Unlike most park owners, I am not a small-government guy. I think that public institutions can be a force for good and a useful counterweight to the uglier aspects of the market. If I had lived in the thirties (that’s the nineteen thirties), I would have supported the New Deal. If I had been able to vote during the sixties, I would have supported Johnson’s Great Society program. I think that Biden’s infrastructure plan is long overdue, and the Green New Deal is a good idea.
However, there is one way in which I am very similar to most of my fellow park owners. Like many, I struggle to help my customers find financing to buy homes. Lenders cannot secure their interest in manufactured homes sitting on rented land in the same way as they can a mortgage on a stick-built home. Many park tenants have scratch-and-dent credit. Because of this, most banks won’t accept mobile homes in land-lease communities as collateral. This means that customers scramble to find financing for their homes and park owners tie up their capital helping them do so.
The First Nakba
Park owners used to be able to get around this problem by taking back paper from residents who bought homes from them. However, in an event that is not referred to as the Nakba by park owners, but that would be if we were the Arab population of Palestine in 1948 and Congress were the Israeli government, big things compared to small, mutatis mutandis, changes to the Truth In Lending Act that went into effect on January 1, 2015 made that practice, if not impossible, unduly burdensome. Since the Nakba, park owners have struggled to help residents purchase their own homes. A few imperfect solutions have sprung up. Some parks offer customers a “rent credit” program, under which a certain proportion of each dollar spent for rent goes toward award points that can be used to purchase a home. Others offer leases with a European-style option to buy. Higher-end parks help customers get loans through chattel lenders, i.e. banks and other lenders who accept personal property as collateral. Some solutions are less bad than others, but none are great.
A Potentially Good Solution
I have not had good luck with chattel lenders. Their credit and mandatory debt-to-income ratios tend to be too strict for many good tenants. One well-known chattel lender whose credit parameters are looser than the rest requires that park owners guarantee their loans in ways with which I am not comfortable. Chattel lenders do not offer good terms. Interest rates on chattel loans are much higher than rates on conventional mortgages (eight to eleven percent as of this writing, as opposed to three or so on a conventional loan). Amortizations are shorter and LTV ratios are higher than on stick-built mortgages, and minimum loan amounts tend to be greater than the value of most used manufactured homes. As a result, they are not a good fit for many mobile home park tenants.
So – you can imagine how happy I was to learn about the Manufactured Home Advantage Program (the “MHAP”). The MHAP is a program co-sponsored by New York State Homes and Community Renewal and SONYMA whose mission is to provide mobile home park residents with home financing on terms comparable to those available to owners of stick-built homes.[1] Under the program, mobile home park tenants can take out state-guaranteed loans that are backed by homes parked on rented land. Because of some creative legal engineering, the collateral is treated as real estate, rather than personal property. This allows the lenders who participate in the program to offer terms comparable to those of land-backed mortgages.
Here’s how it works:
- The customer borrows money either from SONYMA or from a private lender under a loan that is guaranteed by SONYMA;
- The customer, the park owner and SONYMA enter into a three-way ground lease. Under the lease, the park owner grants the customer the right to lease his or her lot for a term of years equal to the term of the mortgage;
- The ground lease is recorded as a real estate interest securing the loan in the applicable county office; and,
- The home and the ground lease are pledged as collateral for the loan.
Here’s how the program benefits customers:
- Interest rates are comparable to rates for mortgages secured by stick-built housing;
- It offers very low LTV ratios. Customers can put down as little as 3% of the value of the home;
- Amortizations can be up to thirty years; and,
- There are flexible credit standards. The unofficial policy is that, if a park owner is comfortable with a customer, SONYMA will lend to the customer. In my own experience, tenants with very good track records of on-time payment of rent and utility bills with whom I am quite comfortable have been denied loans by chattel lenders because they did not satisfy credit or debt-to-income requirements.
Here’s how the program benefits park owners:
- It’s a way to fill lots. More full lots means more monthly income means the park owner’s Lamaze classes, orthodonture bills and college tuition get paid;
- It’s a way to free up capital. Tenants who have been renting their homes because of bad credit can now buy their homes. Getting homes off balance sheet means fewer management headaches and more cash. Said cash can be used to fill lots or buy another park; and,
- Lot rent is guaranteed. Under the program, if a customer defaults on their loan or does not pay lot rent for any other reason, SONYMA or their agent bank will make the park owner whole.
Unless you are a chattel lender, that’s all good news. Best-case scenario, customers get housed, park owners get structures off their balance sheets and the chattel lenders get put out of business. The latter fact should bother nobody. Like cats, cockroaches or Permian bacteria, chattel lenders will land on their feet when the landscape of the business changes.
Possible Hiccups
In order to get the public benefit of the program, park owners have to consent to a certain amount of government oversight and control. The exchange of government support for government oversight occurs when the park owner signs the three-way lease. The lease need not be a zero-sum game, but in its current form, it is not as good as it could be. As with everything, the devil is in the details.
The program was initially designed prior to 2019. Readers will recall that June 2019 was the date of the second Nakba, i.e. the date when rent regulation and new restrictions on evictions went into effect in New York State. The current draft of the three-way lease was produced before the second Nakba, and its language reflects that fact. I understand that a new draft that will incorporate current law is forthcoming shortly; I hope that the issues discussed below will be addressed in the new draft.
In relevant part, here is what the older draft of the lease provides:
- The park owner agrees to lease the applicable lot to the customer for at least the term of the loan;
- The lease will be recorded in the local deed registry;
- Lot rent can not be increased by more than 3% per year;
- Evictions can only be instituted for certain enumerated reasons;
- If the park owner changes the use of the leased property, he or she has to buy back the customer’s home for the greater of (i) the appraised value of the home or (ii) the principal amount left on the loan;
- “Construction” of the customer’s home is the responsibility of the customer; and,
- SONYMA can assign the lease.
The lease is an admirable attempt to square a very round circle, but a few tweaks would make the new draft even better. The following changes would make it more palatable to park owners without detracting from SONYMA’s mission. This is important because if park owners do not sign on, their customers will not be able to access SONYMA financing:
- Remove Contractual Limitations on Lot Rent Increases and Evictions As discussed above, the second Nakba instituted rent regulation and eliminated no-cause evictions for mobile home park tenants. These statutory provisions make contractual limitations on evictions and lot rent increases redundant. The contractual provisions should be deleted, or replaced by references to the applicable statutes;
- Allow Park Owners to Pay for Moves Customers’ equity build-up is protected by Section 3 of the current draft. Under this section, if a park owner decides to, say, build a Home Depot on the park property, the owner is required to buy back borrower-tenants’ homes at the greater of appraised value or outstanding principal amount. Post 2019 law provides protection to mobile home park tenants in case of change of use. The new draft could either simply reference the new statutory provision, or it could provide that park owners be required either to pay borrower-tenants the greater of appraised value or principal amount or to compensate them for the cost of moving their home to another park. Any one of these would allow borrower-tenants to preserve equity build-up in the case of a change in land use;
- Define “Structure” and “Construction” The lease should specify that tenants are responsible for construction and repairs to their homes, and that “home” means everything from the roof to two feet below grade. Below-grade water mains and septic tanks are park owners’ responsibility; water lines, heat tapes and septic pipes between the bib and the ground should be maintained by the customer; and,
- Assignability The lease needs to be assignable by the park owner to a buyer of the property who intends to continue to use the property as a mobile home park. Section 25 of the current lease (“Required Notice of Intent to Sell”) seems to imply that the lease is assignable by a park owner to a potential buyer of the park, but this needs to be made explicit. If the lease can’t be assigned, the park can’t be sold – and very few park owners will sign up if doing so makes it impossible for them to exit their investment.
I have said it before, and I will say it again. The industry is imperfect, but it is pretty good for tenants. We – government, banks, customers, park owners – can work to make it even better for everyone. But park owners need to have a say in crafting the three-way lease. If we are not comfortable with it, mobile home purchasers will continue to get a raw deal. That would be a shame, because this is a great opportunity for all of us, and we are close to the finish line.
[1] NYHCR is a state executive branch agency roughly analogous to HUD at the federal level, and SONYMA, the State of New York Mortgage Agency, is the Albany analog of Fanny Mae.