With interest rates at or near historic lows, it is an excellent time to obtain permanent financing for a mobile home community. It is important for an owner to assess his or her goals and business plan before entering the financing process.

Understanding the different types of lending programs available and the related advantages and disadvantages of these programs is vital to selecting a lender and loan that matches your business plan.

There are numerous loan options available for most community owners. Identifying your business plan and goals is critical to selecting the loan that is best for you.

What are your goals for the next five or ten years?

Questions to consider include: Are you likely to sell the property during these time frames? Are you comfortable taking interest rate risk with a floating rate loan, or do you desire to lock in a long-term interest rate? How important will it be to obtain additional proceeds during this time? The answers to these questions will assist you in determining the right loan for you.

Many lenders offer both floating rate (also known as variable rate) and fixed rate loan programs, and there are also programs that start as a floating rate and offer the ability to convert to a fixed rate in the future.

There is an inherent trade-off between these types of programs. While some floating rate programs offer interest rate caps, you will be taking the risk that your interest rate will increase in the future.

Also, many floating rate programs are shorter term, often five years or less. Floating rate loans usually offer the advantage of a lower prepayment penalty and interest rates that, for the short term anyway, are below interest rates on fixed rate loans.

Fixed interest rates are generally higher than floating rates, but are still very attractive and offer the certainty of that rate for an extended period. To achieve the lowest fixed rate, however, lenders need to structure these loans with a prepayment penalty that is usually more onerous than the prepayment provision on variable rate loans.

Prepayment penalties are, in part, the result of the lender needing to lock in their short-term cost of capital during for the entire fixed rate loan term. The lowest fixed rates are achieved through either a yield maintenance or defeasance type of prepayment penalty.

The actual amount of a yield maintenance or defeasance penalty is a function of treasury rates when the loan is prepaid and also the remaining loan term at time. Suffice it to say, this type of prepayment would result in a large penalty if paid off in the early years of the loan unless treasury rates had increased substantially.

However, most loans offer an assumption provision and a low fixed-rate loan can be attractive to a buyer as long as the loan amount is relatively high as a percent of purchase price.

Securitized lending versus portfolio lending

In addition to different types of loans, there are two different types of lending structures or types of lenders to consider: securitized versus portfolio lending. Once again, there are advantages to both and trade-offs to consider. Further complicating this issue is that some lenders offer both types of lending programs.

Securitized lending, often referred to as “conduit” lending, now accounts for over 25% of the total commercial lending volume in the U.S per the Mortgage Bankers Association of America.

A securitized lender aggregates a large volume of loans and then often teams with others lenders to “securitize” the loans. This involves forming a loan pool that is the collateral for a series of rated and unrated bonds that are issued and typically sold to institutional investors. Securitized loan pools are approximately $1 billion in size and are comprised of hundreds of individual loans.

These large loan pools provide the bonds investors with a lower default risk versus a lender that owns a whole loan which generally results in more favorable rates for borrowers and often a higher loan to value (LTV), as high as 80%, than would be available from a portfolio loan.

Securitized (“conduit”) loans or are usually non-recourse since the primary focus is on underwriting the cash flow from the property.

A portfolio loan, by contrast, is held by a lender on its balance sheet during the loan term. This provides the lender with the ability to modify a loan during the loan term. It is not, however, a guarantee that they will modify a loan, and on fixed rate loans they may not be able to change the prepayment penalty for reasons discussed above.

Nonetheless, there is generally more flexibility available to the lender to modify or restructure the loan after it is originated when it is held in portfolio.

The disadvantage of portfolio loans

A general disadvantage of portfolio loans versus conduits is that interest rates are often higher, particularly fixed rates, and loan amounts are often at lower leverage levels. Credit and underwriting issues may be more restrictive with portfolio lending programs.

These would include issues related to borrower’s experience, quality and location of property, and types of properties that they will lend upon. Many portfolio lenders still have a negative perception of manufactured home communities and consequently may not lend upon them. Also, many portfolio-lending programs require a personal guarantee from the principals.

While the trade offs between different types of lending programs may seem confusing, the good news is that there are more financing options than ever for manufactured home community owners. There are also ways to bridge the gap between some of these alternatives.

A five-year fixed rate loan, for example, provides a fixed rate for an extended period time and offers a more moderate prepay versus a longer term fixed rate. This structure would also enable a borrower to then refinance after five years in order to obtain additional loan proceeds.

Regardless of the type of lending program that is best for you, it is very important to work with a lender or mortgage banker who has prior experience and a good track record lending on manufactured home communities.

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