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Reproduced from an article in the Journal of Manufactured Housing
by: Edward Hicks, Lic. R.E. Broker, Lic.
Mortgage Broker
Sellers
pricing their community must understand investors buying a m/h
land lease community as an investment vehicle must compete with
other types of investments. Community pricing that made sense
a few weeks or months ago, may not be valid for today's market
conditions. Interest rates change regularly.
Investor's expectation of yields also change
regularly.
Although m/h community
investment may be much more complicated than presented here, for
most properties, these basic principals will generally apply. In this explanation Cash
Flow before Taxes is analyzed, as opposed to the less popular EBITDA
(Earnings Before Interest, Taxes, Depreciation and
Amortization).
INCOME/EXPENSE ANALYSIS
For a typical Astabilized@ real estate income property, the best way to determine value is
to use the "income" approach. This may be
expressed as a simple equation:
Value=NOI/Cap Rate, where NOI=GPI x (1-V&C) x
(1-EXP)
NOI= Net Operating Income, expressed in
$
GPI=
Gross Potential Income, expressed
in $
V&C=Vacancy & Collection, expressed as a
percent %
EXP=Expenses, expressed as a
percent
%
The NOI I
for a property with 100 sites at $250 per month, with a 7.0% vacancy
& collection factor, and 38% operating expenses (including
Aafter the sale@ property taxes, $50 per site per year
maintenance reserves, and a 6.0% property management fee) would be
calculated as follows:
100 x $250 x 12
= 300,000
Gross Potential Income
$300,000 x 0.93
=
279,000
Adjusted Gross Income
$279,000 x 0.62 =
$172,900
Net Operating Income
At a Acapitalization rate@ of 9.0% this property would have a
market value of:
$172,900/0.09= $1,922,000 say $1.925M, or $19,250 per
site.
This would be a Agross rent multiplier@ of 77 times the monthly rent, for
those that use that method. The problem with "gross rent
multipliers" is that they fail to take into consideration the true
operating expenses of a community.
At an 8.5% cap rate,
the community would be worth $2,034,117 or $20,342 per site.
This would be a gross rent multiplier of 81 times the monthly
site rent.
MORTGAGEES (LENDERS) TYPICAL UNDERWRITING
Institutional lenders
(mortgages) have the following typical underwriting rules: Debt Service Coverage ratios
of from 120% to 130%, typically 125%. This is defined as the ratio
of NO to the DS, combination of the interest and principal
payment. FHA guaranteed
loans are 110% DSC
NOI is defined after using
the Lender=s pro-forma vacancy & collection,
property taxes, management fee, and maintenance reserves. This may not represent the
actual current levels, but may represent the lenders conservative
underwriting guidelines.
Amortization is typically 25
or 30 years. FHA
guaranteed loans are up to 40 years and the term is typically for 7
to 10 years. FHA
guaranteed loans are up to 40 years.
Prepayment or defeasance may
be based on a Ayield maintenance@ calculation, or may have other methods
of determining the balance for an Aearly@ payment of the loan. FHA guaranteed loans provide
for a 10 years no prepayment or 5 years with a 5%, 4%, 3% etc.
annual declining penalty if elected at Initial Endorsement. There may be a slightly
higher rate for the FHA guaranteed loan 5 year pre-payment
option.
Loans are typically
not more than 75% or 80% of appraised value. FHA guaranteed loans may be
as much as 90% or 95% depending on the program. The rates are typically tied
to an index like LIBOR, Bank Prime Rate or 10 year Treasuries. FHA guaranteed loans are
tied to 10 year treasuries, and are fixed for the term. And, most loans are
non-recourse, or partial recourse, depending on the
underwriting. All FHA
guaranteed loans are non-recourse.
SELLER
FINANCING
There are no established
Arules@ for seller financing, but are created by
seller=s attorney to meet the seller=s needs and protection. In general, interest rates
and terms should be more attractive than the seller would obtain if
they had re-invested the cash proceeds.
GENERAL OBSERVATIONS:
If the property is
not going to be financed by an institutional mortgage
(lender), then the guidelines for maintenance reserves and
management fee may be minimized or eliminated, depending on the
lender=s underwriting. This is especially true when
there is a Apurchase money mortgage@ (seller financing) involved with the
sale.
Many sellers especially
those with smaller or older properties, when listing their property
for sale often
don't include maintenance reserves, or new
property taxes in the expenses.
Especially with smaller
parks, many sellers often
don't include any on site management fee since
they often live in the community and manage it
themselves.
A
"CAP RATE" VALUATION ANALYSIS
The following objective
method of analyzing a community=s value is not based on
anyone=s rules, but is based on many years
of observations. No one
"sets" cap rates, but rather they are set by buyers and sellers,
taking into account market conditions, cost of capital, type of
community, size and age of the community,
etc.
Using the following categories of
various communities:
AGE RESTRICTED 55+ COMMUNITIES
:
A.
Major amenities, no rentals, public
utilities
B.
Amenities, no rentals, public
utilities
C.
Amenities, no rentals, on-site
utilities
D.
No or minimal amenities, no rentals, on-site
utilities
E.
No or minimal amenities, some rentals, on-site
utilities
F.
No or minimal amenities, many rentals, on-site
utilities
Under 50
sites
50-100
100-200 200-300 300 or
more
A.
- -
7.25
7.00
6.75
B.
- - 7.50
7.25
7.00
C.
-
8.00
7.75
7.50
7.25
D. 8.50
8.25
8.00
7.75
7.50
E. 9.00
8.75
8.50
8.25
8.00
F. 9.50
9.25
9.00
8.75
8.50
NON-AGE
RESTRICTED, FAMILY COMMUNITIES
:
G.
Major amenities, no rentals, public
utilities
H. Amenities,
no rentals, public utilities
I.
No or minimal amenities, no rentals, on-site
utilities
J. No
or minimal amenities, 10% or less rentals, on-site
utilities
K.
No or minimal amenities, substantial rentals, on-site
utilities
L.
No or minimal amenities, mostly rentals, on-site
utilities.
Under 50 sites
50-100
100-200 200-300 300 or
more
G. -
9.50
9.25
9.00
8.75
H.
- 10.00
9.75
9.25
9.00
I.
11.50
10.50 10.00
9.50
9.25
J. 12.00
11.00 10.50 10.00
9.75
K. 12.50
11.50
11.00 10.50
10.25
L. 13.00 12.50
11.50 11.00
10.75
The range of ACap Rates@ for community pricing are based on
several investor preferences:
C Larger
communities are preferred over
smaller
C Expenses
as a percentage of income are typically lower larger
communities
C Age
restricted communities are preferred by many
investors
C Public
utilities are preferred by virtually all
investors
C No rental
homes is preferred by most
investors
For example, an age
restricted community (Class A) with 350 sites, major amenities, no
rental homes, and public utilities with a $300 per month rent, 32%
expenses, would have a $
856,800 Net Operating Income
At a 7.75% cap rate, the
community would have a value of $11,055,483. If the community had only
160 sites, with on-site utilities, more modest utilities, using a
cap rate of 8.75% the value would be
$8,972,000.
The same community if
non-age restricted, 350 sites, 38% expenses, with modest amenities,
and public utilities would have an NOI of $ 726,516, and at an
8.75% cap rate, the valued would be $8,303,000. If the community had on only
160 sites, with on-site utilities, using a cap rate of 12% the
community would be worth $6,054,000.
The range of ACap Rates@ for community pricing are based on
several investor preferences:
C Larger
communities are preferred over
smaller
C Expenses
as a percentage of income are typically lower larger
communities
C Age
restricted communities are preferred by many
investors
C Public
utilities are preferred by virtually all
investors
C No rental
homes is preferred by most
investors
For example, an age
restricted community (Class A) with 350 sites, major amenities, no
rental homes, and public utilities with a $300 per month rent, 32%
expenses, would have a $
856,800 Net Operating Income
At a 7.75% cap rate, the
community would have a value of $11,055,483. If the community had only
160 sites, with on-site utilities, more modest utilities, using a
cap rate of 8.75% the value would be
$8,972,000.
The same community if
non-age restricted, 350 sites, 38% expenses, with modest amenities,
and public utilities would have an NOI of $ 726,516, and at an
8.75% cap rate, the valued would be $8,303,000. If the community had on lay
160 sites, with on-site utilities, using a cap rate of 12% the
community would be worth $6,054,000.
OPERATING EXPENSE VARIABLES
Operating expenses will vary
widely with the size of the community, type (age restricted or
family), water sewer & trash utilities billed by service company
or provided by the community at no cost, other services such as lawn
maintenance and/or snow plowing, location which as may affect
expenses such as snow plowing, and the local property tax structure,
etc.
Expenses in larger
communities may be as low as 28% to 30%, medium size communities may
be from 32% to 38% and smaller communities or communities with may
be as high as 40% or more, subject to the above
considerations.
OTHER FACTORS AFFECTING VALUES
Other factors which affect
the value but which are more subjective, include: age & physical
condition, obsolete (size) sites, proximity to Schools, day care centers,
weekly shopping,
regional centers, transportation routes, major thoroughfares, public
transportation, airports, downtown, employment centers, job centers,
etc. Universities,
colleges, museums, recreation: golf courses, ski centers, municipal
pools, beaches, natural amenities: lakes, seashore, mountains, etc.
are also important to review.
When considering adjacent
and surrounding properties most are intuitive: residential is
positive, Industrial is negative, commercial is neutral, land fill:
negative, etc.
Also to be reviewed are area
housing alternatives:
apartment rents, sizes, location; single family entry level
home prices, sizes, location; build-able home sites, prices, sizes,
location and other m/h land lease communities or sub-divisions; home
types, singles/doubles/triples, add ons, expansion units, etc.; home
standards: shingle roof, carports, garages, low silhouette
installation, patio rooms, matching skirting, matching storage
sheds, etc.
A little more difficult to
assess but important are: area
m/h Asocialization@ factors (very subjective) and pride of ownership of
residents homes
Many good investment
properties are not necessarily listed with m/h community experienced
brokers, and since it may be a long, tedious process to find a
suitable property meeting a buyer=s investment goals, using a broker as
buyer=s agent will assure the buyer a good
investment opportunity and the broker adequate compensation for the
time spent.
The
buying and selling of m/h land lease communities requires a good
knowledge of individual markets, and a full understanding of current
buyer =s needs and resources (capital and
management).
"As a real
estate broker specializing as buyer's agent for buying
manufactured housing communities, I often get clients who have
heard m/h parks are good
investments. And while most investors will agree,
there is a basic educational process which any buyer must go
through before successfully buying m/h communities. This site is
intended as a primer for the first time investor who is seriously
interested purchasing manufactured housing land lease
communities.
The services of an experienced,
knowledgeable buyer=s broker should be seriously
considered." The Journal of Manufactured Housing, July 2004:
Edward Hicks, Lic. RE Broker, Lic. Mortgage
Broker.
E-mail me with your questions
(Easteddie@aol.com).
Some community characteristics as shown here, may
be interchangeable when
classifying.
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