Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

Yesterday we encountered Country Mobile Home Park, an estate in Santa Rosa whose park owner is adamant about converting the land to condominiums, and selling the individual plots to those whose homes rest atop those plots.

Plots? I love plots!

[Editorial note: park owners persist in calling the land 'spaces', as if to emphasize the transient nature of home occupancy, when plots is a much more appropriate word, for once the manufactured home is installed on the site, few if any of them ever move again. – Ed.]

Given the property’s good location and attractive construction, you’d think residents would be eager to buy, but as presented by the San Francisco Chronicle, they’re not:

“If it went condo, my wife and I would … have to abandon our unit and leave,” Dion said. “We’d have no place to go.”

If you owned a home here, wouldn’t you want to own the land under that home?
From left, Roger McConnell, Phil Dion, Mickie Dion, and Dick Root.

(Photo by Brant Ward, San Francisco Chronicle)

The couple paid $50,000 for their two-bedroom manufactured house about seven years ago. The monthly rent for their space is $515.

Those facts raise the question: what’s a fair price for the land?

In the ideal world of unfettered and undistorted Lockean capitalism, both buyer and seller are free actors with an infinity of possible actions. In such a case, fair market value is easy to derive: put the land up for sale, give it exposure in the marketplace, pick the highest offered price, and if the seller accepts, then that’s the value. Actual buyer-seller bargaining is the pure procedural value, hence the classic appraiser’s definition: ‘independent parties dealing at arm’s length, neither under undue compulsion …”

Just preserving my bargaining rights

The problem here is that the Lockean ideal is impossible to achieve. Manufactured housing or even longstanding mobiles homes get rooted to the soil; relocating them is at least expensive, and often totally destructive. When the land occupancy cost spikes, it’s the home owners who suffer. They have a substantial capital investment tied to a place – the Dions paid $50,000 – an investment that cannot economically be moved. The power imbalance is self-evidently visible and frequently exploited.

The home owners lack optionality; facing ruinous relocation costs, they’ve got to buy their land or lose their implied home equity. So they’re vulnerable to having a coercive or even punitive price premium squeezed out of them, and in a non-market transaction – you must buy at the price I set – the land could be valued in any of four ways:

Choose the one that’s best for you

1. Land rents. Take the current stream of land rents, treat them as an annuity, and capitalize them at a market cap rate.

2. Comparable sales. Find similarly zoned and situated parcels, and calculate a per-acre or per-space-equivalent price. This gets tricky because density adds value, especially in California’s better counties.

3. Highest-and-best use. Imagine the land vacant (because the mobile home owners would be legally obligated to remove them) and available for development. What is that urban land worth?

4. Pain threshold. The maximum price where a mobile home owner would still be better off staying than moving. This calculation would start with the home owner’s alternative tenure – could the home be moved? What would it cost for an equivalent site, plus the home’s relocation?

The last three of these offer no prospect of continued affordability. How much protection might the first approach provide?

To cook up a valuation, follow the right recipe

For convenience, assume that today the landlord pays real estate taxes [How would a condo conversion be treated under Proposition 13? – Ed.] and park infrastructural maintenance costs. Upon sale to the residents, they rather than the park owner will have to pick up these costs, so from their perspective they need to substitute $515 of monthly debt service for $515 of land rent payments, or else they’ll be economically worse off.

Multiply the $515 monthly rent times 12 to annualize it, then cap $6,180 at 6% – even in a nasty recession, this is still California, and as noted yesterday, I like the location – and you have an ‘affordable’ price for the land of $103,000 a space.

Although I can’t tell precisely how many spaces there are per acre, a random comparable in Redding, California, has 11.5, so what with the interior streets and driveways/ breezeways, let’s make it an even 10. That’s $1,030,000 per acre, and while I can’t tell exactly what land in Santa Rosa costs, a quick search suggests even this would be a terrific price for the land owner.

Is it affordable?

“We couldn’t afford to move our home, and we couldn’t afford to buy the lot underneath,” [Phil Dion] said. “I contacted 13 finance companies, and only one would finance the lot purchase – at 18% interest.”

The Dions are caught in a rate whipsaw. Their monthly rent capitalizes up into value at 6.0%; their land-purchase financing would be at 18.0%, three times as much.

Reconstituted, you’ll be worth one-third as much

Yet if the manufactured home plus the newly bought land were treated as real estate, then they could certainly be financed at something in the 6-7% interest range. So once again, the legacy of having been constructed as a mobile home leads to a financing impairment that destroys affordability for the owned-land-mobile-home asset class – absent government pump-priming of the credit market, that is.

The park’s owner, Country Mobile Investments of Walnut Creek, could not be reached for comment.

Actually, we needn’t hear from this owner, since another Google search reveals that the owner is well aware of the residents’ legal protections, and is litigious about preventing their expansion, as this 2007 article shows:

MOBILE HOME PARK SUES CITY

The owners of Country Mobile Home Park in Santa Rosa sued the city Friday, seeking $23.1 million in damages because the city in May enacted restrictions on condo-style conversions.

One suit, filed in Sonoma County Superior Court, claims the city “unlawfully stymied” Country Mobile Investments’ attempt to sell land at the park on Fulton Road when they passed the ordinance last month.

A second suit, also filed Friday, seeks to overturn the city’s new ordinance.

That for your ordinance!

While there’s no further reference that I could find [Based on ten seconds' search? – Ed. It's a blog post, not a legal brief – Auth.], suggesting that the lawsuit went away as did the proposed county-wide legislation, the following further tidbit caught my eye:

The county law requires park owners to secure the approval of 20% of their residents before filing an application to convert and then getting support from more than 50% once the application has been processed.

Thus we already have two levels of government involved – county and local. The locality’s also trying to strengthen the implied warrant of habitability:

Instead, it requires that park owners prove their parks meet building codes and that their roads, sewer, water and utility systems are in good condition prior to conversion.

Setting aside the procedural questions – how does the owner prove this? – this statute is based on sound public-policy principles. Yesterday I observed that the mobile home park operator – that is, the land owner – stands relative to the residents much as a municipality does to a homeowners’ association, as the infrastructure provider. This is clearly the case at Country Mobile, with its interior roads and association amenities like the visible clubhouse:

Who’s responsible for upkeep on the in-site infrastructure?

As long as we’re in that 2007 scenario, some additional detail is worth citing:

When a park undergoes conversion, individual mobile home lots can be sold to current tenants.

Naturally – and at the right price, desirable for all concerned.

Once converted, local rent control laws no longer apply, although a state rent control law protects low-income residents.

But those protections would be wiped out if those low-income tenants move, purchase a lot or die, according to city officials.

Selling the underlying land as a condo thus both (a) eliminates rental protections for all non-low-income residents, and (b) creates a ‘vacancy decontrol’ elimination of rental protection even for the low-income residents. A nice finesse around resident protections phrased in terms of rental.

You thought I had to trigger the protections, didn’t you?

Sale of the underlying land turns the unofficial affordable housing into officially unaffordable housing.

Even the apparent protection for low-income residents is less than it seems, as the 2009 San Francisco Chronicle adds:

Low-income residents who don’t want to buy have lifetime rent-control protection. But as soon as one unit in the park sells, all the moderate-income and above residents get switched from local rent control – which ties annual increases to inflation – to state rent control, which allows rents to increase to market rate over four years.

There go your rent protections

With multiple levels of government are involved, protections are always going to differ, and it’s no wonder the owner would like to slide into whatever form of regulation is most favorable. In a case like this, the less pro-tenant law is almost certainly going to be from farther away, the more-removed unit of government – if the state law were stronger, the local law would have no reason for existence. (Supremacy principles would generally pre-empt a locality’s efforts to negate a stronger state law.)

In recent years, many cities and counties have barred mobile home parks from going condo, saying they want to preserve affordable housing.

Striking here is the leverage difference in occupant ownership forms between going condo – every owner individually for himself – and co-op, where we all reside in a living club.

Are we?

[Continued tomorrow in Part 3.]

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