Cooperative Financing for Manufactured Housing Parks New Hampshire Community Loan Fund

Project Summary

Created in 1985, the New Hampshire Community Loan Fund (NHCLF) is a non-profit lender that has assisted helped tenants of manufactured housing parks to form cooperatives by securing financing and providing technical for the length of the loan. There is a critical need for this sort of financing because 4% of New Hampshire's 1.2 million residents live in manufactured housing, which has become a viable form of affordable housing. Currently, 10% of New Hampshire's 460 manufactured housing parks are cooperatively owned. Tenants typically own their manufactured house, often at extremely high mortgage interest rates, but rent the land in the park on which the home is located. This leaves low- to moderate-income tenants exposed to many risks, including rent increases, park closure and environmental and public health problems. Due to favorable legislature in New Hampshire, if a mobile home park is for sale and an outside offer is made, the tenants have 60 days to form a cooperative and secure funding. Because this type of lending does not meet the risk requirements of commercial banks, the NHCLF helps the tenants form a cooperative and provides subordinated debt to commercial loans so that park tenants can become tenant-owners. Additionally, the NHCLF helps residents create by-laws, track finances, manage receivables as well as encourage tenants to become more involved in the cooperatives.

Financial Challenge

Manufactured housing tenants, who typically have low- to moderate-incomes, have historically been unable to qualify for a traditional commercial bank mortgage individually. Although the tenants may have qualified collectively, traditional commercial banks would not extend mortgages to a non-legally bound group, as this type of lending does not fit the bank's risk requirements and lending practices. Commercial banks face many challenges to extending this type of financing because the borrowers lack fixed leadership, have low cash equity, and are democratically controlled with no prior management experience. By helping tenant groups become cooperatives, often under the 60-day timeline, the NHCLF is able to create a legal entity that qualifies for purchase financing. Additionally, the NHCLF's senior/subordinated debt package helps commercial banks to overcome their own lending practice challenges.

Because this new business model was initially unproven, the NHCLF originally sought funding from the State Housing Finance Authority, as it had a policy obligation to assist low-income residents, and non-profit organizations such as the Sisters of Mercy, to provide loan and down payment financing. After the fourth successful financing transaction, the NHCLF was able to secure financing from banks that were members of the Federal Home Loan Bank (FHLB). FHLB-member banks have been able to offer two key elements to successful cooperative financing: interest-only advances for down payments and fixed rate financing. The interest-only advances are crucial, as tenants typically do not have sufficient funds for a significant down payment, particularly within the 60-day time limit. Fixed rate financing is also imperative for the financial stability of the park tenants going forward.

Private banks have seen the success experienced by the NHCLF and New Hampshire Housing Finance Authority and have followed suit. The NHCLF has found that FHLB-member banks are willing to make cooperative loans because they receive Community Reinvestment Act (CRA) credits and the NHCLF assumes subordinated debt and provides technical assistance for the life of the loan.

Financial Structure and Benefits

The NHCLF helps manufactured housing park tenants form a cooperative, and each tenant pays a low, one-time membership fee, usually ranging from $500 to $1,000. Because tenants pay the membership fees up-front, they collectively become sufficient for a down payment on the mortgage to purchase the park. The NHCLF assumes subordinated debt for the gap between the capital the residents are able to raise from membership fees and what the commercial banks are willing to lend.

In all of the NHCLF-financed cooperatives, the land and infrastructure (water, sewer, etc.) are financed and secured by mortgages known as "blanket land loans."

This financing results in an expansion in the affordable housing market with stabilized rents and financing that is not at sub-prime rates, but instead at a fixed rate for the life of the loan. Additionally, the NHCLF is able to expand the home-ownership market, which results in a number of social benefits as well.

Social Benefits

There are many studies that prove that an increase in home ownership increases neighborliness and results in a decrease in crime. Additionally, the pride in home-ownership typically results in beautified communities, from replacing old manufactured housing with new homes, to capital expenditures for infrastructure (such as water and septic systems) that result in health and safety improvements. The NHCLF also points to anecdotal evidence of many tenant-owners gaining experience in areas such as management, financial reporting and public speaking through the management of the cooperative. This experience is afforded to lower-income residents who may not have received this experience otherwise, and has even resulted in job promotions.

Project Significance

The NHCLF financing projects are significant because they have proven successful a business model that, prior to 1985, did not exist. This financing provides a long-term financing solution for the manufactured housing industry, a sector that has traditionally had little respect for its consumers.

Project Transferability

Because the NHCLF has proven the success of the senior/subordinated lending model through its 36 transactions worth $14 million since 1984, this project is imminently transferable. In a favorable policy environment, revolving state loan funds and other non-profit lenders can secure commercial bank funds from FHLB-member banks at a fixed rate and with interest-only advances for down payments. Additionally, the NHCLF is in the process of standardizing and institutionalizing its training and technical assistance programs, which are also transferable.

Recommendations

In order to fuel the expansion of affordable housing through senior/subordinated financed manufactured housing, two tracks must be pursued simultaneously.

Policy Initiatives: In order to put land ownership in the hands of residents or a benevolent landlord, there needs to be a favorable policy environment. New Hampshire has enacted a "60 Day Notice" law that requires a manufactured housing park seller to allow its residents 60 days to form a cooperative and secure financing. This legislation should be pursued in states where it currently does not exist. Additionally, manufactured housing dealers should be bonded to ensure accountability for warranties on the housing units they sell.

Because the manufactured housing industry grew from the travel industry, it has historically been treated as personal property, not permanent housing. Manufactured housing should be considered permanent and its lending practices should be covered under ERISA regulations to ensure maximum consumer protection against predatory lending practices.

Market Dynamics Strategy: Entrepreneurs in the non-profit sector can improve markets simply by participating in the market. Because policy initiatives will never ameliorate all challenges in the manufactured housing industry, entrepreneurs can empower consumers by encouraging home ownership.

About the Authors

Jennifer Folsom and Lee Boyle are Masters of Business Administration candidates at the McDonough School of Business at Georgetown University. During business school, Ms. Folsom pursued a summer internship in investment banking and consulted on a variety of financial services consulting projects. Prior to business school, Ms. Folsom was an Associate in the High Net Worth Group at Legg Mason Wood Walker, Inc., where she assisted in the management of a $3 billion client portfolio. Mr. Boyle currently works part-time in the Social Research area for the socially responsible mutual funds managed by the Calvert group in Bethesda, MD. Prior to business school, he worked for the US Congress as a policy analyst.