In this edition of our newsletter, we're excited to share details of our latest transaction, a $26 million Manufactured Housing Community (MHC) located in the Pacific Northwest. Situated in a serene suburb just north of the Vancouver, Washington, this gated community caters specifically to individuals aged 55 and older. Among its notable features includes a clubhouse, complete with a library and convenient RV storage facilities. The community comprises of 130 double and triple-wide homes, each displaying peaked roofs and offering living spaces spanning from 1,100 to 2,300 square feet as pictured below. Now let’s dive into further details.
In November 2023, we began exploring properties in metropolitan areas of the Pacific Northwest known for their high land values and alternative housing costs. During our search, we found an 80-unit MHC in Yakima, WA. It was listed by a local broker who didn’t specialize in MHCs. We get excited when we meet local brokers listing an MHC as there’s likely an opportunity compared to large national brokers who specialize in the asset class and have relationships with larger operators.
Upon reaching out to the broker, we discovered that she had several 'Off-Market' properties available from the same seller. We requested the list immediately. Among these properties, we uncovered a premium asset in a market with high alternative housing costs and a scarcity of new supply—a true trophy find that is exceptionally rare to uncover through off-market channels.
We secured the deal by acting swiftly and implementing creative underwriting strategies. Instead of basing our assessment solely on the current rent roll, we factored in the scheduled rent increases. We did this for three key reasons: (1) The Seller had already distributed rent increase notification letters to all residents. (2) The timing of the increase just before closing made the seller the “bad guy”, (3) Although the scheduled rent increases were on the higher side of the market, we determined they were not over-market.
Despite initial price expectations of $33-35 million, we successfully negotiated a deal at $29.5 million and finalized the contract. The Seller valued our transparent underwriting approach and trusted our expertise. Additionally, securing the deal involved assuming a loan exceeding $15 million from Fannie Mae at an attractive interest rate of approximately 5.5%.
This property enjoys convenient access to the local Interstate, providing residents with a quick commute to the nearby Metropolitan Statistical Area (MSA) and convenient access to nearby retail and dining options.
The properties submarket boasts heightened alternative housing costs, with median housing prices exceeding $580,000. This high cost of traditional housing creates robust demand for manufactured homes and supports continued rent growth. During our Due Diligence period, we conducted an extensive analysis of the surrounding market. You can see some of our findings in the chart below.
During our due diligence process, we discovered three critical pieces of information:
Considering these challenges, our internal equity got cold feet and was reluctant to allocate capital towards this asset. We pivoted our approach and shifted our focus to assigning the contract to a seasoned institutional buyer.
Before implementing our revised strategy and based on our findings during the due diligence period, we attempted to renegotiate the deal by arguing that the scheduled rent increase either had to be reduced or future rent increases had to be paused. Initially, we were informed that the seller had multiple offers above our existing contracted price, so they were not willing to accept anything less. However, after a long weekend, we received a call indicating that the seller was open to renegotiation on the deal, and we settled at just over $25 million (5.8% cap rate) —a nearly 17% reduction from the original price!
With our internal equity exhausted, we knew we would have to assign the contract to a large institutional buyer. Leveraging our extensive industry relationships, we compiled a list of the top MHC owners and started making phone calls.
Initially, four main groups expressed interest within the price range. However, three of them withdrew from consideration after a week or so. They cited reasons including the limited room for lot rent increases (already at the top of the market) and negative local publicity surrounding the community.
The remaining interested party was a highly experienced operator with over 30 years in the industry. While they were enthusiastic about the asset, they harbored concerns regarding the property's flood zone status. Drawing on our extensive experience in agency financing for Manufactured Housing Communities (MHCs), we reassured the seller by highlighting the property's flood elevation certifications. These certifications confirmed that home levels were above the flood base elevation level, providing a measure of safety. Additionally, we conveyed that the existing lender, Fannie Mae, would be willing to waive underwriting insurance requirements due to these certifications, resulting in reduced insurance costs. With these measures in place, the remaining buying group was fully committed to the deal.
In the interest of transparency, we promptly notified the seller of our intention to assign the contract. We included the new buyer on the call and helped alleviate any concerns. Over the following challenging and stressful weeks, we negotiated closing timelines and assignment fees before successfully transferring the contract to the new buyer.
Despite this transaction not originally being planned as a contract assignment, we successfully navigated all challenges and secured a win for our company. We intend to use the proceeds to cover our next 12+ months of operating expenses and use towards our GP co-investment for our next few deals.
We appreciate your support and look forward to sharing more insights and updates. Stay tuned!
Flagship Purchased for ~$93 Million
Flagship Communities is expanding its presence by acquiring seven manufactured home communities with over 1,200 homesites for approximately $93 million. This acquisition, funded partly by a $60 million offering and new debt financing, marks a significant milestone for the company's growth strategy. The purchase price reflects a capitalization rate of 5.6 percent on year-one forecasted net operating income, showcasing strong sales activity in the asset class. This expansion strengthens Flagship's footprint in Tennessee, particularly in the lucrative Nashville market, and marks its entry into West Virginia, the company's eighth contiguous U.S. state. With these acquisitions, Flagship's portfolio will grow to 82 communities with over 15,000 homesites, positioning it as a market-leading owner in the manufactured housing sector.
Source: MHINSIDER. (2024, April 25th) Flagship Communities Announces Largest Acquisition in REIT’s History. https://mhinsider.com/flagship-communities-acquisition/
Contract Assignment: Contract Assignment refers to a transaction in which the rights and responsibilities of a contract are transferred from one party, known as the assignor, to another party, known as the assignee. This commonly occurs in real estate when a buyer transfers their purchase contract to another buyer before the closing.
Non-Disclosure Agreement (NDA): This is a legally binding contract that establishes a confidential relationship between two parties. One party possesses sensitive information, while the other party is granted access to this information. By entering into the NDA, both parties agree not to disclose the sensitive information to anyone else. NDAs establish a confidential relationship between the parties involved, ensuring that sensitive information remains protected and not disclosed to unauthorized individuals or entities.
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Gary Group Capital
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