New Rule in Maine Slows Down Mobile Home Park Sales
An illustration of legislative risk to the real estate investor
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With relatively little fanfare, the Maine Legislature passed a measure earlier this year that will significantly change the way mobile home parks in Maine are transacted. The measure is meant to offer mobile home park residents a chance for equity ownership and, if you listen to proponents of the measure, to guard against the greed of absentee investors seeking purely to maximize cash flow. People of differing minds and opinions may disagree on whether these motivations will actually be served by the new rules, but there is no doubt that these changes introduce new hurdles in any potential sale of one of Maine’s 700+ mobile home parks. The rules also speak to an often under-appreciated risk in real estate investing: legislative/political risk.
The New Rules
L.D. 1931, carrying the title, “An Act to Forster Stable and Affordable Home Ownership in Mobile Home Parks by Amending the Laws Relating to the Sale of Mobile Home Parks,” was brought forth in the spring and quietly went into law on July 2nd with an effective date of October 25th. It became law without the governor’s signature, which means that she did not fully approve of it, but also did not veto the measure. The act reads:
The owner of a mobile home park shall give notice of the intent to sell the mobile home park to each owner of a mobile home in the mobile home park and to the department of the Maine State Housing Authority that provides home-buyer assistance…The notice must include:
A. A statement that a group of mobile home owners or a mobile home owners' association of the mobile home park may make an offer to purchase the mobile home park within 60 days of the mailing date of the notice; and
B. Either:
(1) The price, terms and conditions for which the owner of the mobile home park intends to sell the mobile home park; or
(2) The price, terms and conditions of any acceptable offer the owner of the mobile home park has received for the mobile home park, including a signed copy of the written offer that contains a description of the property. The owner may redact the name, address, contact information or other identifying information of the party making the offer.
For all intents and purposes, what that all means is that the current owner of a mobile home park may not sell the park without alerting the tenants of their own ability to buy it. The current owner must give them notice (via certified mail) with correspondence documenting the items above and must allow 60 days for a tenant or group of tenants to indicate their interest in purchasing the park. At that time, that person or group has 90 days to secure financing. This essentially gives park residents the first right of refusal to buy the park.
As a commercial lender, I ran into this for the first time two weeks ago when a pending purchase of a mobile home park north of Bangor became delayed by 60 days (for now) so that the appropriate disclosures and notifications could be made. The seller was not aware of the new rules and had not alerted their tenants. Once the issue was flagged by the attorney who was working to prepare the closing, a letter was then sent out to all of the park tenants as required. Now both seller and buyer will wait to see if any tenants or a group of tenants comes forth with an interest to buy.
The Impact
The intent of the new rules are to give Maine mobile home park tenants more control over their homes plus provide the possibility of equity ownership either as an individual purchaser of a park or as a cooperative formed with other park residents. Undoubtedly this is well-intended. Maine (like many parts of the country) has a serious housing crunch, and many mobile home park tenants live on a fixed income and cannot afford steadily rising housing costs. There is also something to be said, for sure, about a group of park tenants owning the overall park together in that it could engender a better sense of community, camaraderie, and, in short, neighborliness.
My fear, however, is that there will be many unintended consequences of the new rules that will not be quite so positive. For starters, these new requirements will significantly delay park sales. Given the requirement for 60 days’ notice followed by 90 days for the prospective tenant-buyers to secure financing, transactions could be delayed by a full five months, give or take. It is not uncommon for sales to fall through with such a long runway as impatient buyers look elsewhere or one of the two parties in the transaction simply changes their mind.
While “investor” is a dirty word in some circles, many of Maine’s mobile home park owners are locals themselves including many mom-and-pop types. The new rules will make it harder for these parks to be sold given the delays, which is unfair in many ways to the park owners, who may need the funds from a sale for to pay for other expenses or to pay off debt.
The larger concern is that new rules like this are likely to disincentive investor interest in these parks, which, of course, is the entire intent. Proponents of the bill here in Maine stated quite openly that they want to dampen investor activity in Maine’s mobile home parks especially among those from away because of perceptions that investors unfairly increase costs and make it too expensive for long-time tenants to live in their homes. There will be fewer buyers because some will simply stay away because of the new restrictions, and fewer buyers is detrimental to these mom-and-pop sellers.
The other big problem with turning away investors is that many of Maine’s mobile home parks do, in fact, need investment! Whether it is in groundwork and utilities, aesthetics and amenities, or the rehabilitation of old and dilapidated units, improvements in mobile home parks do not happen by accident or with the wave of a magic money wand. Some of the necessary improvements require serious commitment of resources. Without said investment, living conditions in such a park can deteriorate and become quite detrimental to the tenants themselves. I’ve seen it happen. I can tell you as a lender who has financed a good number of mobile home park transactions, investors dollars are sorely needed in many parks and, yes, these dollars are motivated by a profit incentive. But without that incentive, many of the necessary improvements in Maine’s mobile home parks simply would not be made, to the detriment of the very same park residents the new rule in Maine is meant to help.
Of course, there are plenty of examples of bad and neglectful mobile home park owners. They should be held accountable. And I am sure these new rules could have several positive success stories in the years to come that proponents of this bill might be able to throw back in my face someday if they read these words. But I worry that for every success story there will be more stories of delayed sales, transactions that fall through, and tenants or groups of tenants coming together to buy a park and then not realizing the extent of the capital needs or ongoing expenses or not having the resources to be able to invest in them. Living conditions in a park like this could become worse rather than better.
Legislative Risk
A good real estate investor is always mindful of risks. Unexpected capital needs, problematic tenants, rising costs, a higher cost of borrowing, damage to a unit: these are all common risks that to a certain degree can be mitigated against (although not perfectly; there is always going to be risk). But L.D. 1931 illustrates an additional risk, which is that with the stroke of a pen or the pounding of a gavel, an industry can change overnight.
Now I don’t want to be dramatic of exaggerate the impact of this particular measure. It is not like the Maine legislature is mandating a limit on transaction prices or seizing property or anything like that. But it will have an impact. More common examples of legislative risk might be the possibility that a city or town could completely outlaw short-term rentals, for example. Or that a community might enact rent control or some other restrictions on the screening of tenants or how the rent application process is handled. A huge possible risk that would be potentially cataclysmic to many real estate investors is that through legislative decree the IRS could change the way rental income is taxed including the expenses that can be deducted. Imagine if the IRS taxed rental income on the gross amount instead of the net amount, for example. There are some people in certain circles who want to have that conversation.
For all these reasons, it is so important for those in real estate to monitor what is happening in their local town halls and in their state’s legislative bodies. As I said at the outset, different well-minded people of varying opinions can have different views on any one of the possible legislative items noted above and I am not writing today to pass judgment on any of them, but it does not take a lot in many of these municipalities or legislatures to drastically alter the business model for a real estate investor. The risk of that, while difficult to predict or quality, is something to be mindful of.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
Weekly Round-Up
Here are a few things that caught my eye around the web this week:
More on the Vibes-Are-Off story, according to a recent survey, small business owners think it is a good time to invest in their businesses but are also feeling pessimistic about the economy. The survey has been administered for fifty years. Business owner optimism has been below the 50-year average now for 22 consecutive months. H/T Matty Yglesias. Read the survey here.
Via Lance Lambert, the average 30-year fixed mortgage rate fell to 7.09% this past week, the lowest level since September 1st.
According to RedFin, Sacramento was the top location for homebuyer migration in the past three months. Also making the list, Portland, Maine at #5, as well as several cities in Florida. Read more.
One Good Read
I have run this mini-feature at times in the past and people seem to like it where I share one article or podcast episode that is a little bit off the beaten path that I think might interest people. This week I am sharing a story about a 50,000 square foot store in Scottsboro, Alabama that obtains all of the unclaimed baggage from airlines around the country and then sells it as a discount. The name of the store? Unclaimed Baggage. Read the story here or listen to the four-minute story by clicking on the tab at the top of that page. It was a fascinating read/listen.
Have a great week, everybody!
Great article and link, thanks