M-H-Conversion-Primer

Manufactured Home Conversion Primer

There is some confusion surrounding the “subdivision” of a mobile home park.

A subdivision can take several forms, which include a cooperative (approved by the State and local agencies). This form of cooperative excludes the limited equity cooperative and the mutual benefit non-profit conversion which is often referred to as a cooperative.

Another form of subdivision, discussed in an earlier post, is the condominium form of subdivision (ownership). The condominium form is often referred to as an “airspace condominium” as it does not lead to individual ownership of the space or lot beneath the mobile home.

In a full subdivision, often referred to as a “planned development” or “planned unit development,” each lot is individually owned by the homeowner and the common area (streets, clubhouse, underground utilities, etc.) is owned by the Homeowners Association (“HOA”). Each lot owner automatically becomes a member of the HOA.

In order to accomplish a full subdivision and sale of lots, a Tentative Tract Map and a Final Tract Map must be prepared and approved by the local jurisdiction. This does take longer than the condominium conversion, but it has significant advantages not the least of which is financing.

The full subdivision is governed in California under Government Code Section 66427.5, which requires full compliance with the Subdivision Map Act and contains no short cuts (as in a tenant-initiated condominium conversion discussed earlier, set forth in Government Code Section 66428.1).

The full subdivision does not require the conversion to be resident initiated or a positive vote of residents. The requirements do include:

  1. Avoiding economic displacement of tenants by giving tenants option to purchase or continue to rent their spaces if they choose not to purchase.
  2. Filing a Tenant Impact Report as to the effect of the conversion upon non-purchasing residents.
  3. Make the Tenant Impact Report available to all tenants before any hearings.
  4. Obtain a survey of residents with the cooperation of the existing HOA, if any exists. The survey shall be by written ballot with each household having a vote and the results of the survey shall be submitted to the local entity as a part of the subdivision map hearing.
  5. The goal of not causing economic eviction is mandated by two State-imposed limitations upon post-conversion rent increases. For those tenants who earn less than 80% of the area median income, the rent increases after the subdivision are effectively limited to cost of living, unless rents have not been increased to that level in the prior four years. For those who earn above 80% of median income levels, rent is allowed to increase to “market rent” (as determined by a qualified appraiser) over four equal annual increases, with no further control in the rent.

The final provision of this code section, applicable in California, is that governing body reviewing the subdivision map is limited to considering only the foregoing as it deliberates on the application.

This latter phrase in the code has led to an increasing complaint by some resident groups and cities with rent control, and legislation was vetoed by the Governor this past term which would at least modify the ease with which a conversion can be accomplished.

In addition to the foregoing, the developer must still apply for and obtain a Public Report from the DRE under the California Subdivided Lands Act. That Act is found in the California Business and Professions Code Section 11000, et seq. Again, this involves a subdivision with five or more lots or property interests. There are a number of exclusions to this requirement, but they generally relate to “business properties and the leasing of apartment stores . . . and mobile home parks.” The reference to mobile home parks, however, is limited to leased spaces not spaces for sale.

Basically, this sequence of the Business and Professions Code requires an application by the developer for a Public Report from the Department of Real Estate for the sale of five or more interests in a planned development or stock cooperative. A limited equity cooperative is exempt if it meets certain requirements. (See our discussion on this site as to Limited Equity Cooperatives).

The application for Public Report results, once approved, in a Public Report which is a form of caution for the consumer, and it contains:

(1) A series of warnings as to the potential for problems and advice as to the effect of living in a common interest development.

(2) It specifically requires that sales are conditioned upon a number of elements, including required deposits for reserves for replacement, advance homeowners dues and other important elements.

(3) The actual interest to be conveyed is described as well as the management and maintenance and operational expenses. Many other variable elements are discussed and included. Things like nearby services, schools and medical offices are included.

Finally, the financial elements are described at length in the Public Report. The escrow of funds, title insurance, tax and assessments are also covered. In particular, a buyer will be provided with an operating budget for homeowner’s dues, as well as detailed reserve analysis and budget.

The DRE allows the developer to utilize the project documents only as approved. These documents include the Covenants, Conditions and Restrictions, the Articles and Bylaws of the HOA, as well as the final map which describes each parcel to be conveyed.

Once the Public Report issues, the sales can be initiated. It is also recommended that the “Pink Report” be considered in any full subdivision as it allows taking deposits and obtaining “tentative” sales projections before the final Public Report issues. It has been used successfully in the past, but requires a separate decision based upon project needs.

With the full subdivision, each buyer receives a deed to his or her lot which is insured by a local title company. Funds to close each sale are handled by a State approved escrow company. All funds are held in escrow until the conditions of the buyer, seller and where applicable lender are met. Under most situations a “foundation system” will need to be retrofitted to the home in order to qualify for acronym financing. In the Planned Unit Developments we have handled to date, the Seller has generally included the cost of the foundation system in the lot price. The approved system allows the home to be united with the land and treated as a single unit. The financing for lot and home are much more appealing and available in a properly completed planned unit development, where other forms of conversion may not be readily accepted by banking institutions. A Planned Unit Development conversion also removes the stigma (and added cost of borrowing money) when a manufactured home is treated as personal property, as is the case in cooperatives and leasehold communities. In California the recognition of the combination home and lot as a single unit of real estate is accomplished by recording an approved form with the local county recorder.

We should note at this point that manufactured homes constructed prior to June 1976 are not treated the same as post-1976 homes by most lenders, as these homes do not have HUD approved construction. There has been continuing controversy regarding this difference, but to date the discrimination still exists, and the cost of borrowing on a pre-1976 unit is still more expensive, and in some cases not available.

Once the developer contracts to sell a sufficient number of lots, the first escrow can close and each buyer receives his or her deed for the lot. The grant deed transferring the common area is given to the newly formed HOA at this time, and the project is managed by the new HOA’s elected Board.

Generally a professional management firm is retained to handle day-to-day operations of the park. The Board of Directors are elected by the members, and the Board’s role is to set policies and procedures, to oversee and delegate work to the management company and/or managers. Until a set percentage has been conveyed to residents or until sufficient time passes, the developer generally retains a super majority vote for the unsold spaces. This enables developer control of the Board for a limited time while further lot sales are completed. This is common practice NOT JUST in mobile home park conversions, but also takes place in traditional, site-constructed subdivisions when they are first constructed and sold.

In any resident purchase, the difficulty of “unsold interests” is a problem which will be discussed in another chapter.

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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