Blog # 503; Copyright @ 16 September 2018; community-investor.com.
Perspective. 'Land lease communities, previously manufactured home communities, & 'mobile home parks', comprise the real estate component of manufactured housing.'
This blog posting is the sole national advocate, voice, official ombudsman, historian, research reporter & online communication media for all North American LLCommunities.
To input this blog &/or affiliate with Community Owners (7 Part) Business Alliance, a.k.a. COBA7, use Official MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764.
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INTRODUCTION: What follows, 'Says a Lot' & 'Does Little', beyond expressing angst & frustration concerning the state of land lease community investment in the U.S. today.
We've Got A Problem!
Consolidation of Land Lease Communities into Property Portfolios,While a Mature Trend For This Unique Income-producing Property Type - Since Syndication Days of the Late 1970s - Appears to Now Be Out of Control & Reason
The problem? Often, but not always, 'outside money' (i.e. foreign investors, hedge funds) coming into this realty asset class,
Consequences? In general, sell-out to next fool willing to part with his/her money;
OR, divide the property portfolio up among disgruntled limited partners;
OR, 'continue to march' as if nothing untoward has happened, hoping for some degree of capital recovery upon disposition of the property or properties.
All three consequences are occurring simultaneously, in different regions of the country.
All the while, do these 'Johnny come lately' property portfolio builders, including those who've been around for awhile (i.e. decades) take active and or leadership roles in state manufactured housing association matters, lobbying, education, and networking? Not usually - unless there's a landlord/tenant legislation challenge, or threat of regulatory action (e.g. rent control), that directly affects them..
Also (almost) gone are the days when sole proprietors developed raw land into land lease communities! Local regulatory barriers to all forms of affordable housing (Recall the deadly zoning triad: NIMBY, her sister LULU; and of course, BANANA!*1) continue to prevail throughout the U.S., despite federal efforts to the contrary. And have you tried to find development capital of late? Good luck with that. Consequently, land lease communities continue to be a scarce investment opportunities - whether 'under development' or as acquisition trophies.
Did you know? There is a published list of the '10 Good Reasons to Own a Land Lease Community'. It's Appendix II (page # 151) in the second edition of SWAN SONG, 'George Allen's History of the LLCommunity Real Estate Asset Class' & 'Official Record of MH Shipments (1955-present day)'; COBA7, Indianapolis, IN. 2018. Available for only $24.95 (post paid) via the Official MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764.
In any event, relative scarcity of the property type is 'reason # 1'. This followed by 2) low annual turnover @ 5-10 percent per annum; 3) stable, competitive rent (usually, in the past); 4) lower operating expense ratio or OER @ 20-40 percent, compared to conventional apartments @ 50+%.; 5) economy of scale; 6) affordable home ownership & equity; 7) recession proof; 8) more opportunities to 'add value' (Think 'Alternative Income To Rent' measures proposed by RE consultant Allen Cymrot); 9) more versatility (Contemporary presence of modular homes, Park Model RVs, Vs for a season, ADUs*2 & more...); 10) opportunity to serve society - as low cost housing and prime source of 'affordable housing'.
So, as a realty asset class, or unique income-producing property type, 'We have a problem!'. What can be done about it? Not much, unfortunately. This is a Free Enterprise economy, and folk are certainly free to be profligate with their money if they desire to do so - and as we all know, 'Fools continue to be born every minute', where buying into the use of OPM ('Other Peoples Money') is concerned!
The only hope I see for salvation here; resolving this problem, is for the asset class to 'grow a resident-focused conscience' and implement principles of professional property management into all properties, small and large, from top to bottom! Will these two measures occur? Not likely.
It's just that, after four decades in this business, seeing the same and similar mistakes made time and again, I truly desire to step in 'more than as a freelance turnaround specialist'; but rather, as a 'homeowner/site lessee advocate', to ensure fairness and reasonableness for our customers, clients, residents! Unfortunately, the present day land lease community business model is not structured to function, and self-govern, in such an altruistic ('benevolent') fashion.
Bottom line? As long as land lease communities are plagued with profiteering taking priority over resident relations, we'll not MAKE MANUFACTURED HOUSING GREAT AGAIN! anytime soon.
1. NIMBY = Not in My Back Yard; LULU = Locally Unwanted Land Use; &, BANANA = 'Build Absolutely Nothing Anywhere Near Anyone!'
2. ADU = Accessory Dwelling Units, a.k.a. Granny Flats
George Allen, CPM, MHM
COBA7, a division of GFA Management, Inc., dba PMN Publishing
Box # 47024,
Indianapolis, IN. 46247
Mike Callaghan Response: Managing Partner, Four Leaf Properties
Thank you George Allen for identifying a critical problem in the MH industry. I’m responding to your “We’ve Got a Problem” blog with an unequivocal “Yes” response. We officially have a problem!
A number of transactions have recently hit the market that suggest an irrational exuberance in MH that is neither informed, nor healthy. There are a very, very large number of new fund managers (I probably talk to 1-2 of them every week, in support of our third-party offerings) who are highly-attracted to the yields in our space, but don’t have a basic working knowledge of the business. They’re literally coming out of the woodwork, and they’re also making a premature commitment to the space before they even understand it. This reminds me of the ARC, Value Family Properties days….it’s 2005 all over again. We’re over-heated. When the market thinks a 6 cap is an acceptable price for a 1960/1970’s, 3-star “vintage” community – we’ve lost our way.
Everyone who has owned those properties understands that there is a silent regulator to profits called obsolescence – it’s definable, it’s measurable and it has to be rationalized over time. You have to invest heavily in older communities – churn old inventory, upgrade mechanicals, upgrade infrastructure - just to maintain your current income levels. That doesn’t even consider the cost of NEW improvements and NEW homes. Everyone wants to focus on the former, but forget about the latter. The barometer for an OER in older communities isn’t 40%...it’s closer to 50%...maybe even 55% if you’re digging deep. And that doesn’t consider the true cash impact on capitalized expenses.
I am not suggesting that re-development isn’t viable. On the contrary, I think it can be very lucrative and very rewarding. But when the delta between interest rates and cap rates falls below 2%, you’re in negative cash flow territory on anything that isn’t running like clockwork. The market is currently rewarding vacancy almost more than occupancy. As an operator just commented to me last week (one who just received an over-ask offer on four properties), “People are paying me more to sell my vacant lots than they are paying me for the full ones”. It’s 100% true.
Taking my example of ARC and Value Family Properties….those models were predicated on buying and operating older communities on razor-thin margins while growing occupancy with (largely) low-end homes – it was simple financial engineering with no backbone. There’s more hungry money on the sidelines than was the case 15 years ago and we’re now a legitimate asset class - conditions that are only making the run-up more acute and more accelerated.
The Case for NEW Homes. Why New? Why Now?
By Mike Callaghan, Managing Partner Four Leaf Properties
If our industry wants to lose the “trailer park” moniker, here’s an idea – get rid of the trailers!
Despite an unprecedented run in occupancy gains and MH property values, our industry is still struggling with legacy perception issues. Despite all of the recent successes, the landscape is still dotted with rusted metal boxes that taint and discount the value of new inventory. Industry-wide, we’re still managing $100B of obsolete, pre-1980s inventory. The answer to our problem, simply put, is that we need to wipe the slate clean and make trailers and trailer park owners go away.
If you’re one of the thousands of operators still sitting on the fence, let’s talk about the ‘why’ and ‘why now’ for new homes.
First, you’re absolutely throwing away your money and your residents’ money on vintage 1970-80 homes. Old homes demand lots of repair. And, if you’re in a climate-sensitive location (warm or hot) your customer is likely losing $100-150/month in energy costs. Why don’t people like to buy 1970s cars? The technology is old. The ride is poor. Maintenance costs are way too high. Does this sound familiar? A low cost, singlewide home can be financed over 15-20 years for $200/month. Isn’t that a better option for you and the customer?
Second, operators in MH who are bringing in new homes in waves are capturing market share at a dramatic rate. There are two very strong forces at play in the housing marketing today – the growing number of seniors and millennial buyers. The country is getting appreciably older, forming a fast-growing, new breed of would-be 55+ buyers who are attracted by the low cost of MH living. Downsizers are attracted to developments with homes priced under $100K with carefree home maintenance and lifestyle amenities. Many lifetime renters, who are seniors on the lower income spectrum, are also turning to new MH homes where they can live more comfortably on a fixed income.
Millennial buyers, on the other hand, are value-centric, covet flexibility in lifestyle, and aren’t willing to sacrifice life experiences for a 30-year mortgage on a home. Using the internet and social media to validate their decisions, millennials are becoming strong advocates for buying new homes and are measuring the value against apartment living. What you won’t find on the internet is people talking about the great deal they got on a used trailer. Don’t look now, but those young buyers are hitting their ownership peak in the next few years – so if you’re not poised, you’re likely to miss the greatest influx of home ownership since the baby boomers.
The final argument for new homes is the value to the owner. If you’re a value purist who just chases yield on your investment, rethink the penny-pinching approach and chase the real money. Cap rate compression hasn’t happened simply because markets have improved. If that were true, we would have seen this type of compression at many points over the last 30 years, and we haven’t. What’s different is the inherent quality of the product. New manufactured homes are not just comparable to apartments – they’re better. Communities that are commanding increasingly higher prices are doing so because the NEW product is perceived, even by the financial community, to be superior. If you want top dollar, the writing is on the wall. Replace the old with the new and you’ll reap the benefits exponentially.
Why now? Market momentum is building. Quality NEW homes and financing options are available. As an industry, we’ve matured and are ready to collectively trash the trailers.
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