Lending Trends in Manufactured Home Community Financing

By Tony Petosa

SSince 2000, Wells Fargo has originated more than $13 billion in financing within the MHC sector and has been named Community Lender of the Year 12 times, by the Manufactured Housing Institute. With the consideration that, as we go to print the COVID-19 crisis is being addressed, and lenders are assessing associated economic fallout, we'll provide an overview of what we perceive to be the best lending options currently available for manufactured home communities as well as some emerging trends within financing programs.

The MHC sector has enjoyed an incredible run over the past several years as lenders and investors alike have recognized the strength and stability the asset class demonstrates— strong occupancy, solid rent growth, low default rates.

Because of these characteristics, we have not only seen investors purchasing communities at historically low cap rates, but we have also seen lenders aggressively pursue financing for MHCs by offering historically low interest rates. So, with myriad lenders pursuing manufactured home communities, it is important for owners to know what to expect in today’s financing environment when dealing with these various financing options.

The agencies have been the first lender of choice for most community owners for quite a few years now. Fannie Mae saw their MHC lending volume increase dramatically after the 2008 financial crisis, and Freddie Mac also has experienced growing market share after their 2014 entrance into the community lending space.

In 2019, Fannie Mae provided $2.5 billion in community financing while Freddie Mac provided $1.4 billion. The most notable recent development for the agencies was the lending volume cap structure that the Federal Housing Finance Agency announced in October. The maximum lending cap for each agency was set at $100 billion through 2020 with a noteworthy requirement that 37.5% of their total volume be dedicated to “Mission Driven Business”, formerly known as "Uncapped” business, which happens to include manufactured home communities. Another important item of »

note in the FHFA’s plan is that “Green Financing” — financing for borrowers who commit to implement certain energy and water efficiencies at their properties — will not fall under the definition of Mission Driven Business. Given that Green Financing accounted for as much as half of the agencies’ uncapped business in recent years, we expect they will have added motive to pursue MHC financing throughout the rest of the year as they will need to fill the void that will be left as a result of the exclusion of Green Financing from Mission Driven Business. As such, manufactured home community borrowers should not be surprised to see interest rate spreads quoted by the agencies to be significantly lower than spreads for conventional multifamily properties.

In 2019, lenders of commercial mortgage-backed securities, also known as conduit lenders, captured their highest total loan volume since the years preceding the 2008 market crash. Most industry experts expect loan volume to remain strong in 2020, but as it relates specifically to manufactured home communities, we don’t expect CMBS lending programs to be the first choice for most community borrowers, particularly for properties that qualify for agency financing. The CMBS lenders typically will have wider spreads, a more expensive process, and more restrictive loan structures when compared to other lending options. Additionally, their interest rate pricing may be more volatile relative to other lending options as CMBS lenders are more closely tied to movements in the general financial markets. However, CMBS lenders do like the community asset class because it provides diversity to the pools they securitize, and they can be a good option for MHCs of lower asset quality, MHCs located in tertiary markets, and for borrowers with credit issues.

Historically, lifecos have been more focused on lower loan-to-value (LTV) transactions, but recently we have seen many lifecos demonstrate more willingness to move up the LTV scale. Still, lifecos tend to be more selective on asset quality when assessing manufactured home communities, and they also prefer large loan transactions, often of $10 million or higher. For these reasons, we don’t envision lifecos greatly increasing their MHC lending volume in 2020, and instead would expect them to pursue higher quality conventional apartment loans, particularly given the FHFA’s mandate for the agencies to originate a material portion of their allotted lending volume on affordable multifamily properties. For those MHC owners who do finance their properties through lifecos, they can take advantage of competitively priced fixed-rate long-term debt (up to 30 years) and the ability to lock in the interest rate at the time of loan application. But, in today’s low interest environment, most lifecos are implementing interest rate “floors" that often results in an all-in interest rate that is higher than the quoted spread to the actual index yield.

When it comes to community financing, it can be hit and miss with the banks, and it is difficult to tell at this point whether they will increase their market share in 2020. While some banks have a good understanding of MHCs (i.e. strong credit performance), and will therefore quote aggressive loan terms, others view community financing as “special purpose” real estate and will only lend on a conservative LTV basis and/ or on a short amortization schedule, 20 years in some cases. In contrast to the non-recourse lending options provided by the agencies, CMBS lenders, and lifecos, community owners should be prepared to sign personal guarantees on most bank loans, and the personal credit of the borrower will be subject to just as much scrutiny as, if not more than, the performance of the property. Furthermore, we expect banks to continue to focus on properties located in strong infill markets while shying away from secondary and tertiary markets. In fact, regional banks may not be willing to lend on properties located outside of their retail footprint. One way banks are expected to compete for market share throughout the year is by continuing to offer lower closing costs and more flexible structures in comparison to the other financing options discussed earlier.

While it may be intimidating for borrowers to have to assess so many different lending options, remember that this is a good problem to have. COVID-19 and overall economic recovery will be at least the short-term focus may impact some of the lending options we discussed, but we expect interest rates to remain very low and favorable lending terms to be available for MHCs in 2020.

For more information or for a copy of the "Manufactured Home Community Financing Handbook" contact Tony Petosa at (760) 438-2153 or tpetosa@wellsfargo.com or visit www.wellsfargo.com/mhc. MHV

Tony Petosa is based in San Diego and is the managing director for Wells Fargo Multifamily Capital where he has worked for 20 years.

He originates loans nationally and has opened and managed regional loan origination offices in Florida, Georgia, and Southern California.

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