Lenders Play Favorites With Manufactured Housing
Why the debt markets are waking up to this once sleepy asset type.
In a volatile market cycle, no word resonates stronger than stability. For decades, apartment housing has been a bastion of stable income for investors and a preferred target for lender allocations. Now, with the capital markets currently flush with allocations targeting multifamily lending, it has also become the asset class where lenders are facing the most competition for loans on quality properties in the current cycle. Subsequently, a range of multifamily alternatives have become desirable targets for debt providers in pursuit of yield. Of these, student housing, senior housing and build-to-rent single family homes have all become attractive targets—but not more so than manufactured housing.
The manufactured housing sector remains resilient in an era where affordability is a paramount housing concern. It’s a hybrid rental housing model that limits park ownership risk and offers stable returns. Park owners supply and maintain infrastructure and amenities, while renters provide their unit and home maintenance. Commitment to home ownership and relative affordability provides the desired tenant stickiness for stable occupancy and the subsequent reliable cash flows and consistent rent growth support efficient underwriting. There are also significant barriers to entry for new construction, including entitlement, financing and length of time to stabilize. These strong property fundamentals have not gone unnoticed by lenders.
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Permanent Loans
There has never been a more accessible era for permanent financing on manufactured housing in terms of lender confidence and allocation bandwidth. With high barriers to entry for new construction, most lending in manufactured housing is focused on refinancing existing maturities or funding new acquisitions. Some of the top sources for permanent debt are life companies, agencies and credit unions. All are known for their non-recourse terms with characteristics that appeal to different borrowers.
The life companies have become the most aggressive competitor for top tier properties and are deploying loan quotes that achieve higher leverage than their traditional permanent programs with a DSCR as low as 1.15x on an interest only basis. The lower DSCR carries a premium in rate but will allow stretch proceeds if needed. Life companies can be very aggressive on lower LTV requests and can also offer attractive flexible prepayment structures. The agencies are also a time-tested source and offer similar terms and certainty of execution as life companies although they remain tied to a 1.25x DSCR with prepayment options that are more limited or expensive. Credit unions round out the list of options as a viable source for comparison and compete aggressively through maximum prepayment flexibility with DSCR requirements as low as 1.20x.
There are other differentiators between the two primary sources of manufactured housing finance worth noting. Life companies can lock an interest rate at loan application, an attractive option in the current cycle’s volatile rate climate. The agencies can potentially lock rate within two weeks of application. Also, the agencies require adoption of their Tenant Site Lease Protections covenants, a set of resident protections that most owners are already meeting in practice but puts an additional layer of government oversight on borrowers during the loan term. For many owners already tied to stringent rent control and local oversight, this can feel like overreach.
Performance and underwriting
Manufactured housing’s most stable cash flows come from the permanent residents. However, many parks also feature at least some RV parking infrastructure for seasonal travelers, particularly in destinations appealing to snowbirds or tourism. Historic performance of these transitory rentals is acknowledged by lenders when measuring DSCR but can require a deeper dive to successfully fulfill underwriting requirements. For many owners and lenders, the idea of a committed, long-term tenant is appealing for stability. But RV slips can provide an additional source of robust income alongside permanent residents for enhanced cash flow to augment overall performance.
Park owners seeking to maximize rents will focus on active maintenance and management, with lenders clearly rewarding experienced owners managing multiple properties with their best terms. For many borrowers, cross collateralizing stronger performing assets alongside weaker properties can provide increased proceeds that can be redeployed to improvements, a strategy that is meeting the market where portfolio management is scaled to create value.
Value add over new construction
Manufactured housing parks are hard if not impossible to finance with traditional construction loans due to the long lease up (typically five years vs. the two years desired for construction loans) and the dearth of entitled sites even ready for construction. Most new development comes in the form of a value-add play through internal or bridge financing. This is where banks and debt funds can come into play as options with relevant loan programs.
Many existing communities are increasing cash flow through the transition of RV slips to permanent manufactured housing sites. This transition leverages existing space and infrastructure but puts a more stable cash flow in play that will ultimately resonate with lenders during a future permanent refinance. Funding these transitions typically requires a strategic permanent refinance with cash out to fund the necessary improvements and lease up from proceeds, on hand equity available to cover the necessary cap ex to repatriate at refinance or a bridge structure that provides stretch funding at a higher rate prior to a future permanent refinance.
Another value-add play we are seeing more of is the transition of RV parks to Park Model communities. Many clients that have owned and operated mobile home parks but are unable to find quality properties on the open market at their price point are buying RV parks and transitioning them to Park Model communities for stabilized cash flow. Permanent refinance comes into play once the property is stabilized and cash flows consistently. There are lending options available for traditional RV properties, but lenders will want longer term tenants and a proven track record that can be documented with monthly occupancy information to finance communities that are solely RV focused.
Market momentum
Like self-storage, manufactured housing was once traditionally a mom-and-pop or private investment target that has become recognized as an asset class that is the most stable and sought after commercial real estate opportunity. While not every lender embraced this asset class in the beginning, they are now very focused on this multifamily alternative asset type with increasing interest, competitive terms and dedicated allocations. In a volatile market, manufactured housing stability shines. With that in mind, we expect this asset class to continue to achieve the most aggressive terms and rates as it has proven over time to be the most desirable and stable commercial real estate investment.
Patrick Barkley is a principal with Gantry.
