the RV/MH Hall of Fame in Elkhart, IN. CSH models are generally singlesection, or modest-sized multisection in configuration, have pitched/shingled roof systems, a front end porch, and durability-enhancing features intended to speed and control costs of ‘make ready’ between homeowners and or unit renters.
II.
Eight Key Steps to being Fully Informed!
No big mystery here. If you’re into manufactured housing & land lease communities as an executive, manager, investor, the first four of the following eight bullet point highlighted trade publications are nothing short of being MUST READS. The fifth bullet point identifies the sole, relatively high-priced media focused on strategic and timely information needs of the top execs throughout the industry and realty asset class. And bullet points # 6, 7, & 8 are the proverbial ‘icing on the cake’ periodic Press Releases and news alerts distributed digitally by the Manufactured Housing Institute (‘MHI’), Manufactured Housing Association for Regulatory Reform (‘MHARR’), and National Association of Manufactured Housing Community Owners (‘NAMHCO’)
WEEKLY
• FREE blog posting (the one you’re reading NOW) for anyone in manufactured housing & land lease community ownership/operations. Simply access www.educatemhc.com and request to be put on the distribution list. It’s that simple and accessible to YOU.
MONTHLY
• Allen Letter. A digital publication, distributed continually since 1989, is the oldest trade media serving, primarily, land lease community owners/operators throughout the U.S. & Canada. HUD-Code housing manufacturers subscribe to stay abreast of what’s happening within the fastest growing market for their unique, factory-built housing product. Cost? Only $135.95/year for 12 monthly issues. To subscribe, visit www.educatemhc.com
QUARTERLY
• MHInsider. While the newest national MHIndustry trade publication, already into its’ second year, it has already eclipsed the coverage and presence of the magazine and tabloid it replaced: Manufactured Home Merchandiser and The Journal. Themed to showcase whatever regional or national trade show event is occurring during said quarter, the magazine also contains features by a plethora of writers, along with an Allen Legacy column in each issue. To subscribe, visit www.mhvillage.com
• Manufactured Housing Review. This online e-zine has set a new and higher standard for news coverage online than what existed beforehand! Buttressed by a stable of industry writers, covering specialty topics, the publication has made itself a ‘must read’ experience. To subscribe, visit www.manufacturedhousingreview.com
SPECIALTY PUBLICATION
• The Allen CONFIDENTIAL! Digital business newsletter has been serving the manufactured housing industry for more than a decade, in large part tracing the unfolding of the ongoing paradigm shift reshaping manufactured housing distribution since the turn of the century. It’s most well-known for the ‘advance news’ it shares confidentially with subscribers, facilitating strategic business decisions that otherwise would have been made with less guidance. To subscribe, visit www.educatemhc.com Cost? $544.95/year for 12 monthly issues
OTHER NEWS RESOURCES.
• MHI. Visit www.mhi.org
• MHARR. Visit www.mhar.org
• NAMHCO. Visit
So, are YOU presently ‘fully informed’, or about to become fully informed, as you take steps to read this blog weekly, the Allen Letter monthly, MHInsider and Manufactured Housing Review quarterly, and Press Releases and news alerts from MHI, MHARR, & NAMHCO? And don’t forget the Allen CONFIDENTIAL! This is the ‘sleeper’ of the eight resources designed to position you successfully as you make key business decisions.
III.
Still Making Up My Mind…
To identify or not, elected leaders (board members) of MHI, MHARR, & NAMHCO.
Recently, Mark Weiss, president of MHARR, in a treatise titled: ‘Lead, Follow…or Get Out of the Way’, told how his board has decided to ‘take the bull by the horns’ to launch a new post-production national advocacy entity to represent interests of these segments of the manufactured housing industry. At the time, I suggested MHARR’s ‘not identifying’ board members by name, was a major flaw in the plan. After-all, who’d you rather follow? The leader(s) you know or ones you don’t know? Well, I’m ‘working’ on the matter, relative to all three bodies: MHI, MHARR, & NAMHCO. So keep reading this blog to ‘stay informed’. Also…
If you’d like to do your own ‘leadership research’, visit www.guidestar.org to review, for a price, the #990 tax forms, to learn the names of association board of director members.