May 20, 2022- DST Education Series B- Asset Classification Discussion Part 4 MHC

Editor’s note- this is part four of a ten-part series on the var­i­ous asset types of DST offer­ings.Part 4: Man­u­fac­tured Hous­ing (MHC) Asset Clas­si­fi­ca­tion

By Al DiNi­co­la, AIF®
May 20, 2022
DST 1031 Spe­cial­ist
NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC
 
You may have dri­ven by loca­tions that have a com­bi­na­tion of trail­ers, campers and oth­er vehi­cles all shar­ing the same plot of land.  The ref­er­ence to the “trail­er park” may have been the sub­ject of many come­di­ans includ­ing dis­parag­ing remarks over the years. There is a notice­able dif­fer­ence between the trail­er park struc­ture and the Man­u­fac­ture Hous­ing Com­mu­ni­ties. At one time the invest­ment into man­u­fac­tured hous­ing may have been thought of as a mar­gin­al asset class. There has been an inter­est­ing chain of events lead­ing to an increase pop­u­lar­i­ty not only by the res­i­dents who call these loca­tions home, but investors as well. The facts are that fac­to­ry-built hous­ing (as a seg­ment of real estate) has become one of the asset class­es that has been very sta­ble. There is a tremen­dous amount of inter­est in this asset class. Many experts state there is a bright future for man­u­fac­tured hous­ing com­mu­ni­ties. Since 2000 the man­u­fac­tured hous­ing sec­tion (accord­ing to Green Street Advi­sors) has not expe­ri­enced a decline in net oper­at­ing income (NOI) when doing a year over year com­par­i­son. This was the only major com­mer­cial real estate asset class to return this type of result. Delaware Statu­to­ry Trust (DST) spon­sors have added this asset class to their offer­ings over the past few years with excit­ing results.

What is impor­tant is to have an over­all under­stand­ing of the asset class. The man­u­fac­tured hous­ing com­mu­ni­ties (MHCs) are dif­fer­ent from many of the old­er Mobile

 homes sit­ting in a vari­ety of loca­tions. Those old­er homes are now obso­lete due to HUD pol­i­cy changes in 1976. For­tu­nate­ly, many of these old­er homes have been or will be replaced.   The new MHC set­tings typ­i­cal­ly have more ameni­ties as well as a sense of com­mu­ni­ty than the old trail­er parks. Typ­i­cal­ly, in a MHC, there is a club­house, swim­ming pool, and oth­er social ameni­ties includ­ed in the com­mu­ni­ty.

Demo­graph­ics are impor­tant.

• There is an esti­mat­ed 22 mil­lion peo­ple liv­ing in man­u­fac­tured or mobile homes in the U.S. Num­bers are tracked by the Man­u­fac­tured Hous­ing Insti­tute.
• Man­u­fac­tured hous­ing pro­vides shel­ter for rough­ly 7% of the U.S. pop­u­la­tion.
• There are approx­i­mate­ly 43,000 land-leased com­mu­ni­ties that con­tain 4.3 mil­lion rental sites.
• The new homes are man­u­fac­tured in con­trolled facil­i­ties.
• On last count by the insti­tute there were 136 pro­duc­tion facil­i­ties in the US. These homes or pro­duc­tion unit typ­i­cal­ly are about 1,500 square feet and the 2019 price was about $82,000.

MHC com­mu­ni­ties still pro­vide the most afford­able price point for hous­ing, and they pro­vide excep­tion­al­ly afford­able hous­ing. In addi­tion, MHC com­mu­ni­ties com­bine the best fea­tures of the rental mod­el and own­er­ship. Res­i­dents own their own home and have their own pri­vate yard, but only pay a mod­est lot rent and have use of sub­stan­tial com­mon areas and ameni­ties.

Rental Income
The prop­er­ty own­er (or DST spon­sor through a mas­ter ten­ant agree­ment) rents plots of land to indi­vid­u­als who have a park mod­el home built (deliv­ered) to the prop­er­ty.

• This is a land lease to the ten­ant.
• The ten­ant (who owns the struc­ture) pays the month­ly rent for the land as well as oth­er poten­tial expens­es such as a pass through on tax­es in cer­tain juris­dic­tion.
• The ten­ant insures the prop­er­ty thus elim­i­nat­ing the need for the landown­er to insure all the struc­tures.
• In the event of a cat­a­stroph­ic loss the tenant’s insur­ance would han­dle the repairs or replace­ment of the home.
• Insur­ance would be need­ed on any of the com­mu­ni­ty wide facil­i­ties such as club­hous­es and any oth­er struc­tures.
• The landown­er is also respon­si­ble for the main­te­nance of the roads and oth­er facil­i­ties.
• Occu­pan­cy tends to be high­er than oth­er mul­ti fam­i­ly assets.
• Delin­quen­cies are low and many states have laws on the books that favor the land­lord.

Eco­nom­ic Dri­vers:
Inter­est by investors for MHC asset remained high in 2021. There was a com­pres­sion in cap rates but investors as well as Delaware Statu­to­ry Trust spon­sors con­tin­ued to seek acqui­si­tion in key loca­tions. The steady growth was fueled by strong demand.

There are unique issues that the MHC sec­tor is expe­ri­enc­ing.

• Today’s fac­to­ry-built homes increas­ing­ly resem­ble stick-built homes, with lux­u­ry fin­ish­es and archi­tec­tur­al details that mim­ic con­ven­tion­al-home designs.
• The new sup­ply of land for devel­op­ment is vir­tu­al­ly nonex­is­tent. With this scarci­ty of new sup­ply, both in terms of new com­mu­ni­ties and new homes with­in exist­ing prop­er­ties cre­ates pres­sure on acqui­si­tion prices.
• New pro­duc­tion of homes or park mod­els has been ham­pered by the dis­crep­an­cies in sup­ply chain issues. This may have pre­vent­ed the replace­ment of old­er homes with­in the com­mu­ni­ties with new­er ones where there were emp­ty lots.
• Old­er res­i­dents liv­ing in dat­ed home who pass away leave the struc­ture to the heirs. While the old­er homes may be placed on the resale mar­ket, many times these much old­er homes have lit­tle resid­ual val­ue when com­pared to the new­er built homes.
• There also are the con­tin­ued image prob­lems with the con­struc­tion of new com­mu­ni­ties and the reluc­tance on the part of munic­i­pal­i­ties to accept this much need­ed hous­ing stock. Munic­i­pal­i­ties, zon­ing boards and neigh­bor­hood asso­ci­a­tions often show great resis­tance to allow­ing new com­mu­ni­ties to be devel­oped or expand­ed. Once again, this posi­tion may be as a result of old stereo­types.

Afford­able Hous­ing Solu­tion.
A great solu­tion for the afford­able hous­ing cri­sis could be man­u­fac­tured hous­ing. Local gov­ern­ments com­plain about the need for more afford­able hous­ing, but gen­er­al­ly speak­ing they tend to hin­der the devel­op­ment of man­u­fac­tured home com­mu­ni­ties. That is a prob­lem. There are loca­tions where MHC is mak­ing inroads such as Albu­querque, N.M., Win­ston-Salem, N.C., and Flo­rence, S.C.

With the hous­ing cri­sis what is need­ed is quick­er per­mit­ting that can cre­ate an increase in the num­bers of homes for pur­chase or rent. Man­u­fac­tured hous­ing, in many US loca­tions is the only tru­ly afford­able, non­sub­si­dized form of detached hous­ing avail­able.

Mar­ket Per­for­mance.
Which U.S. man­u­fac­tured hous­ing mar­kets per­formed the best and why? Four and five-star Flori­da loca­tions in age-restrict­ed com­mu­ni­ties per­formed the best. Rust bowl “trail­er parks” pop­u­lat­ed by low­er-income res­i­dents per­formed the worst. Many of the Flori­da facil­i­ties were owned for decades by mom-and-pop own­ers. Fre­quent­ly this type of facil­i­ty becomes the tar­get for acqui­si­tion, repo­si­tion­ing, phys­i­cal improve­ments and struc­tured as a DST offer­ing.

The res­i­dents in high-end, age-restrict­ed com­mu­ni­ties in Flori­da are retired and are not as depen­dent on employ­ment to pay their lot rent, and they have retire­ment income and sav­ings. The pan­dem­ic was a year of “busi­ness as usu­al” for them.

Com­pare rel­a­tive­ly well-to-do retired res­i­dents to work­ing-class res­i­dents employed at the low­er end of the ser­vice sec­tor. The res­i­dents work­ing in restau­rants and fac­to­ries that closed dur­ing the pan­dem­ic expe­ri­enced dif­fi­cul­ty pay­ing rents if in apart­ments. The same sit­u­a­tion may occur with work­ing-class res­i­dents strug­gling to pay their lot rent, while wealth­i­er retirees had no finan­cial issues induced by the pan­dem­ic.

Even dur­ing the down­turn caused by the COVID-19 pan­dem­ic strong con­sumer demand cou­pled with low sup­ply is why MHCs have thrived regard­less of eco­nom­ic trends. Man­u­fac­tured-hous­ing real estate invest­ment trusts (REITs) have out­per­formed the broad­er REIT index over the past sev­er­al years. This mea­sure of the sector’s invest­ment strength is anoth­er rea­son to include MHC as an addi­tion to an invest­ment port­fo­lio.

Sum­ma­ry
Man­u­fac­tured hous­ing is also afford­able, typ­i­cal­ly cost­ing less mon­ey to devel­op ver­sus site-built homes (accord­ing to Nation­al Real Estate Investor). This asset class address­es the nation’s hous­ing afford­abil­i­ty cri­sis.

The qual­i­ty and rep­u­ta­tion of MHCs have dra­mat­i­cal­ly increased. As com­mu­ni­ties have improved in design and image, as well as proven to be a low-risk invest­ment, real estate invest­ment trusts, pen­sion plans and oth­er insti­tu­tion­al investors have includ­ed them in their port­fo­lios. (The Out­look: Man­u­fac­tured Home Com­mu­ni­ties” Midyear 2021, Mar­cus & Millchap).

Sig­nif­i­cant bar­ri­ers to entry exist in devel­op­ing new MHCs, as zon­ing and enti­tle­ments are dif­fi­cult to obtain. The num­ber of MHCs con­tin­ues declin­ing, as old parks are con­vert­ed to new uses, lead­ing to very lim­it­ed sup­ply. This lack of inven­to­ry means vacan­cies con­tin­ue to tight­en. This is espe­cial­ly the case in age-restrict­ed com­mu­ni­ties. More than 10,000 peo­ple turn 65 years old each day. In addi­tion, house­holds retir­ing to warmer cli­mates or that are seek­ing out a sec­ond res­i­dence are also boost­ing demand, espe­cial­ly in the Sun Belt states. Demand is antic­i­pat­ed to con­tin­ue for man­u­fac­tured homes, mean­ing an increase in both rents and mar­ket val­ue.

Con­tent for this arti­cle was obtained through com­mu­ni­ca­tions with DST spon­sors of Man­u­fac­tured Hous­ing Com­mu­ni­ties. Not all MHC loca­tions are the same and may have dif­fer­ent results.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion).

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Thank you.

NAMCOA® – Naples Asset Man­age­ment Com­pa­ny®, LLC