Would you be better off selling your mobile home park or keeping it through a “cash out” refinancing? How does that process even work? That’s the topic in this case study in which M.J. Vukovich of Bellwether goes step-by-step though the process of refinancing mobile home parks, as gives numerous case studies of how these deals work and the amount of money that was available for “cash out”. As you’ll learn, the every-high lot rents coupled with lower cap rates means that many existing mobile home park owners may be unaware of the amount of capital they can tap through a “cash out” financing, and this money is initially tax free and, in many cases, non-recourse. It’s a very important and serious option that many park owners are simply unaware of but that all owners need to know to make informed decisions.
The Very Serious Business of Refinancing Mobile Home Parks - Transcript
Frank Rolfe: If you own a mobile home park, one of the most important things you need to be aware of is the power, the economic power, the risk mitigation power of doing a refinancing of that property. This is Frank Rolfe with mhu.com. We're going to be talking with MJ Vukovich of Bellwether. He's been a specialist in mobile home park loans for about 15 years. He does almost nearly a billion dollars a year of loans, and we thought he would be an excellent expert to talk about the power of refinancing, and then, additionally, give you a case study or two on that topic. MJ, are you here with us?
MJ Vukovich: I am. Hi, Frank.
Frank Rolfe: Hey, MJ All right. First, let me talk about why we love MJ so much. MJ is what is today called a capital consultant, but in the old days, we call them a loan broker. He's someone who goes out to the marketplace for you, finds a loan, brings you, typically, several different loan options, helps guide you as to which one you should select. And then once you select the lender, he, basically, manages the process, watches over, helps if there are any potholes in the road as you go all the way to the completion of the process. We are huge believers in load brokers. We've been using them for decades. MJ is our all-time favorite of it. And so, we wanted to get him on here, because there's no one's opinion on the topic we trust more than MJ's. MJ, give people an overview on mobile home park refinancing.
MJ Vukovich: Yeah. Thanks, Frank. I appreciate that. Mobile home park refinancing has maybe never been better. There's a lot of different options that you have today, as opposed to what it was like a number of years ago. But what I was going to go over today was a little bit how the process works, and show you a little bit of a case study on what we've done in the past, and the very recent past, in fact, even this year in terms of what it can look like. People ask, how do I get a loan? A lot of people, almost everybody, will need a loan to either buy a property, and when you go to refund finance to get some more capital to expand, to buy more properties for whatever you're planning to do.
MJ Vukovich: And they come in a lot of different sources. They can do seller carry when you're buying it, and then banks, credit unions, there's CMBS, there's the agencies, Fannie Mae, Freddie Mac, and FHA are the... Primarily Fannie Mae and Freddie Mac, FHA technically does have mobile home park loans. They don't really do them that often. Life insurance companies and pension funds, debt funds, there's all kinds of stuff out there. They all have little different nuances to them and have different uses when you're going to them.
MJ Vukovich: The key is to make sure that you're going to those best sources for what fits what you want to do, the needs of your property, and then giving those folks the right information that they need to make the decision. You want to do that. You want to anticipate any concerns that those lenders are going to have, and then it helps to have a relationship with them. That's what I do, and, in large parts, is keep relationships up, understand what these lenders want, what they do, what their hot buttons are. And so, that will allow me to help guide you in that process. And additionally, they know that as I'm keeping those relationships up, they know that there's going to be some volume coming their way. So I get a little bit of a volume discount and can push on different things, because I'm a customer of theirs. And if I'm saying, "Hey, XYZ lender, we really need you to push on this or that for my clients, because I've got a lot of business coming behind this, and I need you to step up here." That's something that I can do very frequently.
MJ Vukovich: And so, you can do most of this stuff yourself. For Fannie Mae and Freddie Mac, you will need to go through a lender, like myself, and a direct lender for Fannie Mae and Freddie Mac. But you could call a CMBS shop. You could call a life insurance company and they'll get you a correspondent, which we are one as well. You can call banks. You can do all of these things, or a lot of them, by yourself. Not all of them you can access by yourself, but what we provide is that volume discount, that knowledge of being in the market consistently all the time, and just the understanding of how to do it. And the other benefit that we bring is that I have been an owner. It's actually third generation, so I know that side of it too, what you're going to deal with once you get the loan. Let's talk about a case study, what does it actually look like?
MJ Vukovich: We had this loan a little bit earlier in the year. This is an owner of multiple properties with a bunch of bank loans on them. Some of them were a little bit smaller, some of them were bigger, but all had been bought, and even some had so few seller carries. The problem was the smaller properties, by themselves, were difficult to finance, and they had some quirky things to them. Smaller properties tend to be a little quirkier. They have owners that may have built them themselves. They may not have gone through all of the really strict types of code and stuff like that, depending on what year they're built, how.
MJ Vukovich: There's a lot of different things that come with it. Lenders will look at a small deal and go, "I know this is going to be very difficult for us," and they'll just go pass. And then the other thing is they wanted to pull out a bunch of money and banks won't let you do that typically. They will sometimes if you own it for a decade or something. They'll let you pull out a little bit, but they're very, very cautious about letting you pull money out. That's where the secondary market comes in.
MJ Vukovich: This owner was caught in between two different stools, if you will, and not on either one. What we were able to do is we had a couple really good relationships with some CMBS lenders that we could leverage those relationships to say, "Hey, this is a really good client of ours. They've done a really good job. They want to pull out some cash on these deals in order to buy more properties, and buy more homes, and to expand. And we can configure this so that it looks the right way for you to sell that on the MBS market."
MJ Vukovich: And we were able to do that, but we were able to get the owner cash out. We're able to get them a good long-term fixed rate in this inflationary environment. That's going to look better and better. We're able to get them to them a little bit of interest only, and we were also able to keep out some of the properties that they didn't know if they were going to keep long-term and that they might sell later in the future. The bottom line, it was really good. Our relationship was good to understand the market, what could be done, what couldn't be done, the lender, so we could say, "Hey, what can you stretch here? Can you push here? Or can we structure it this way?" And then the owner got the chance to reduce their payment, reduce their interest rate, get cash out to be able to buy more properties or invest in other places. And the flexibility of having some of their properties free and clear, so it was a really good win all the way around.
MJ Vukovich: Let's talk about the numbers. In this scenario, the owner had purchased all their properties for about $5 million. They owned them anywhere from three to five years, but most of them around the three year mark. We got them nine and a half million dollars out for their properties. They appraised for around 15 million bucks, and the proceeds that went back to the owner were around four and a half million bucks, a good interest rate of around 375 with three years of interest only, and it was nonrecourse. You look at that and their rates ranged anywhere from four and a half to five and a quarter previously. There's no interest only. There was 20 and 25 year amortization schedules.
MJ Vukovich: They got another half, almost double, what they paid for the properties out in cash to be able to go use in other spots. They were able to reduce their payment, and they were able to still have some flexibility with some of those properties outside of this that are free and clear. That they could sell. They could even finance those later. A really good overall transaction that is going to give them very cheap money to be able to go and invest or buy another property down the road. That's it in a nutshell. My contact info, and the little blurb on myself there. But feel free to reach out, send an email, give me a call to chat about your scenario, and happy to discuss whatever you need and what your goals are in terms of your financing.
Frank Rolfe: MJ, give people an idea of the timeframe of this type of thing, so if someone were to say, "Yeah, this makes a huge amount of sense to me, particularly, while the financing market is so strong right now." What is, roughly, the turnaround time from someone calling you to having the refinancing done, just roughly?
MJ Vukovich: Yeah. Generally speaking, I would say from when I take that first call to when that check is in your hand from the refinance, it's usually about 90 days. And that includes things like, you getting me the information, us asking you all those questions. It's going out and getting bids. You selecting the best bid. And then us going through the process with lender from their due diligence and underwriting process to rate lock and to closing. All those things are wrapped up in about that 90 day period. Can it go faster? Absolutely. But that's largely dependent on how quickly you can get things together for us, and answer questions, and which type of lenders we use. But 90 days is a good framework that you can say, "Hey, in three months from when I call MJ, I could have a check in my bank account."
Frank Rolfe: Which is really fast. In other words, if they were to contact you today, they would have this done with ease during Q1 of 2022 theoretical.
MJ Vukovich: Yep.
Frank Rolfe: Okay. Another question for you. Obviously, mobile home parks come in all shapes and sizes, and heaven knows we certainly own everything from 15 spaces up to 750 spaces. But I know that there are minimum requirements on these type of loans. What sized loan are we looking here? Not per just price initially, because we, ourselves, have done deals with you where our purchase price was a fraction of the final valuation at the refinancing. But as far as the actual value today, what size deals are the sweet spot for what you do on refinancing?
MJ Vukovich: Yeah. For refinancing, the sweet spot, and especially if we're doing cash out, is $3 million and greater. Now, we have done ones below that, so it really depends. It doesn't mean like, "Hey, my property's worth $3 million. I guess my loan is going to be less than that, so don't call MJ" Still give me a call. Lots of times, depending on the market, depending on what different lenders are doing there, sometimes that they're saying, "Hey, we'll take it. We'll do something less than that." But generally speaking, especially if you're buying something and you've added a bunch of value, and you're getting cash out, $3 million is usually the spot for loan size. That's about a $4 million value starting at that, so that's where the sweet spot starts picking up.
Frank Rolfe: If somebody has a property they've been doing a great job of very rapidly increasing the rents and increasing the occupancy, how long do you have to season? If someone's listening to this and says, "Well, I've done so much. I've increased the value a ton." But how long do they have to have that seasoned before they would come to you, or before a lender would accept that as being the number they can base the value on?
MJ Vukovich: Yeah. Really good question. There's two things I'll say to that. One is for cash out, lenders want you to own the property for, at least, a year. So if you bought it today, this is the 16th of November, 2021, they would want you to have it on, at least, to the 16th of November, 2022, before they're giving you cash out on the deal. Secondly, generally speaking for occupancy, they want a trailing three months of operations. They'll look at that. Your occupancy can still be going up, but let's say you hit 90% occupancy. You bought it at 50%, you got to 90%. They'll want to say, "All right, it's been 90% for the last three months, at least. And so we're going to blend whatever the last three months worth of occupancy are."
MJ Vukovich: And then from a rent increase point of view, three months is ideal. But they can, as mobile home parks, one of the great things about them is that, you can increase all of the lot rents at one time. So if you do a $15 rent increase on the 1st of December, and you collect all of that rent, we could do a loan as of the 1st of January based on that income push forward and annualized. It's a little bit tighter and tougher to do it that way, but you can do it. I would say, by and large, three months worth of trailing occupancy and rent is what most lenders are looking for.
Frank Rolfe: Okay. MJ, Fannie Mae and Freddie Mac both have the ability and some loan to do periodic resizing of the loan. In other words, as your net income grows, you can go in and actually tap into that. Can you talk a minute about how that works, and whether those programs apply to cash out deals as well as normal deals?
MJ Vukovich: Yep. Great question. The Fannie Mae and Freddie Mac have what's known as a supplemental loan program, exactly what you just said, Frank. You do a loan and, let's just say it's a $3 million loan, and you increase your NOI over the next couple years. And now, instead of being worth $4 million that you got a $3 million loan on, it's now worth $5 million. You can go back to Fannie Mae and say, "Hey, we would like to tap into some of that equity." And they will do what's known as a supplemental loan, which will go at the terms at the time and with a little bit of an additional amount to the interest rate, because it's not the original loan, it's a supplemental one, but still significantly cheaper than anything else you can get out there. But resize that loan, take out additional cash, and that's both for refinanced properties, as well as acquisitions. So you can do that on either of those.
Frank Rolfe: MJ, let's talk for a minute about time urgency, because anyone who watches the news, for even five minutes each day would obviously be alarmed at all the things that are changing in America, seemingly by the minute. Obviously, tax code changes would have no impact on a refinancing, I don't think, because the money you take out is not taxable because it's a loan.
MJ Vukovich: Right.
Frank Rolfe: Which, I think, is an important point for people to know. So whatever money you get in your check, in your wire, from the cash out is not taxable. It's not taxable income at that point. It's just a loan, so there's no tax. But obviously, we all live in a world of some degree of concern and sense of urgency on interest rates. That's one item and the other one is just the stability of the lending markets. Have you ever seen lending markets as strong for mobile home parks as you're seeing right now?
MJ Vukovich: I haven't. It is as strong as they've ever been, and they're more sources of capital from the debt perspective than there's maybe ever been, which is a great thing. But I would say, what you're saying, Frank, in terms of interest rates, if you're listening to the news, in terms of the fears of inflation and increased government spending in some of these bills that are being contemplated are only going to probably make that problem more difficult. And so, if there is inflation that typically means a rising interest rate environment. The sooner you can lock in a lower rate, the better in that regard. And so, I don't expect that the inflation will be 1970s oil crisis inflation, but I do think we are going to be heading into a period of increased prices for goods and services, which will impact interest rates and it's going up. In that particular case, it's not really a tax issue, it's much more of a... The time is as good as any to be able to do your refinances now.
Frank Rolfe: Right. A sense of urgency in interest rates is one, and then the other one is... Go back historically, for those who weren't looking at refinancing back in the era of 2007, 2008, the great recession, this type of lending virtually disappeared, did it not, for a matter of almost of years, correct?
MJ Vukovich: Yeah.
Frank Rolfe: Tell people what happened when the great recession hit.
MJ Vukovich: Yeah. When the great recession hit MBS product, which is CMBS, Fannie Mae and Freddie Mac, all of those, are considered mortgage backed securities. Those markets completely froze for a period of, probably, from 2008 to around 2012, 2013, they started thawing out again. So that's four or five years worth of time. It wasn't that they were completely, completely gone for those entire period of time. But really for all intents and purposes, the majority of properties were not able to access any of that type of MBS product. Life insurance companies had a really tough time. Banks, a lot of banks, were in trouble and they weren't lending. It can go away, and we have had precedence for it going away. And even the best lending environments, if something really seizes up, you can be in trouble and it can be long periods of time before you're able to figure out, all right, what are we going to be able to do here and do a refinance? And when are these markets really going to come back to being efficient again?
Frank Rolfe: Yeah. And I want to throw that out, because some people may not be aware of the cyclical nature of this. You're entering in 2022 at a time when 70% of world economists predict a recession at some point in the year, 2022. If the recession hits, as if the magnitude of the great recession, then you can call MJ and MJ will say, "Gosh, I'm sorry, no one is doing this lending anymore." The bottom line is, you've got a fairly extreme sense of urgency, in my opinion. If you can refi and want to refi, you need to be refi-ing right now, because you've got this sweet spot where you've got the interest rates at historic lows, and the markets for this product, enormously stable. None of us know the future, but now is a really good time to refi. MJ, give people again, what's your contact information if someone wants to reach out to you and get just the information on their property, and how much it could be cashed out for, et cetera? What's the best way to reach you?
MJ Vukovich: Yep. My phone number is (720) 758-9227. And the email is [email protected].
Frank Rolfe: Okay. Well, thanks to MJ, appreciate your time on this as always and your expertise. And again, if you're listening to this and saying, "Yeah, I'm very interested in cash out refinancing." Which, if you own a property that qualifies, you definitely should. Then I would reach out to MJ as quickly as possible. Because again, this is one of the best times to do cash out refis that we've ever seen. It doesn't last forever. And so if you can, if you are in a position to harvest that moment, this would be a very good time to get that process going.
Frank Rolfe: Again, MJ, we appreciate you being here and thought this was just a timely topic. We get lots and lots of calls on this topic from people at msu.com, so we wanted to go ahead and produce this, just to bring people up to date on how the process works. Again, MJ, thanks for being here. Thanks everyone. And we'll talk to everyone again soon.