Why Park Owners Need To Raise Rents to Keep Housing Affordable

Hi everyone. I did a small write up on my bigger pockets blog and thought I would also post it here as well. Here is the link:

http://www.biggerpockets.com/blogs/6817/blog_posts/45113-why-park-owners-need-to-raise-rents-to-keep-housing-affordable

And here is a copy of the text:

Yes, you read the title of the article correctly. Park owners need to get those rents higher and keep them going up consistently to make sure that their mobile home parks stay affordable.

The story I am about to share always cycles around, thought the names and faces change, the concept is the same. It is the classic case of the dreaded landlord pillaging the pockets of the tenant. An example of recent times was by one of the largest mobile home park owners in the country.

Frank Rolfe came under scrutiny for his company’s recent purchase of the North Lamar Mobile Home Park in Austin Texas. They were put under a magnifying glass when the company raised rents and charged back water to the tenants.

The rents were increased to $450 a month and the water bill passed back to the tenants. The community went into a frenzy threatening legal action against their new landlords. Ironically what the residents did not realize is that they should have been thanking Frank and praising their company for doing that to them.

What the news media outlets did not know, or perhaps failed to mention, is that while Franks company bought the park and increased the below market rents, there were two competing offers for the park that both would have resulted in redevelopment of the property and left the approximately 70 families displaced with no where to go.

Frank explained that you can be doing a disservice by having the rents too low. In an overall picture, why does this hurt affordable housing? Most people have heard the term highest and best use as it pertains to land use. Mobile home parks are at the bottom of the food chain. Mobile home park values are a function of their rents. As your rents increase, your property value increases as well. Alternatively, having too low of a property value puts the park as a more vulnerable target for redevelopment.

As an example, say at X price per acre, the economics of park redevelopment make sense for a for a C store, bank, office building, apartment complex or shopping center.

Then we get to Y price per acre and the only feasible redevelopment options will be an apartment complex or shopping center.

Then we get to Z price per acre and it becomes cost prohibitive to redevelop the park since the land value does not allow a developer to make the project viable as their costs would be too high and they must find a different property where the numbers work.

Lets run a few hypothetical scenarios of a mobile home park that could be similar to this one and see what happens when we change some assumptions. The park is 70 spaces in Austin TX and has lot rents of $350 with the park paying the water bill. Using a quick valuation with industry rules of thumb, (70 spaces x $350 lot rents = $24,500 per month gross income or $294,000 annually) with an expense ratio of around 40%, that leaves an approximate net income of $176,400 or based on a cap rate of 10%, the parks value would be around $1,764,000. If the park had a higher water bill, the park could have an even lower value. If the density of the park is 10 spaces per acre (total of 7 acres), we essentially can give a land value of around $252,000 per acre for any potential developer looking to change the use of this property.

Now lets take this parks value and increase the lot rents from $350 to $450 and pass the water expense to the residents (thus reducing the total expenses by approximately 10%). 70 spaces x $450 lot rents =$31,500 per month gross income or 378,000 annually. At an expense ratio of around 30%, that leaves an approximate net income of 264,600 or based on a cap rate of 10%, the parks value would be $2,640,000. So for that same park, a developer would now have to spend $377,000 per acre in order to redevelop the land. Even this small jump of property value significantly raises the bar of what a redevelopment cost structure would have to support.

Now, lets look at the most extreme case scenario, the park has a lot rent that is in line with some parks in Austin that are $700 per month.

70 spaces x $700 per month= $49,000 per month or $588,000 annually, At an expense ratio of around 30%, that leaves an approximate net income of $411,600 or based on a cap rate of 10%, the parks value would be $4,116,000. So for that same park, a developer would now have to spend $588,000 per acre in order to acquire and redevelop the park.

So as you can see outlined in the above examples, the property will be most prone to redevelopment when the land value is too low because it poses the smallest barrier to redevelopment. By having rents “high enough” it begins to give the property some protection from redevelopment. By keeping the rents artificially lower than market rents, a park owner is really hurting the overall housing affordability because the chances will become exponentially higher that the park would be redeveloped and that park that once offered affordable housing would be gone forever.

Often times in a park with older homes, the residents own their own homes and do not pay a mortgage so the lot rent is the primary monthly housing expense (excluding utilities). For our example, a family owns and is living in a 3 bedroom mobile home at the park. Now, even in the most extreme example of $700 per month for lot rent, when you go to bestplaces.net and search comparable housing of a 3-bedroom apartment rent for Austin Texas, it shows the average monthly rate at $1,483. Can you imagine, if one of these people lost the ability to live at this park, their monthly housing cost can literally double overnight when looking at the alternative for a comparable amount of living space ?

Perhaps as an industry , the term should not be “affordable housing” but the term should be changed to “relative affordable housing”. $700 is cheap when you look at your alternative of $1483. $400 might be cheap when your alternative is $900. What people fail to realize is, sure it may be bad to get a rent bump of $100 but that is actually the best case scenario when looking at how this would have played out for these families if it ended up an auto mall or condo buildings. The city of Austin might be cheering for new class A condos but the news article would not have covered the 70 families that slipped off into the shadows possibly ending up homeless, on government subsidized housing, or even violating health regulation by exceeding occupancy limits with other family or friends. Frank has cited that this phenomenon of redevelopment is a reality. He previously had a park in Springfield Missouri, which had low rents and was targeted for redevelopment to become a Harley Davidson franchise in addition to an apartment complex.

I really don’t think Frank is going to be getting any thank you cards at any point in the near future though that would be great if he did. At the end of the day, Frank’s company has preserved at least 70 “relatively” affordable home sites in a city where housing costs are becoming extravagant even for those on the higher end of the income spectrum. Is it possible, that landlords like Frank, who raise rents to market rates, are actually helping keep housing affordable by preserving an industry that may otherwise vanish?

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