44-lot park comes back legal nonconforming with no rebuild right after a casualty. How do you price a tail like that?

Question

Zoning verification letter landed last week on a 44-lot community I've been circling. The park predates the current ordinance, so the use is legal nonconforming, and the letter says in plain language that if a casualty takes out more than half the units the use does not automatically come back. Nonconforming and rebuild language is written differently in every state and usually differently again in every county ordinance, so read the code section the letter cites instead of trusting the summary.

Two honest ways to look at it. One is that the tail is real and cheap. A park-wide loss on a land-lease community where residents own their own homes is a strange event to underwrite, your insurable basis is roads and utilities rather than dwellings, and every buyer after you inherits the same letter, so it isn't a new problem at resale. The other is that the letter is exactly what caps your exit. Lenders read it, appraisers footnote it, and a buyer three or four years out with tighter credit will discount the same paragraph harder than I would today.

There's a third path where you treat it as a project rather than a risk: apply for a conditional use permit or a rezone into a district that lists manufactured housing as permitted, and pay the entitlement cost out of early cash flow. That means a public hearing in front of neighbors, and I have watched those go badly for reasons that had nothing to do with the application.

Curious where the room actually lands on this, because I've heard experienced operators say both things with total confidence.

stephen_ok9 · Answer

The part I'd chase first is what your lender does with it, because that determines your price more than your own risk tolerance does. Some credit committees treat limited rebuild rights as an insurance question and want an ordinance or law endorsement plus a longer loss of rents period. Others knock the term down or drop proceeds. Get that answer in writing before you spend money on diligence, and confirm the current terms with the lender rather than a broker's recollection of last year's deal.

On resale, the discount isn't fixed. It shows up as a smaller buyer pool, which mostly means fewer bidders willing to do agency debt on it.

laurenkim53 · Answer

Half the rural counties I look in won't even write you a letter like that. You get a phone call from a part-time planner who says it's been there since the seventies and nobody's ever asked. That reads friendlier and it's worse, because you're holding an opinion instead of a document. At least parcel knows what he owns.

tylerbrooks9 · Answer

I came to this asset class because the failure modes are supposed to be a water line and a slow payer, not a hearing room. A letter that says the use might not come back is the kind of thing I'd still be thinking about at 2am three years later... so for me the discount would have to be very large before it stopped being an excitement I didn't sign up for. That's a temperament answer more than a math one, I know.

brandonlee36 · Answer

I own one of these. 38 lots, nonconforming, and I went ahead with the rezone route in year two because I thought the entitlement would add value on paper. Six months, about $14k in engineering and legal, and the planning commission tabled it twice before the applicant next door poisoned the room over traffic. I withdrew.

What I learned is that the park operated exactly the same before and after. Lot rent collected, occupancy held, nothing changed except the $14k. If I did it again I'd take parcel's discount at closing and never open the file, and hollow is right that the written letter is the good version of this problem.

44-lot park comes back legal nonconforming with no rebuild right after a casualty. How do you price a tail like that?

4 replies