Long answer to your three questions… - Posted by Ray Alcorn
Posted by Ray Alcorn on August 03, 1999 at 24:24:07:
Chill,
Let me see if I can help with your questions about mobile home parks. I notice that you have asked several questions today, and I think I can help.
Last question first: Drew did a very nice job explaining the valuation procedure for a small park. The one thing I would add is that I use the actual operating expenses and cash-basis income rather than an estimation for valuation purposes. A mobile home park is just like any other income property. It?s value is derived from the stream of income generated by the property, adjusted for the effort and risk involved in collecting that income. A Capitalization Rate (Cap Rate) is a product of that calculation. Cap rates on small parks here in the east generally start at around twelve percent, and adjust upward for age, condition and park-owned homes. I have no problem using a forecast of income and estimated expense to project cash flow in future years based on MY operation of the property, but would not want to value the existing operation on how I would run it. That gives the present owner the benefit of my own optimism!
There are several valuation techniques for mobile home parks: Appraisers will use three methods of valuations; income approach, replacement cost, and comparable sales on a per space basis, then “reconcile” the three figures. When the appraiser does a final reconciliation of value, the income approach will almost invariably have the greatest weight, except in cases where restrictive zoning or other barriers to competition are present.
Your question about liability insurance is a good one. We (my family company) currently operate several income properties, including a mobile home park. The risk in a park is generally no more than any other income property, and in some respects less so. The park you are considering has no park-owned homes, which is a plus in that and other regards. We generally cover each of our properties with a minimum of $1 million dollars liability insurance, however I?ve noticed in recent years a trend by lenders to require $2 million per occurrence liability coverage, and in our case an umbrella policy on top of that. This is a direct result of the ever increasing cost and occurence of litigation over anything and everything. (We were last sued by a guy who hit a pothole on his bicycle… and it turned out it wasn’t even our pothole!) Your park having a small amount of insurance expense is typical, given the lack of park-owned homes and/or other structures. Call your insurance agent and have a quote prepared on both property/casualty and liability, with a $1 million dollar per occurrence minimum liability coverage. If you decide to increase the coverage it is fairly cheap to do so. We generally get bids from three agents on a new property.
Financing a park can be a little tricky, especially at the size (45 spaces) of the park you are considering. Most of the large national lenders have a 100 space minimum, though I know a few that will do 50. This size deal is usually done by a local bank. They will treat it just as any other income property loan. That is to say they will look first to the property as the source of repayment, but will also evaluate the borrower. Of the “C?s” of credit, banks are biggest on character and collateral. After that are a number of lenders that specialize in small income properties. These lenders are active on a regional and national basis, and are usually best contacted through a good mortgage broker. Some of these loans can be found with limited recourse to the borrower, but it depends on the structure and strength of the overall deal. Rates are holding steady right now at about a point over prime for this size deal, with one and a half to two points in fees. Most lenders want LTV?s on a park around 65-75% on a first mortgage, but have no restriction on CLTV. It is quite common to see seller financing of 15-25% in a deal like this, precisely because there are limited funding sources. Again, deal structure can make or break a funding proposal. It will pay off ten times over if you will work with someone who is experienced in commercial finance to put together your package. Consider any fee you pay as tuition!
There are also several sites on the web that can help in locating financing for hard-to-do deals. Hard-to-do is defined as any deal where either the property or the borrower, or both, are less than standard criteria would permit.
Good luck with your prospective deal. If I can help further just drop me a line.
Ray Alcorn