Manufactured-Home-Community-Conversion

Manufactured-Home-Community-Conversion

Conversion of a mobilehome park is generally referred to as resident ownership and has been available for close to thirty years here in California. The process has matured over time, but it now seems to be more controversial because of what is perceived by some residents and some city officials as an attempt to defeat rent control.

Historically, many mobile home parks were developed in the 50’s, 60’s & 70’s as a form of interim use or as “land banking”. Some of the older mobile home parks actually developed out of former trailer parks, which are now treated as mobilehome parks with long term residents.

The last major wave of mobile home park construction ended in the mid to late 1970s time frame. Because of high land costs and, at times unfriendly treatment by local jurisdictions, the construction of mobilehome parks has been reduced to “nil” in the large population centers. Where new construction exists at all, it has been driven into the far reaches of less populated regions or, in some cases, to recreational areas away from large cities.

Much of the lack of park construction can be credited to negative attitudes in communities. Most of these negative attitudes are the result of a lack of knowledge and understanding of the manufactured home product, and those who wish to live in such communities. The cost of land also contributes greatly to the lack of construction. During this same period of time the need for low cost housing has increased as our population has grown and shifted over time.

Local jurisdictions have been pushed to include or consider manufactured housing as a part of their housing element which each jurisdiction must qualify to obtain state benefits. It has been our opinion that Cities should not be allowed to simply lump all of their manufactured housing communities into the category of “affordable housing” just to meet the requirements of their housing elements. Certainly, many such communities do not “fit the bill” of being affordable housing – many communities strive to be more than just an affordable place to live. It is important that communities are judged not solely upon the type of home placed within them, but rather upon the individual merits of each community.

In some cases operators looked at the market as a constant source of higher income with little or no thought the constituents in the parks who owned a home on the park owners land. When the need for retention of this mode of living was finally recognized and some park operators continued to increase rents at what by residents was felt to be unaffordable, local jurisdictions passed legislation to control rents in the name of affordability. In some cases, the imposition of artificial limitations upon rents may have been justified. In other cases, however, the blanket imposition of rent control has resulted in a transfer of substantial value from the park owner to the resident who can command a substantial premium for a home located on a lot which has rents controlled and well below market.

Starting with the division of land and home, which ultimately seems to feed the fires of discontent and then adding rent control, the owners and homeowners have grown further and further apart. What started as a rather congenial relationship has at time degraded to animosity and multiple theories of litigation in many communities.

Many operators have operated with the principle that the best approach to the relationship was to be relatively moderate in annual demands and attempt to provide the best possible environment for the resident groups. There is little demand for rent control where this attitude is consistent throughout the community.

With the passage of time and enactment of rent control statutes, the park owners who did not push rents have been further affected by the retroactive enactment of rent control which too has placed additional pressure on what was otherwise a good relationship.

Many residents originally chose the manufactured housing lifestyle as it best suited their needs and in many cases still does. These residents enjoy the atmosphere and friendship established over time. These persons do not wish to be bothered by all that can be involved with ownership of the land and home together.

Other residents who perceived that their lifestyle was being threatened by increased rents, and in some cases by what was perceived as a lack of care by Park owners, sought rent control. With the political clout of a relatively large population in the park, the local jurisdiction readily passed ordinances to protect those who now owned a home on someone else’s land.

Rent control has often created a new source of tension between land owners and home owners, which is a seemingly never ending battle. Where rent control started with a retroactive application of start rates (the starting rental rate is backdated many years to a rate lower than what is currently being charged) coupled with extremely limited annual rent increases, tensions have increased and resulted in extremely complex litigation. Some of the litigation was successful in the opinion of park owners, but many suits resulted in what was perceived by homeowners as complete vindication. Rent control has also been challenged at the ballot box and that too has produced mixed results.

Adding to the tension, many homeowners believe that rent control is an absolute right which was never going to disappear. As the demographics change in many areas, the rent control issue was not as politically charged and rent control either modified or disappeared. That is a continued concern for many homeowners in rent controlled communities. In the past where park residents were vocal advocates at local jurisdications, today, you see homeowners who do not live in manufactured housing communties questioning their city’s expenditure of tens of thousands, to in some cases millions of dollars defending rent control for a small minority or the city’s residents.

One item of contention that has been resolved in some venues, but not all is the question of allowing a new or prospective tenant homeowner to step into the shoes of the prior tenant – assuming the below-market rent upon purchase. The cities know they must maintain some affordable component and, have been reluctant to allow “turnover controls” to be relaxed while, some have allowed moderate upward adjustments on turnover.

The result has been that the surviving statutes have tended to be considered unfair by park owners, some of whom have turned to other pursuits to justify their investments. This often accomplished by sale of the park to large corporate owners and a different, and sometimes degraded environment in those communities.

The park owners allege, with some justification in rent restricted jurisdictions, that the turnover control has not kept housing costs low as the selling homeowner has been able to demand much higher prices for older homes because of the fixed component of rent.

There are some limited academic studies which seem to indicate much higher resale prices for homes in rent control jurisdictions. As yet, we have not seen a comprehensive study which fully documents this theory. There is much anecdotal evidence to this conclusion, but no comprehensive study.

Unfortunately, if the selling homeowner is enabled with a much higher sales price, the affordability is lost to the community. Yes, the land rents are less then comparable rents elsewhere, but the new buyer will be required to have a larger income because of the higher home price. The point is made regularly by park owners without much success either politically or in the courts. There has been some relief granted park owners by removal or loosening the turnover control, but that still creates an unequal situation and can cause affordability to be lost by radical rent increases.

Some planners have postured rent control in an “either/or” format. In that situation, if you opt for rent control, then the home price is also controlled. If, on the other hand, you wish to obtain the highest price for your home, you can opt out of rent control and home price control. No matter what is proposed or accomplished, the solutions thus far have been unacceptable to one side or the other.

The California State legislature recognized the difficulties and together with the assistance of some pioneers in the field crafted statewide legislation to encourage residents to purchase the park in which they reside. Examples of such legislation include:

– Ability of residents to form a mutual benefit corporation to purchase the park in bulk and lease spaces to its members without excessive administrative burdens.

– Ability of resident who purchases the park to assume the real property tax basis of the prior owner in lieu of the standard Prop 13 increase upon turnovers.

– Creation of the Mobilehome Park Resident Ownership Program (MPROP) which provides some below market rate purchase funds for the use of residents and at times cities and later non-profit public benefit corporations.

There have been other funds available and utilized through the various local jurisdictions and some federal funds, but generally the majority of the below market rate financing has been through MPROP, which is administered by HCD at the state level.

We will discuss the various methods of conversions in separate chapters but we will introduce the subject of conversions at this point.

The method of conversion affects the price paid as well as financing available. The advantage available to the seller often depends on the immediate and long term goals of the seller. Obviously, in such a major transaction without a willing seller, all of the rest of the conversion discussion becomes moot. Why then will a seller consider the resident when there are literally dozens of ready, willing and able buyers who have cash available to invest and close a sale very near term?

– Some owners have had a long term relationship with the residents and, given equal or similar choices, favor a resident purchase.

– Some owners realize that the most willing buyer should be the residents who have more to gain by ownership and much more to lose if the opportunity disappears. It is perhaps equally true that some owners are fearful of dealing with the residents and some of their representatives, due to years of tension and at times litigation or administrative challenges at the local level.

– Given the correct circumstances, the residents can afford to pay more than some conventional buyers. This is particularly true when either the seller, a third party or the resident can add value to the park prior to the actual purchase and sale.

–For instance, a full subdivision which creates lot financing by each space owner with much more favorable rates than other methods.

–Also a condominium subdivision imparts significant additional value and perhaps slightly less favorable financing than in a full subdivision. Under either method the extra value is built in to the purchase and the initial down payment to acquire an interest in the park is much less per person.

–The purchase by a public benefit corporation, although not a true resident purchase does allow a higher price to be paid due to the availability of non-profit below market financing and some potential for real property tax reduction for the non-profit based on the number of low and very low income residents.

– The residents utilize a direct form of purchase or a subdivision can also access some limited amount of below market rate funding, which can enhance the price to be paid.

– The resident, with the assistance of the local jurisdiction, can at times create some federal income tax incentives, not available to a REIT or other investors.

On the other side of that same coin, the park owner may choose to ignore the residents due to prior or present tensions.

No matter what the approach, both buyer and seller should consider utilizing experienced, capable professionals. We encourage both sides to look at the methods employed by their advisors and make a considered judgment based on past performance and reputation of that advisor.

Check Back Again for More Information,

Gerald R. Gibbs, President, The Gibbs Law Firm, APC

About The Gibbs Law Firm, APC

The Gibbs Law Firm, APC has represented clients in all aspects of Real Estate and Business Transactions for more than 32 years from its office in San Clemente. Gerald R. Gibbs, and his son David Gibbs have a combined 47 years experience representing mobile home park owners and residents in a variety of legal matters, specializing in the sale of parks to its residents. Mr. Gibbs is generally acknowledged as one of the pioneers in the field of mobile home park conversions and subdivision, having represented Cities and other local jurisdictions, park owners, nonprofit entities, resident groups, and having testified in court and before legislative and administrative bodies on the subject of mobile home parks and conversion. Mr. Gibbs has worked with other industry leaders on shaping the legislation governing park conversions. For more information about this transaction or about the firm, please call David L. Gibbs at (949) 492-3350.

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