Mobile Home Park Mastery: Episode 351

Handing Off The Lending Baton

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Even though the amortization on a mobile home park mortgage is typically 25 to 30 years in length, the balloon comes due around year 5 to 10. Like a relay race, the successful mobile home park owner must make sure that the baton can be seamlessly passed to the next lender. In this Mobile Home Park Mastery podcast we’re going to review proactive methods to make that transition reliably smooth.

Episode 351: Handing Off The Lending Baton Transcript

My daughter used to run track in high school, and if anyone has been a parent of someone who runs in track, you know the most terrifying event for many parents is the relays, because if one kid drops that baton, the race is over for the entire team. I used to sit in the stands and watch her, she came in fourth in state in the 4 by 2, the 200-meter relay. And everyone of all the parents were terrified because they didn't want their kid to drop baton, I didn't even care where the team finally placed. Could have come in last. The thing I was most worried about is, would my daughter drop the baton and then the whole team would blame her till the end of time.

And the same is true on the baton that you pass when you are trying to maneuver a mortgage from one bank to the next lender, because typically with a mobile home park, even though the amortization is 25 or 30 years in length, most lender loan terms before the balloon comes to only rank from about five to 10 years, so the average mobile home park is gonna require that relay handoff of the baton, at least two times before the mortgage is paid in full.

This is Frank Rolfe, The Mobile Home Park Mastery Podcast. We're gonna talk about the stressful yet the correct tips to make it easier to successfully pass the baton to make the movement from your existing lender to the next one. So let's first go over some of the givens of getting that baton passed from one lender to the next. The first thing you have to know is when you get that initial loan on that mobile home park, whether it's five years, seven years or 10 years, whatever the term is, for at that moment, you've got a pre-plan how you are going to get that baton passed five or even 10 years out into the future. You have to start thinking backwards from that moment. Because if that's the moment, if we have a 10-year note and we have a balloon that comes due in 10 years, we've gotta look at that deal and say, Okay, well, if I have to get a new bank in Year 10, that I'm gonna have to probably have seasoning of the loan happening and probably at least, year eight or nine, and therefore I'm gonna have to make a lot of my improvement in my rents, in my occupancy, in my cost cutting very early on, so I have plenty of time to get that completed and seasoned.

And there are other things we know about lenders that they wanna see when that deal hits their desk. We know they wanna see 80% occupancy or greater, that's what they call stabilized. So we got to think of that too to say, Okay, well, we've gotta sell and fill and bring in X number of homes a month to hit that target, to give us some seasoning before we even go out to the market to get the new loan. And if you really think about that thoroughly, if I have to get that baton passed 10 years into the future, I have to give myself at least a year to find that lender. Now we're at year nine and a couple of years of seasoning and so that falls back to year seven, and if I'm only at 65% occupancy and I have to fill 44 or more lots between purchase date and year seven, well, then that's my job and I must not fail. So you've gotta think backwards a little to figure out what the key moments are in the life of that 10-year loan, so that you are fully prepared for the next lender to get that baton passed.

Also remember that there are some realities in lending, even though people hate to admit it. One of the big realities is the debt coverage ratio, because when I go to the bank to get the loan, they're going to look at how much net income my property has and from that, they're gonna ascribe based on a debt coverage ratio maybe 1.25 or 1.3, how much debt this deal can support. And that number between what my note is coming due is and the number that the bank is gonna have on the debt coverage ratio, that's gonna tell me how much money I have to bring to the table.

And interest rates are up significantly, significantly since Q1 of 2022. If you bought your park prior to Q1 of 2022 and now your loan is coming due, well, you've gotta look and say, Okay, well, how much NY do I have to hit? So that with my debt coverage ratio, I can swap my existing mortgage with this next one that's coming down the pike. And when you work backwards from that, you may say, Well, based on that, because I had not calculated interest rates to go up that significantly, I've gotta raise the rents even more. I've gotta fill even more a lots. I've gotta be even more draconian in my cost reductions.

Now, here are some key items to remember when it comes time to start looking for the new loan. Number one, you've gotta give yourself plenty of time to find the replacement loan. I get calls from people all over the nation who find me online, and they always call me up and tell me I've got this terrible, terrible life-changing event that's gonna occur. Please save me. They'll say, I saw you in the New York Times, they said you are the human encyclopedia of all things Mobile Home Park. So give me the magic formula to save me from ruin. And those calls typically come in two styles. They call from people that have park-on home rentals that are just killing them. Death by a thousand cuts.

They can't rent the things. The people don't stick, they don't pay, they evict them, they trash the home. They're continual CapEx cash machines. That's one style I get all the time. And the other one are people calling me because they can't get a loan, and then I ask them how much time do you have to get the loan? And they say, Oh, three weeks, four weeks. Things like that.

So here's the key item, you have to start the process to hand off the baton to the next bank, you gotta start that at least a year ahead. At least a year ahead, because that year is gonna fly, and within that year you've gotta find the new lender and hopefully, you find one where everything works, but that doesn't mean you have the loan yet, you still have to go through the committee and then you have to do all the legal stuff required to actually have the final closing where they cut a check.

And you also want sometime that if you fail in your mission, if you can't find that bank, you still have time to go out there and perhaps put that park on the market and get it sold. So you gotta give yourself plenty of lead time, at least a year. Take two years if you can. You can't have too much time, believe me, it suddenly just evaporates. It's like a movie where the second head on the clock is just spinning at 1000 RPM. Give yourself plenty and plenty of time.

Also, it will probably really improve your odds of success if you use a loan broker. Why is that? Because loan brokers have access to many, many more options than you do just as an individual. You pretty much have to use a loan broker if you're gonna get a loan that's conduit or Fannie Mae or Freddie Mac, it's just kind essential.

But even if it's just a bank loan and you're looking for, they're gonna know a lot more banks than you possibly even have any idea of. And as a result, they're gonna be able to shop around and get you better terms than you could. So even though they take a small fee, typically 1% of the transaction, they're gonna more than make that up in cost savings and all the other great things they can do, not to mention getting the stress off you, because they'll be able to be solely focused on that loan where you probably got other priorities you're trying to manage in addition to finding that loan.

You also must always have a plan B and a plan C and a plan D for any contingency. You wanna be like the pilot who landed the plane in the Hudson River. You've gotta be calm throughout the entire process, giving yourself plenty of early time to realize... And you can run the numbers, okay, if I take this deal to this lender, given the current interest rate environment, am I gonna fall short? And if I did fall short of the capital need, where would I get the capital to make up the difference? You need to get a financial partner.

Is there anyone you can borrow money from? Not that you'll need to, but you'll be able to say, Okay, here's what might happen, and as a result, this is my plan for my worst case scenario. It also does not hurt to keep a continual relationship with your existing lender. This is a horrible mistake some people make. They get the loan, and then they just basically never talk to their bank or ever again. They're sending payment in every month, so there's no problems there, but there's no further communication. Then as the renewal comes up, they reach out to their lender, and what do they find? They find the lender is not even there anymore.

Their bank officer has moved on, changed banks, retired, who knows what. Now they have to forge a new relationship just to really get in the door on the renewal. Much better off to keep a continual dialogue with your banker. Maybe reach out to them every quarter, a phone call or an email, let them know what you're doing. Give them an update on how the park is doing and the progress that you've made. That way, if the bank officer moves on from that bank, you'll have plenty of advanced notice, you can start forging a relationship with the replacement.

You don't wanna have it where it's coming up on your renewal in just a couple of months, first time you've called your bank in nine years and just be told, I'm sorry they're not with us anymore. Now, I have never had a situation, fortunately, where I could not pass the baton. Never dropped the baton. And almost all the park owners that I talk to always successfully pass the baton. We're very lucky as an industry in that regard, because so many banks love mobile home parks because we have the lowest default rate of any form of real estate.

They also love the attributes of our loans, which are that the rent roll is incredibly stable, the homes never leave and the fact we typically are always raising rent, always filling lots, so the numbers are always getting more and more positive. But nevertheless, it's very, very important that you do follow common sense, give yourself plenty of time work on volume, use a broker. Remember that the key thing when you start that process of buying the mobile home park and getting that initial loan, at that very moment, you've gotta start taking about handing off the baton.

This is Frank Rolfe, The Mobile Home Park Mastery Podcast. I hope you enjoyed this. Talk to you again soon.