‘We’ve Got A Problem!’ – Revisited….
Blog # 505; Copyright @ 30 September 2018; community-investor.com
Perspective. ‘Land leases 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 North American LLCommunities.
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INTRODUCTION. OK, here it is; a second blog posting from COBA7, in one week!
You know the subject matter has to be important, for that to occur! And it is!
When in CA., earlier this week, for MHI’s annual meeting, ‘We’ve Got A Problem!’, relative to overvaluing land lease communities, then oft times profiteering at the expense of homeowner/site lessees, was commonplace conversation among some owners & operators gathered there. Wish I could tell you the matter was on the agenda of the National Communities Council division, but it wasn’t. Point? If national advocacy entities won’t address this timely challenge (‘Maybe it doesn’t have a practical solution after all’), it’ll likely play out on one or another public (e.g. social media) platforms available today. I’d prefer that not happen, but what other alternative is there? MHARR has no land lease community members to engage; NAMHCO is busy recruiting new members; and, COBA7 frankly, is focused on providing unique products and services needed and used by property owners/operators invested in the realty asset class.
So, read what follows with this thought in mind: ‘Where do we go from here?’ Nowhere? Or somewhere that, in time and with effort, helps MAKE MANUFACTURED HOUSING GREAT AGAIN! Achieving that goal translates into more HUD-Code housing shipments, and more filled (now vacant) rental homesites nationwide!
‘We’ve Got A Problem!’ – Revisited….
Upon occasion, this COBA7 blog posting ‘touches a nerve or two’ with readers, and we receive ‘from a few to many’ pithy and thought-provoking responses from throughout the manufactured housing industry and land lease community real estate asset class. And that’s certainly been the case with blog # 503, posted 18 September 2018. Here the sequel….
In the ‘We’ve Got A Problem!’ blog, we endeavored to make this case:
‘Consolidation of Land Lease Communities into Property Portfolios, While a Mature Trend ..Since Syndication Days of the Late 1970s – Appears to now be Spiraling Out of Control and Reason!’*1
Wrote of naive, ‘outside money’ – though not in all cases, corralling larger (i.e. 200+ rental homesites apiece) land lease communities from an already limited, stagnant inventory of such properties nationwide. Then the jacking of rental homesite rates to levels out of proportion with other forms of multifamily rental housing in the same local housing market*2; and, buying new HUD-Code homes with little to no idea ‘how to sell them’, let alone ‘seller-finance them’; often winding up with vacant units or desperation rentals, and troubled income-producing properties..
Anyway, this line of thinking, via blog posting # 503, inspired interesting – and as penned earlier, ‘pithy & thought-provoking responses’ from blog floggers (‘readers’) – all active in one or another segment of the manufactured housing industry. And, in this case, I’ve purposely ‘saved the very best for last’ – so don’t miss it! Here goes…
• “GEORGE. If you’d been a STREET DEALER 20 years ago, you would have written this expose’ from that perspective!” BB Hmm. Think about it. That’d have been 1998, when manufactured housing industry shipped 372,943+/- new HUD-Code homes; mostly via ‘dealers’ into (then) manufactured home communities spoiled by a far more rambunctious housing finance environment than exists today.*3
• No time frame cited here, but: “When we did the right thing for our customer, priced the new home reasonably for them, with profit for us, then serviced the tar out of the customer when needed, what happened? We Won; We Prospered; We Survived to fight another day when times were touch. This focus – provided the customer with a product, service, and price that worked for THEM and reasonably profited us.” NCB
• “Thanks for this! I share some of your concerns. I think one thing big portfolio owners have, compared to small portfolio Mom & Pop-size owners/operators is DEEP POCKETS. They’re able to make waves, while we have to convince a few people to make certain moves, rather than broad-brushing matter(s). An apt example of this is how GSEs (Fannie Mae & Freddie Mac), via Duty to Serve (‘DTS’) plans, are putting MH loans back into their product line. Bottom line for me? I do not see the consolidation (trend) as being too scary at this point in time.” JS
• “I think focusing on the customer can be not only a remedy for many ills in the industry today, but Good for Business. In the Manufactured Housing Manager class I attended, Katie Hauck, MHM, did an excellent job demonstrating the value of a healthy work and community culture, something that’s missing in other investor/operator educational products I’ve seen . Those communities with a sense commaradarie, and ownership that puts the residents first, will have staying power.! Rents will be reasonable, no crazy finance structures in place, just solid, value-based residency and community!” JS (Lightly edited. GFA)
And now this gem from Mike Callaghan of Four Leaf Properties, Chicago, IL. In my opinion, this is a Must Read for everyone owning/operating one or more land lease communities throughout the U.S. today. Mike also presented this important and timely message at the 27th International Networking Roundtable earlier this month, and will do so again, at the SECO Conference in Atlanta, GA., 10 & 11 October. Want to attend? Reach out to firstname.lastname@example.org See you there! Now, back to Mike:
“I’m responding to your ‘We’ve Got A Problem!’ blog, with an unequivocal ‘YES’ response. We officially have a problem!” (What follows has been lightly edited. GFA)
• A number of transactions have recently hit the market, suggesting an irrational exuberance in manufactured housing that’s neither informed or healthy. There is a very large number of new fund managers (‘I probably talk to one or two 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 model. They’re literally coming out of the woodwork, and they’re also making a premature commitment to the asset class before they even understand it. This reminds me of the ARC, Value Family Properties days.*4 It’s year 2005 all over again.
• Everyone who has owned land lease communities understands there is a silent regulator to profits called obsolescence – it’s definable, it’s measureable, 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 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 of an OER (operating expense ratio) in older communities isn’t 40 percent…it’s closer to 50 percent…maybe even 55 percent, if you’re digging deep.*5 And that doesn’t consider the true cash impact of capitalized expenses.
• I am not suggesting redevelopment isn’t valuable. On the contrary, I think it can be very lucrative and very rewarding. But when the difference between interest rates and cap rates falls below two percent, 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 rental homesites than they are paying me for the full ones.” That’s 100% true!
• Taking my examples 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 now, 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.*6
Well, that about covers the responses to date. Is there something you’d like to add or contest? If so, please respond ASAP via email@example.com or (317) 346-7156. Remember. We’re all in this ‘business environment’ together; so, let’s ‘work together’ to MAKE MANUFACTURED HOUSING GREAT AGAIN!
An Important REMINDER. If this blog # 505 winds up being posted on Friday, 28 September, know that’s also the DEADLINE date for submitting completed 30th anniversary ALLEN REPORT questionnaires via FAX: (317) 346-7158. If you need a blank form, phone (317) 346-7156 and request it. My goal is to make the 2019 ALLEN REPORT (researched & published since 1989!) the Best Ever. Why? Think about it…
George Allen, CPM, MHM
COBA7, a division of GFA Management , Inc., dba PMN Publishing.
Box # 47024, Indianapolis, IN. 462437
1. National land lease community portfolio counts over a three decades long period of time: From 25 known (then) manufactured home community portfolios in 1987 to more than 500 land lease community portfolios today, per SWAN SONG; COBA7, IN., 2017, page # 19. Minimum portfolio requirement? Own/fee manage five standalone land lease communities and/or 500 rental homesites.
2. Traditional rent rate proportion/comparison = 3:1 ratio; e.g. conventional 3BR2B apartment rental rate roughly three times land lease community rental homesite rate, in same local housing market – with utility expenses treated similarly in both instances. Contemporary proportion, oft where largest properties are concerned, especially in Sunbelt regions = 2:1 ratio. For example. $900/month apartment rental rate divided by three = $300/month comparable LLCommunity renal homesite rate, versus $900 divided by two = $450/month rate today, in many instances.
3. Why (+/-) clarification following annual shipment volume figure? Until year 2013, monthly MH shipment totals, researched and published by the Institute for Business Technology & Safety (‘IBTS’) – HUD’s perennial contractor for this valuable service, were annualized differently by two national advocacy entities representing HUD-Code manufactured housing. NOW there’s but one official annual total. For complete list of annual shipment totals going back to 1955, refer to Figure A in aforementioned SWAN SONG text.
4. Truth be told ,additional names can be added to that list. For example, in my opinion and during my career, beginning with Ellenberg (or Ellenburg) Capital Corp and GEF Communities, Inc., of the 1970s and 1980s; then American Landlease, a REIT, in the 1990s….And the list goes on…
5. For official land lease community chart of operating expenses accounts, see Figure F; again, in the SWAN SONG text, available from COBA7 for only $24.95 (postpaid) via Official MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764.
6. Asset class legitimacy, for today’s land lease communities, can be traced to the mini-REIT wave in 1994 & 1995, when (then) MHC, Inc., went public as a real estate investment trust, followed by Sun Communities, Inc., and Chateau Communities, Inc. Note. UMH Properties, also a REIT, predates the 1990s REITs by a decade. For list of all land lease community REITs to date, read the 29th annual ALLEN REPORT as Appendix I in aforementioned SWAN SONG.