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Manufactured Home Community Best Practices Debate, Rentals vs. Sales and Accounting Methods

May 26th, 2017 Comments off
tristar-estates-bourbonnais-il-CreditMHC-MD-com, posted MHPorNews.com.

Arial photo credit, MHC-MD.com.

A recent post from Eric Enloe, Managing Director of JLL Valuation and Advisory Services has revved up debated topics in the industry – home rentals versus sales – as well as a look at various best practices regarding accounting and corporate structure methods.

Most participants in the manufactured housing industry know that the best way to add value over time to a land lease community is to drive maximum rental growth rates while holding expenses to a lower growth rate,” writes Enloe.

But, did you know you can often add value to a community without investing any time or capital?”

Enloe then provides three “tricks” to maximize community value, as viewed through what he calls the eyes of a lender:

  • Ensure that your leases allow for a pass-through of increases in real estate taxes and other government assessments.

Enloe writes that this lease clause will ensure that, as your property rises in value, a hypothetical increase in real estate taxes doesn’t impair the underwritten value of your property.

  • If you have community-owned homes, make sure you charge yourself the same rent as your third-party pad tenants.

If you charge yourself—or a related entity— below-market pad rent, you could be reducing the value of your property from a lender’s perspective because they are often limited to underwriting rents supported by the rent roll,” Enloe said.

Alternatively,” says Enloe “the lender is not likely to allow you to count community-owned pad rents in excess of unrelated third-party pad rents, but be sure not to short change your community by failing to ensure that community-owned pad sites depict rental rates at least in line with other tenants.”

  • If you have community-owned homes, some of your payroll, as well repairs and maintenance expenses, is likely associated with maintaining these homes rather than the actual land lease community.
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Credit: The Investor.

Enloe writes that, “if you can track these labor and materials expenses separately, or at least make a reasonable estimate of them at the end of each month, many lenders will allow you to deduct these expenses from your property’s operating expenses, thereby increasing the underwritten value of the community.”

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Eric Enloe. Credit: CRE.

He continues, “if the lenders can’t give you credit for your personal property (chattel), you shouldn’t be penalized by counting the expenses for maintaining such chattel as a community operating expense, reducing the underwritten value of your property.”

Following these three simple suggestions,” writes Enloe, “will maximize most lenders’ underwritten value of your community, ensuring the best possible financing terms for yourself or a potential buyer.”

 

Gathering Industry Feedback

As the manufactured housing industry’s trade publication of record, MHProNews asked for industry feedback from professionals in the community sector on Enloe’s article.

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Richard Nodel, owner, Nodel Parks, photo credit, LinkedIn.

I agree with all three points made. I think the most important one has to do with segregating all expense attributable to the home operation separate,” says Richard Nodel of Nodel Parks.

As we know lenders do not like to count the ‘home rental income.’ To help offset that, we need to clearly show all the expenses that could be cut if the rental homes were not there.  Again, nothing controversial there, just good common sense.“

I am in favor of more attention being paid to the ever-growing segment of our business, which is rental housing,” said Nodel.

Sun, ELS and UMH are among those community operators that turned to rentals as a faster way to fill vacant home site.

Bucking the Rental Trend with Home Sales

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Video still from Roberts Resorts are from an exclusive interview, A Cup of Coffee with Scott Roberts of Roberts Resorts, linked here.

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http://www.mhmarketingsalesmanagement.com/cup-of-coffee/a-cup-of-coffee-withscott-roberts

Scott Roberts of Roberts Resorts, is one community professional who is “bucking the trend” in the tide of rentals in communities.

Roberts says that his operation is focused on selling homes, rather than renting them.

Other industry professionals point out that renting homes routinely results in a drop in new manufactured home sales.

While some renters may, over time, decide to buy the home they lease/rent, the total conversions reported to MHProNews typically hover in the low single digit a year range when it comes to the percentage of buyers that become renters.

Other Views

I disagree with the first bullet – rising real estate taxes would be a reflection of rising site rents or occupancy – both of which should cover increases in RET. I assume owners are already charging what the market will bear for site rent,” said one industry professional, off the record.

Other comments included this from a Midwestern operator.

If the owner is at that max, and the RET finally catches up, does it really make sense to go to residents and say, “I just increased your rent for 2018 by $15.  That was before I knew I’d pay an additional l $5 per pad for increased RET.  So I’m passing that on too? Isn’t the increase in RET reflective of the ongoing increase in site rent?”

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Brian Gallagher. Credit: LinkedIn.

Brian Gallagher, Chief Operating and Financial Officer Santefort Real Estate Group, LLC, shared his take regarding point number three in the Enloe article.

Rather than record all home and site expenses on the books of the entity which owns the community and is the borrower on the mortgage, and then ‘deduct’ home related expenses from site operations, it’s much better to establish a separate LLC to account for all home operations, separately from site operations,” Gallagher told MHProNews.

 

A Closing Disclosure

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On the consulting side of MHMarketingSalesManagement, there are companies our sister operations work successfully with that fall into each of these camps.

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MHProNews is not taking a public position on these questions.

Instead, as the industry’s trade publisher of record, we’re highlighting the evolving discussion and debate in the important manufactured home community sector on how these issues are viewed by professionals.  This fuels the useful discussion of what are the best practices for community owner/operators?

The Daily Business News will continue to track these and other industry debates and discussions. ##

(Image credits are as shown above, and when provided by third parties, are shared under fair use guidelines.)

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RC Williams, MHProNews.

Submitted by RC Williams to the Daily Business News for MHProNews.

 

(Copyright Notice: This and all content on MHProNews and MHLivingNews always have been and are Copyrighted, © 2017 by MHProNews.com a dba of LifeStyle Factory Homes, LLC – All Rights Reserved. No duplication is permitted without specific written permission. Headlines with link-backs are of course ok. A short-quoted clip, with proper attribution and link back to the specific article are also ok – but you must send a notice to iReportMHNewsTips@mhmsm.com of the exact page you’ve placed/posted such a use, once posted.)

Federal Housing Administration Bailout Mandated by Law

October 1st, 2013 Comments off

Following a story from yesterday, Sept. 30, regarding the need for a $1.7 billion bailout of the Federal Housing Administration (FHA) by Treasury, FHA Commissioner Carol Galante says the request for funds comes from an estimate of forecasted losses from Dec. 2012 that cannot be altered due to mandated accounting rules. She says the next report will document that the agency is in better shape than one year ago. But critics argue the FHA was too lax with bad lenders and borrowers with high default rates. Republican leaders want swift passage of the Protecting American Taxpayers and Homeowners (PATH) Act which will eliminate Fannie Mae and Freddie Mac and reform FHA’s accounting system. As nationalmortgagenews reports, earlier this year the White House had projected a shortfall of $943 million, but that number has grown due to the slowdown of mortgage applications recently. However, Galante says the main reason is due to accounting, MHProNews has learned. The Federal Credit Reform Act of 1990 requires the agency to cover all expected future losses for 30 years and maintain a 2% capital reserve. “No bank in America reserves for credit losses on a 30-year terms, instead banks get to adjust reserves based on economic conditions,” says David Stevens, president of Mortgage Bankers Association (MBA). “But this is very complicated, very unique accounting and technically they have to draw the funds even if they don’t need the money.”

(Image credit: Federal Housing Administration)

Overhaul Fannie and Freddie? Why?

March 7th, 2013 Comments off

As washingtonpost informs MHProNews, while Fannie Mae and Freddie Mac have been vilified for allegedly causing the financial meltdown, for being bailed out by the government to the tune of $131 billion, and for taking business from private firms, neither the Democrats nor the Republicans are actively doing much to change the GSE landscape. While they remain for-profit entities, they are backed by the government, and despite the criticism, they were the only home finance game in town in 2009 when banks were not interested in making home loans. As Neal Irwin says, the housing collapse would have been much worse had Fannie and Freddie not been around. The reason the overhaul has not happened is because there are too many vested interests in keeping the system as it is. Accounting for 90 percent of U. S. mortgages keeps originators, servicers, lenders, banks, and builders pretty busy, not to mention the contributions from the GSEs to political campaigns.

(Image credit: Federal Housing Administration)

D.C. has Highest Mortgage Payment

November 28th, 2012 Comments off

OriginationNews informs MHProNews at $1,642 a month Washington, D.C. has the highest mortgage payment, accounting for 31 percent of household income, according to Lending Tree. Hawaii ranked second with a monthly average payment of $1,536, and California was third at $1,446 a month. Both Hawaii’s and California’s payments represented 30 percent of household income. D.C. also had the highest loan amount at $331,886. In the survey, 15 of the 51  areas studied have an average monthly payment above $1,000. At $711 a month, Nebraska had the lowest mortgage payment, followed by Arkansas, Iowa, Oklahoma and Missouri.

(Image credit: caudium)

Patrick Industries Announces Q2 Financials

July 26th, 2012 Comments off

According to MarketWatch, reflecting an 15 percent increase in revenue from the manufactured housing industry, Patrick Industries, Inc. (+8.19%) of Elkhart, Indiana reported net sales for the second quarter of 2012 rose 39.9 percent, or $33 million, over the $82.6 million of the same quarter in 2011. Net income for Q2 2012 was $13.3 million, $1.22 per diluted share, over $3.7 million, or $0.36 per diluted share for the same period of 2011. Shipments in the MH industry for the first six months of 2012, accounting for 19 percent of the company’s sales, increased 20 percent over the same period for 2011. Net sales for the first six months of 2012 rose 43.5 percent, from $66.2 million to $218.3 million, over $152.1 million for the same period of 2011. Net income for the first six months of 2012 was $18.3 million, $1.70 per diluted share, versus $2.5 million, or $0.24 per diluted share, for the first six months of 2011. MHProNews knows Patrick manufactures and distributes component and building products to the recreational vehicle and manufactured housing industries, as well as to other industrial markets.

(Image credit: Patrick Industries, Inc.)

Cavco’s Revenues Spiked Grandly, but……..

June 27th, 2012 Comments off

MSNBC tells us Seth Jason at The Motley Fool says he judges company performance by comparing inventory increases to revenue increases: if inventory expands faster than sales, it could indicate a problem, one which he suggests may be happening at Cavco Industries. Trailing 12-month revenue rose 157.9% while inventory increased 288.2%. When comparing the most recent quarter to the same quarter last year, revenue grew 156.3% and inventory rose 288.2%. But the sequential quarterly period saw revenue fall 13.1% and inventory drop only 0.1%. In addition, Jason notes the type of inventory—raw materials, work-in-progress, and finished goods—may be telling. A large increase in finished goods inventory may mean product is not selling well. MHProNews has learned at Cavco, on a trailing 12-month basis, finished goods inventory grew the fastest, increasing 1,023.6%. On a sequential-quarter basis, work-in-progress inventory grew the fastest, increasing 19.1%. The author does caution that numbers cannot tell the whole story: Call the company’s investor relations for a more thorough accounting. Cavco is one of the largest manufacturers of manufactured and modular housing in the U.S. Cavco’s stock gained 4.23% in today’s trading.

(Image credit: Cavco Industries, Inc.)

Modular Home Building on the Rise?

April 27th, 2012 Comments off

SBWire reports ModularHomesNetwork (MHN) says the modular housing industry is stabilizing after losing a number of manufacturers in 2011. With more starts this year than last, and growth in the multi-family market, MHN notes Q1 modular housing growth in the New England area, New Jersey, and upper Midwest as well as Texas and Louisiana. Figures in our MHProNews story posted Dec. 2, 2011 (the last accounting we have seen) from the National Modular Housing Council show 3,544 modular homes shipped in the third quarter of 2011, a two percent drop from the same quarter 2010.

(Photo credit: Modular Homes of Delaware)