Virtually every state has, at some point, debated, denied or passed legislation regarding giving the tenants the "first option" to buy the property. They do this using faulty assumptions and absolutely zero understanding of how the "tenant-owned" process works. In this Mobile Home Park Mastery podcast we’re going to explore the truth behind this issue and reveal what the government is apparently fully unaware of.
Episode 389: Why Tenant "First Options" Rarely Happen Transcript
Around 700 astronauts have gone into space, but only 12 of those have ever walked on the moon. And based on probability, that's still a higher percent than how many times mobile home park residents have bought the park they live in. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about why the concept of tenants buying their own parks just really doesn't work that well. And additionally, why the industry has been greatly damaged from bureaucrats across America thinking somehow it's attainable. Now, let me first start off by saying that we have sold no less than three of our own mobile home parks to the residents over the years.
And no park owner has any problem with selling a park to the residents as long as they pay the same amount that a outside buyer would pay. But where the damages really come in is the constant narrative through the media, to legislators throughout America that this is somehow a very likely outcome if only with a little prodding from state government, this could all be achieved on every mobile home park. And that's simply not the case. Let's first go over how the concept of the tenants buying a mobile home park works.
Let's say you've got a mobile home park, you have some residents, you want to sell the park. And the residents say, hey, we want to buy that park. And you say, well, okay, what the heck, their money is as good as anybody else. So here's how the process works. First, a non-profit goes to the residents. It has to organize them into groups. So using parliamentary procedure, they can agree that they want to start the process of trying to buy the property. Then all kinds of third party reports must be produced, all fully paid by the nonprofit. And then once they get everything together, the residents have to then vote they want to buy the property. And then the tough part comes in. They have to find financing for this acquisition. But the residents have no money. They can't pass the hat and come up with hundreds of thousands, if not millions of dollars. And they have no credit either. So a non-profit of some type has to cobble together the down payment. And then you have to find a lender willing to make a loan on this thing, knowing it will be run by the residents. And therefore you've got to have a personal guarantee by another non-profit.
So the tenants really never buy the mobile home park then, nonprofits buy the mobile home parks and let the residents live in them for a while. Now, the residents are the worst managers imaginable for a mobile home park. Number one, they can't collect money because they refuse to evict each other. So right out of the chute, when the invoices go out on monthly rent and people say, "Well, I don't have the money to pay", they just let it go, they let it slide. Additionally, the residents never vote to invest capex money into the park to maintain it or enhance it. Of course they can't because they have no money to begin with, but even then, they're never going to collectively say, yes, let's go ahead and fix the streets, let's go ahead and fix the water. Because they know it will cost them more money in the form of even higher rent. So fast forward down the road what you have is you have parks that are owned and managed by the tenants and two things occur. Number one, the lot rents typically go up significantly because they have to make allowances for the lack of collections.
And the condition of the properties often goes down the drain because there's no professional management to keep them well maintained. So the quality of life of a resident, in my opinion, is lower when you have a non professional owner. When they buy the properties themselves, things just don't work out. But there's even bigger problems than that. The big problem comes in the form of the debt. Now when a professional group buys a mobile home park, they obtain the normal channels of financing. And probably the most common on parks large enough that the tenants would buy them are conduit, also known as CMBS debt and Fatty Mae Freddie Mac. And those debt instruments are typically roughly 10 years in duration, fixed interest rate and very dependable. But when you look at how often these tenant owned community deals are put together, they're not using traditional channels of debt because those debt holders don't find this situation to be appealing or safe for them.
So instead they'll cobble together all kinds of little loans from different groups with very, very short terms on them. That just seems to be the norm. Now, what happens down the road when those loans are coming due two or three years from now, will they get renewed? Well, let's think about that for a minute because will there be somebody else who wants to personally guarantee that debt to go for another several years? Can they even find a bank at all that would even want to continue on? And do the groups that put the money in not want their money back out? Case in point, recently there have been no less than four tenant owned communities that have been put into foreclosure in Canyon City, Colorado. I don't know the particulars on them because the media loves this whole concept of tenant owned communities. So they don't really reveal much of the stats other than the fact that there's four that are in foreclosure.
Now, you don't see mobile home parks go into foreclosure very frequently, that's for sure. But when you look at how few transactions there have been of tenants buying their own property, it makes even four rather remarkable because here are the actual stats on how many mobile home parks are bought by their residents. If you go to the website for ROC, Resident Owned Communities, which I believe is the largest of the non-profits who structure these deals, you will see that since inception they've done, I think, 330 deals maybe.
And of the 330 deals, you'll notice from their website, 150 of those alone, I believe are from one state, a little state, I think New Hampshire. But when you look at the big wide world of America and you take the number one state for mobile home parks in America, as far as quantity, Texas, they've only ever done three deals there, and you look at the number two, California, they've only ever done two deals there, and you look at our number three, Florida, and they've done no deals there.
In fact, in a world where there are 44,000 mobile home parks, roughly, something that numbers only in the hundreds is really of no material significance at all. That's roughly somewhere around 1% to 3%. Now, if everyone was honest and said, yeah, yeah, these deals really are very, very rare, I would have no problem with that. If the astronauts were told on the front end, well, your chance of walking on the moon is so tiny it's not worth talking about, okay, that'd be fine. But instead, the media and the non-profits who create these deals have gone all over the map to every state trying to get legislators to amend the regulations such that the residents must always have first option to buy the property.
And what it does is it slows down the free market system. It's crazy. I don't know of any other industry where you have to have this little period where your tenants have the right to try and buy. And when the residents do try and buy, the problem is, if the property owner doesn't want to bend over backwards, they never happen. They're never able to structure these deals, and anywhere near the accelerated timeframe they would need to make it happen. So I think the only time those deals ever happen is when the seller, for some reason, wants to go ahead and help make it happen. But it's such a rarity, it would be roughly about the same percentage of being struck by lightning, perhaps. And you can't really change laws over such a small percentage of probability.
The other problem you have is that in going around and convincing bureaucrats that this tenant-owned construction is possible, it also has skewed some of their other laws. Some states now, if they're going to grant money to mobile home parks to the residents to fix their homes, they'll only do it if the tenants own the property.
Some states are talking about giving grants to do infrastructure and mobile home parks, but once again, the criteria is you have to be owned by the residents. And no one has bothered to really tell the facts to the people who vote in these laws of how rare that kind of situation truly is. The bottom line is that no mobile home park owner ever has cared or has any negative stigma against selling to the residents. But the lack of acknowledgment of how rare these deals are and the flaws in their structure, and the very fact there's four foreclosures right now out of that little tiny sampling of tenant-owned communities, that's truly troubling. And hopefully at some point this fad will end because it's been very damaging and untruthful for the park industry. This is Frank Rolfe with Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.