Most participants in the manufactured housing industry know that the best way to add value over time to a land lease community is to drive maximum rental growth rates while holding expenses to a lower growth rate. But, did you know you can often add value to a community without investing any time or capital?
Here are a few tricks to ensure you maximize the value of your community as viewed through the lens of the lending community:
- Ensure that your leases allow for a pass-through of increases in real estate taxes and other government assessments. This simple lease clause will ensure that, as your property rises in value, a hypothetical increase in real estate taxes doesn’t impair the underwritten value of your property. Even most jurisdictions with rent control measures allow for property owners to pass through governmental assessments and taxes, so be sure that your leases allow for it to maximize your borrowing potential on assets.
- If you have community-owned homes, make sure you charge yourself the same rent as your third-party pad tenants. If you charge yourself—or a related entity— below-market pad rent, you could be reducing the value of your property from a lender’s perspective because they are often limited to underwriting rents supported by the rent roll. Alternatively, the lender is not likely to allow you to count community-owned pad rents in excess of unrelated third-party pad rents, but be sure not to short change your community by failing to ensure that community-owned pad sites depict rental rates at least in line with other tenants.
- If you have community-owned homes, some of your payroll, as well repairs and maintenance expenses, is likely associated with maintaining these homes rather than the actual land lease community. If you can track these labor and materials expenses separately, or at least make a reasonable estimate of them at the end of each month, many lenders will allow you to deduct these expenses from your property’s operating expenses, thereby increasing the underwritten value of the community. If the lenders can’t give you credit for your personal property (chattel), you shouldn’t be penalized by counting the expenses for maintaining such chattel as a community operating expense, reducing the underwritten value of your property.
Following these three simple suggestions will maximize most lenders’ underwritten value of your community, ensuring the best possible financing terms for yourself or a potential buyer.