Lending against a park versus lending against an apartment building: which collateral would you rather hold?

Question

I've been comparing two loan requests and the collateral question is bothering me.

One is a 96 lot manufactured housing community, tenant-owned homes, lot rent well under the local apartment comp, expense ratio in the high thirties. The other is a 40 unit apartment building in the same county, expense ratio around 55 percent, similar loan amount.

The park has better coverage on paper because the expenses are lower and the tenants don't leave. Sticky residents means the income line is steadier than a building with 40 percent annual turnover.

But if it goes wrong I own a park. The homes belong to the residents, so I can't just re-tenant a unit, and the value depends on whether the private water and sewer lines under it hold up and whether the local jurisdiction stays friendly to the use. With the apartment building I own the housing itself and there are a hundred buyers for it. Foreclosure and disposition rules differ a lot by state, and what I can actually do with occupied lots after taking it back is a question for counsel in that state rather than something I'd assume.

So it's steadier income against harder collateral. Which would you rather hold a first position on, and what would change your mind?

wendy_park48 · Answer

tender, the thing I'd look at before answering is who your buyer is at disposition, because that's what determines whether the collateral is hard or not.

A 96 lot lot-only park with clean tenant-owned homes and rents under market has an obvious buyer list now that institutional capital has validated the asset class. It sells. What doesn't sell easily is the park with 30 park-owned homes, a master water meter, and a city that's been talking about the site's redevelopment potential. Same asset class, completely different liquidity. So I'd stop comparing park to apartment and start comparing this park to the specific things that would make it unsellable.

On the documents, I'd want the private utility question answered in the loan file rather than in a reserve. Ask for whatever the seller has on line material, age and any inspection, and if there's nothing, that's information too. Also read the community rules and the leases for whether the borrower can actually pass through utility costs, because if they can't, the low expense ratio you're quoting is fragile the moment water rates move.

I'd hold the park position, with a lower loan-to-value than I'd write on the apartment. The income quality is genuinely better. The exit is narrower, and you price narrowness in proceeds, not in rate.

Lending against a park versus lending against an apartment building: which collateral would you rather hold?

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