Non-Recourse Debt Vs. Recourse Debt Vs. The Governor Of West Virginia

When I got into the mobile home park business with my first property “Glenhaven”, one of the chief attractions was the financing. The deal was $400,000 with $10,000 down and the seller financed the remaining $390,000 with non-recourse debt. This was insanely compelling to me as it meant that – no matter what happened – I was only out $10,000 if I walked away from the deal at any moment. Sadly, the Governor of West Virginia did not follow this same conservative posture when he borrowed $700 million with full recourse. So what is recourse vs. non-recourse debt, and why do mobile home parks have so many non-recourse options?

What is “Non-Recourse”Debt?

There are two types of debt, and the difference revolves around what happens in the event that you default on your loan obligations. If you stop making payments – or if the loan suffers a “term default” because you can’t find a replacement bank when the term of your loan comes due – then the bank takes the property back and sells it at auction. If the amount that it sells for is less than your loan balance, then there is a difference that must be addressed. If the loan is “recourse” then the bank can come after you personally to make up the difference. However, if the loan is “non-recourse” then the bank has to suffer the loss as they cannot come after you for a penny of the deficiency. Clearly, in this regard non-recourse debt is always superior.

The Types of Non-Recourse Debt Available on Mobile Home Parks

Mobile home parks are unique in that they offer so many non-recourse debt options:

  • Seller financing. This is the old original way that mobile home park purchases were financed. Essentially, the seller acts as the bank, offering a loan that is securitized by the park itself and without any recourse on the part of the buyer. This is the exact type of loan that compelled me to buy Glenhaven. In this structure, your worst case scenario is that you would lose your down-payment but nothing more in the event of abject failure.
  • Bank financing. Traditionally, bank loans have required full recourse on the part of the borrower. However, it is possible with some banks to convert that to non-recourse if you put more money down. While the bank will probably require recourse at 20% down, for example, they might change to non-recourse if you put down 40% or more. It is worth asking.
  • CMBS “Conduit” financing. This type of loan product is based on securitization of loan pools, in which the banker becomes a “servicer” and the loan becomes the property of investors who buy it on Wall Street. These loans are always non-recourse except for a “fraud carve-out”. With loan amounts typically $1 million and up, these are the work horses of the loan industry.
  • Fannie Mae/Freddie Mac “Agency” financing. Yes, Fannie Mae and Freddie Mac financing mobile home parks and, in fact, they currently represent more than 50% of the total loan volume of mobile home parks financed each year. And, yes, they are always non-recourse except for a “fraud carve out”.

How This Could Have Helped the Governor of West Virginia

The Wall Street Journal just reported that ”West Virginia Gov. Jim Justice is personally on the hook for nearly $700 million in loans his coal companies took out from now-defunct Greensill Capital”. Apparently, these loans were full recourse and now Justice is on the hook for the deficiency. Had he signed only non-recourse loans, then he would have walked away free from any financial obligation. Although he amazingly has the net worth to survive this hit – being valued at over $1 billion in net worth by Forbes – it will destroy the majority of his wealth. A similar tale was that of Clint Murchison, the former owner of the Dallas Cowboys. It is rumored that he had full recourse on over $1 billion of loans going into the 1987 Texas S&L Crash and it cost him the team, which he had to sell to help pay back the banks.

Conclusion

Non-recourse debt is of staggering importance and yet too many people – including the Governor of West Virginia apparently – fail to take advantage of non-recourse loan products. The good news is that the majority of mobile home park debt is non-recourse, and that’s one of the compelling factors in buying “trailer parks” for smart investors.

Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Along the way, Frank began writing about the industry, and his books, coupled with those of his partner Dave Reynolds, evolved into a course and boot camp on mobile home park investing that has become the leader in this niche of commercial real estate.