Two days ago, we looked at Santa Rosa’s Country Mobile Home Park, whose owner wants to condo the land (at least as reported in the San Francisco Chronicle; the owner wouldn’t talk to the newspaper), and yesterday we saw that in a forced condo conversion, land value would be a tussle.  Yet why the choice of condo rather than co-op? 

It has to do with optionality.  Who can force or block what?

I’m blocking your conversion attempt

To sell to a co-op, by definition the land owner must persuade at least a majority of the residents – often a super-majority – that the proposed purchase is a good deal.  With a condo, evidently the owner can act unilaterally through a subdivision procedure, putting the residents to a Hobson’s choice: pay the owner’s price – which can include a premium equal to the home owner’s sunk costs lost on relocation – or move.

Like it or lump it

Nor are mobile homes insignificant.  According to the Chronicle, California hosts 4,707 private owned mobile home parks with 365,382 lot spaces (an average of 78 per lot), home to 700,000 residents.  One Californian in fifty lives in a mobile home park.

The legislation’s sponsor echoes this post’s themes:

“We’re trying to make sure that people whose lives are going to be affected have a voice,” said Assemblyman Pedro Nava, D-Santa Barbara, the bill’s sponsor. “Mobile home parks are affordable housing. The notion that you could have the land sold out from under you is just abhorrent.”

The proposed legislation (text in pdf) opens with a policy statement, then quickly gets to a procedural solution:

SECTION 1. Section 66427.5 of the Government Code is amended to read:

66427.5. At the time of filing a tentative or parcel map for a subdivision to be created from the conversion of a rental mobilehome park to resident ownership, the subdivider shall avoid the economic displacement of all nonpurchasing residents in the following manner:

(a) The subdivider shall offer each existing tenant an option to either purchase his or her condominium or subdivided unit, which is to be created by the conversion of the park to resident  ownership, or to continue residency as a tenant.

No one can be forced to buy or evicted for failure to buy.

 (d) (1) The subdivider shall obtain a survey demonstrating support of a majority of the residents of the mobilehome park for the proposed conversion.

This equity-balancing procedure – the large landholder having to persuade at least a majority of the small landholders – dates back to the English Enclosure Acts, about which I posted by borrowing from Jack Aubrey:

Most of what I know about the Enclosure Acts, I learned in Aubrey-Maturin

Harry glared about him, scribbled sums on a piece of paper, and then said to Griffiths, ‘God’s my life, sir. You have the effrontery to present this with just the barest majority by value, when you know perfectly well that three quarters or four fifths is the usual figure. And to make matters worse, far, far worse, you do so against the will of the lord of the manor, your natural superior. I have never heard of such a thing. I wonder at it, sir. I wonder at it.’ (Pages 74-75)

Back in Santa Rosa, the survey requires procedural democracy:

(3) The survey shall be obtained pursuant to a written ballot.

(4) The survey shall be conducted so that each occupied mobilehome space has one vote.

Voting about future use or sale is core to group ownership of property, as we saw in Florida’s Briny Breezes, and similarly core to land-use policy decisions, like the UK’s stock transfer.

After the condo conversion – assuming it goes through – the minority non-purchasing residents would receive extra protection akin to that they now have under the state’s mobile-home park ordinance:

(f) The subdivider shall be required to avoid the economic displacement of all nonpurchasing residents in accordance with the following:

(1) As to nonpurchasing residents who are not lower income households, as defined in Section 50079.5 of the Health and Safety Code, the monthly rent, including any applicable fees or charges for use of any preconversion amenities, may increase from the preconversion rent to market levels, as defined in an appraisal conducted in accordance with nationally recognized professional appraisal standards, in equal annual increases over a four-year period.

More fingers, Mr. President

(2) As to nonpurchasing residents who are lower income households, as defined in Section 50079.5 of the Health and Safety Code, the monthly rent, including any applicable fees or charges for use of any preconversion amenities, may increase from the preconversion rent by an amount equal to the average monthly increase in rent in the four years immediately preceding the conversion, except that in no event shall the monthly rent be increased by an amount greater than the average monthly percentage increase in the Consumer Price Index for the most recently reported period.

Assuming this legislation were to pass, one can expect it to be challenged by park owners, who have shown a consistent predilection for litigating mobile-home statutes, particularly at the county or local level.

In response [to ordinances barring mobile home park condo conversions in the name of affordable housing preservation], park owners have filed more than 15 lawsuits against the municipalities.

Though the home owners have a strong case in policy equity, particularly given the unique history of mobile homes and their netherworld status as an asset class, the park owners have a strong legal point: preventing subdivision and sale to the residents, regardless of price, materially compromises their rights as landowners.

The only one that made it through the appellate process was decided for the park owner, said Richard Close, a Santa Monica attorney who represents owners in many of the lawsuits.

Close to the owners? 

Mr. Close has been on these issues for a quarter-century, and has successfully represented owners trying to condo their parks:

Mr. Close co-authored “Downward Mobility” (Los Angeles Daily Journal 2007); “Conversion to Resident Ownership: Does it make sense for you?” (WMA Reporter June 2007); “County Leaders Missing Point on Park Conversions” (Santa Cruz Sentinel 2007)

In several of these pieces he cites what seems a critical potential fact:

How can low-income residents afford to become homeowners? For low-income residents who elect to purchase their lots, the state provides 3% financing in an effort to preserve affordable housing and to promote affordable purchase housing.

Mr. Close’s assertion is not documented by a hyperlink, and it’s inherently suspect.  Three percent financing is well below market, meaning there’s an implicit subsidy involved, which further implies finite resources, which implies competition for those resources … which implies they won’t be much help to mobile home owners.  As negative confirmation of these deductions (beyond Mr. Close’s unsubstantiated assertion), the only reference I can find is to CalHome, a state program for which mobile homes are eligible but clearly neither preferred nor encouraged:

Grants to local public agencies or nonprofit corporations for first-time homebuyer downpayment assistance, home rehabilitation, including manufactured homes not on permanent foundations …

Assistance to individual households will be in the form of deferred-payment loans, payable on sale or transfer of the homes, or when they cease to be owner-occupied, or at maturity.

Note: CalHome does not loan directly to individuals.

If I have this straight, CalHome wouldn’t work in a condo situation, it would apply only if a non-profit rode to the rescue and bought the whole park.  If I’m right about this, then Mr. Close’s claim is a red herring.

Something fishy?

Can’t blame a guy for trying

Financing is available through banking institutions, Cal-Vet loans and local governments often offer financial assistance through redevelopment funds/first-time home buyer programs.

Furthermore, most park owners offer financial assistance in an effort to facilitate sales and encourage resident ownership in the parks.

Translation: We’ll set the price out of your reach, then offer you a discount to swing your approval.

Remember: residents lack optionality, as in practical economic terms, they cannot move:

“In the old days, if you didn’t like a park, you unhooked and drove to another location,” said Sam DiGiacomo, who lives in a mobile-home park in the town of Sonoma and runs the local chapter of the Golden State Manufactured-Home Owners League, which represents residents. “But now they’re not really mobile; my home sits on a cement foundation, the wheels are removed.”

Cover of the most recent GSMOL publication

“People think we’re nomads that travel from place to place,” said Suzanne Angeo, a resident of Santa Rosa’s Country Mobile Home Park. “But we live here; these are our homes. Many of us have invested our life savings into them.”

Suzanne Angeo waters in front of her manufactured home at Country Mobile Home Park in Santa Rosa. (Brant Ward / The Chronicle)

Many residents worry that going condo will wipe out that investment.

Potential buyers will heavily discount the value of the homes if they have to pay a big premium for the lots, said Will Constantine, a Santa Cruz attorney who represents park residents fighting condo conversion.

“When a park owner converts, the mobile-home owners lose about 95% of their homes’ value,” he said.

That has to be hyperbole.  It’s likely to be bad but not that bad.

“If a resident wants to sell, the person buying has to buy the lot. If you have to pay $200,000 for a lot, you won’t have much left over to buy the mobile home.”

Mr. Constantine’s numeracy seems no better than Mr. Close’s; in fact, the whole Chronicle piece is missing that crucial element.  What price would the owner think equitable? 

[Mr. Close's Downward mobility article offers as an example a favorable land purchase in Palm Springs, $88,000 spaces now worth $139,000, which sounds good, except that the cited home owner is now paying $190 in monthly association fees and $100 in taxes, plus a minimum of $440 per month in capital costs (6% x $88,000), for a total occupancy cost of $730 monthly versus the $500 he paid before in monthly rent.]

Let’s play our game, with your home on the line

What price is affordable? 

The right price for a mobile home, not a trailer!

What price is financeable?  Since we have no information on any of this, we fall back on procedure. 

The owner wants all the optionality with none of the restrictions; the residents are rightly terrified that with such a power imbalance, if they lack legal standing they will lose their affordability. 

“For many of us, this is our last home; we’ll go from here to the grave or a nursing home,” said Jean Warnes, 74, who chairs the homeowners association at Sequoia Gardens, a Santa Rosa mobile home park that has applied to go condo. It has the same owner as the Country park.

For most of us, housing is not only a comfortable haven for our declining years, it’s also a source of inflation-hedged wealth to be monetized for ourselves or our children:

You should have listened to me when I recommended buying the lot

“When we pass away, our heirs cannot inherit our homes if they must buy the air-dirt underneath. If we go to a nursing home, we will have nothing for our keep.”

“As many years as we’ve paid rent, we could have bought this lot over and over,” said Joan Allen, who has lived in Santa Rosa’s Country for 29 years.

Probably not, actually.  And your rent’s likely been cheaper than the cost of owning a home would have been.

“I feel it would be more advantageous to buy the lot. If we had the opportunity and the price was right, it would be a good investment.”

Once again, it’s back to the question of price – and the related question, at least in the unique asset class of mobile homes, of who has what optionality.

The bill passed the Assembly in May on a 41-31 vote and is eligible for a vote on the Senate floor Aug. 17.

Wonder how they’ll vote?

I predict it will be enacted.

I make laws with my right hand

Then it’ll be litigated.

So sue me

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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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Legally, mobile homes that lack land aren’t real estate, and you can’t finance one as real estate; instead you get a chattel loan. You can’t avail yourself of the legal protections of a property owner (like RESPA); you can’t use a real estate broker. The law sees your home as a tin can on wheels

You want to buy the land, don’t you? Reunite your home and the land on which it sits by turning your mobile home park into a condominium?

If you owned a home here, wouldn’t you want to own the land under that home?

Or do you?

As profiled in an intriguing San Francisco Chronicle article, how and with what approvals or consent rights a mobile home park may turn from a rental to ownership is a politically incendiary issue in California:

Tuesday, July 21, 2009

(07-20) 20:22 PDT — Mobile home parks, still affordable to many people, have become the latest housing battlefield. A growing number of park operators want to convert the spaces those mobile homes occupy to condominium ownership – a move that some residents say would price them out of their homes.

A bill being debated in the Legislature would give local governments and park residents more say in such conversions. It would allow municipalities to give more weight to surveys of community residents in deciding whether to approve condo conversions.

Surveys, we discover from reading the proposed legislation, really mean majority-vote referenda – as they should, because a decision to go condo is irrevocable and economically disruptive. If the park owner can compel it unilaterally, then that ground owner can evade the resident rent protections otherwise available to mobile-home park residents under California law.

At issue are two things:

1. Who gets to choose if the mobile home property goes condo?

2. What’s the right price?

Ooh, the Right Price is gonna be a tough question

The ‘right’ price may be fair, it may be affordable, it may be something else.

How can I figure if the Price is Right?

Mobile homes represent unique challenges in public policy surrounding land rights. They are legally awkward, as they are neither true rental nor true ownership. Instead owned mobile homes on rented spaces possess the worst optionality features of both:

• Rental – lack of controllable occupancy cost
• Ownership – substantial capital investment that is lost upon relocation

Neither fish nor fowl, neither ownership nor rental, they place the home owner at a horrible leverage disadvantage versus the park (land) owner, which is why so many states, California among them, have enacted a series of incremental mobile-home-owner protection laws.

Previously I’ve posted extensively about mobile homes, which remain to me America’s great overlooked and underappreciated form of affordable housing.

Mobile homes are also the closest configuration and tenure form we in the US have to the global south’s informal settlements, including the regularization of land tenure and the challenges of municipal infrastructure (which ain’t free).

Traditionally, mobile home park owners rent out lots and maintain common areas such as roads, clubhouses or pools. Residents own their dwellings but pay rent for the lots where they sit.

Relative to the home owners, the mobile home park land owner is in much the same position as a developing-world municipality is with its slum dwellers, with the significant differences that the park owner is not publicly accountable and is out for pure profit.

“Not that there’s anything wrong with profit!”

As in global-south slums, the occupants often lack legal standing, but as their numbers grow, they gain political clout, and in liberal democracies, they learn how to wield it:

“We’re trying to make sure that people whose lives are going to be affected have a voice,” said Assemblyman Pedro Nava, D-Santa Barbara, the bill’s sponsor. “Mobile home parks are affordable housing. The notion that you could have the land sold out from under you is just abhorrent.”

Nava wants the home owners to have a say

[The California-oriented Web site Sham Conversions not only lets you know exactly where they're coming from, but also links to the source material – Ed.]

When a park converts to condo-style ownership, which requires approval to subdivide from the municipality, the so-called air space the mobile homes occupy is offered for sale, often for prices of $100,000 to $200,000, eliminating rent.

This framing entangles two threads that often intertwine but need not necessarily: valuing the land, and rendering the resulting price affordable to the residents.

Critics say park owners are exploiting a loophole in state law that lets them cash in big-time, circumvent local rent control and gentrify affordable housing.

California allows local regulation of mobile home park ground rents, typically at levels whose escalation is tied to some external metric (like CPI) that allows the owner an inflation-hedged return, but not a pain-threshold or highest-and-best-use return. Recognizing that owners of mobile-home park land may want to sell, or may want to use selling as an end-run around regulation, many states have right-of-first-refusal or similar right-to-buy statutes that are activated if the land owner starts a sales process.

Captain, sensors indicate our legal deflectors are losing power

Some owners try to maneuver around this protection by taking sequential actions that achieve the same economic outcome – decontrol – without invoking the resident-protection provisions. We saw these shenanigans in New Jersey’s Paradise Park (see Part 4 of A Christmas Present for Paradise Park), whose owners undertook an I-know-nothing approach to their conversion-oriented sale:

Whether or not you like a mobile home park in your town, says the court, the legislature has decided that existing mobile home park residents are entitled to protection, and the law must carry out that policy conclusion.

Judicial review of individual statutory sections of the Act must, therefore, be guided and informed by these two overarching legislative policies:

1.  To continue the use of mobile home parks on lands currently used for such a purpose; and

2.  To encourage and promote ownership and self-governance by the residents of these parks.

A consistent theme running throughout these exemptions is that none of the transfers or conveyances carry a significant risk of changing the property’s use to something other than as a mobile home park. That is, if properly carried out in good faith, none of these transactions undermine the Legislature’s commitment to encourage park-ownership by mobile home residents, and self-governance in mobile home communities.

In other words, for a sale to be exempt from triggering resident rights, it must not increase the threat to those rights. This is an entirely sound public-policy principle, one that finds its expression in numerous affordable housing preservation statutes.

My sovereign duty is to protect my people

Mobile homes are the dark matter of the affordable housing universe – significant, important, and ignored.

Good faith is the linchpin of this analysis. If courts permit interested parties to utilize these statutorily recognized transactions as legislative loopholes, i.e., as a means of circumventing the procedural and substantive rights bestowed to mobile home park residents in N.J.S.A. 46:8C-11 and N.J.S.A. 46:8C-12, then the public policy rationale embodied in the Act is frustrated.

Because they’ve crept on us as a configuration and tenure (see Mobile homes: how they got here, Part 1, Part 2, Part 3, Part 4), mobile homes are unofficial affordable housing. The resulting jurisprudence of their affordability derives from case and common law – meaning that it’s always evolving, and patchwork, and hence has both gaps and strains.

Found a gap in our land-use laws

But [California's mobile home] park owners say:

1. This is a property rights issue

2. Going the condo route is the best way to capitalize on their investment

3. It benefits residents who can afford to buy or can obtain publicly assisted loans to buy.

The park owners are right that the legislature or courts need to grapple with property rights. If these are judicially compromised, then it’s potentially an eminent domain taking and hence governed by rigorous procedural rules and strong protections of property owners’ economic rights.

That said, the park owners’ arguments boil down to:

1. Touch my property and I’ll sue you for eminent domain taking compensation.

2. This is how I can maximize my return.

3. Anyone living in the park who can’t afford the land price should get help from the government, not me.

Admittedly, this casts their position in a harsh light, based on secondhand reporting in a possibly-unsympathetic newspaper.

You want sympathy? I’ll show you sympathy!

But let’s go back to the issue of process. Who decides?

Santa Rosa’s Country Mobile Home Park is one whose owner has applied for condo conversion, a move opposed by a majority of its residents. Among them are Phil Dion, 70, and his wife, Mickie, 67.

Courtesy of Google (Earth and maps), here’s the property:

1180 Fulton Road, Santa Rosa, CA 95401

Good location; only a couple of miles from downtown and the US 101 freeway, yet at the same time on the edge of development (with all that agricultural land directly to the west).

Do those look like tin cans on wheels to you?

Most striking in the photograph is how good the homes are, and how well laid out on the site. By contrast with some higgledy-piggledy single-wide developments, that look like the back end of a distribution warehouse, these are carefully laid out on subdivided streets. Moreover, Google’s street view (link should work, UPS van emerging) shows a trim bungalow-style complex, with a discreet wall along the main road and the property’s name on an entrance sign. No one driving by would think it a trashy trailer park.

Fortunately, this isn’t our subject property

Thus it seems evident that residents might be interested in buying the land underneath their park.

Will they? At what price? Who will decide?

[Continued tomorrow in Part2.]

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In yesterday’s depressing blog post, we visited beautiful distant Victorville, California:

Over the mountains on the road to Vegas: isolated Victorville

A new-construction development in Victorville is being dismantled, as reported in this Los Angeles Times story, because holding the property has become more expensive thanks to the perverse consequences of a recent anti-foreclosure California law, SB 1137.

This may not be what Victorville wants, but it’s what Victorville is getting:

The image Victorville presents of itself: happy people developing land!

(Scrolling banner from the City of Victorville’s Web site)

The lender is tearing down the property because it now has negative holding value (and thus, potentially, negative equity), and the city (spokeswoman Yvonne Hester) seems blind to the potential opportunity for affordable housing.

The development was in a part of town remote even for Victorville, a wind-swept high desert city of about 100,000 residents.

Famous for its Route 66 Museum

In more urban areas, lower-maintenance properties like office buildings are being ’saran-wrapped’ – completed, then sealed and held 100% vacant in the expectation that sometime soon they will be worth renting.  That’s harder for single-family homes, each of which must be protected by an occupant.

Individually wrapped for your protection

However, it’s all but impossible to protect an uncompleted (and hence unoccupiable) property except with round-the-clock security guards.

Anything can happen if nobody’s watching.

A dozen of the homes were in various stages of construction. Some had frames erected, and a few others had drywall hung, said Jorge Duran, Victorville’s code enforcement manager.

The four finished homes, however, were richly appointed with granite countertops, whirlpool bathtubs and dual-pane windows.

Now they will be disassembled and sold for body parts.

Building permits were issued in September 2007, Hester said.

Development is like the tide: it rolls in to new greenfield (or, in Victorville’s case, desert-field), reaches a high-water mark, and then either stops of recedes. 

Dear Mr. Bogart, you are the last developer in Paris, Texas …

Home prices were already falling, but in San Bernardino County, the median price that month was still a robust $325,000, according to DataQuick, enough to keep fueling hope — or denial.

This developer was in the unlucky position of being the last, worst optimist.

“These Egyptian properties are NOT vacant!” shouted Tom, deep in denial

Construction halted in the summer of 2008, and the homes became a nuisance, attracting vandals and squatters, Hester said.

A home is an organism defended by its occupants.  If there are no occupants, the home is defenseless. 

The city first cited the developer for failing to maintain the property in July, Hester said.

Notice that California’s unwisely structured law, SB 1137, penalizes foreclosing banks worse than developers.  Developers can be hit only with the normal citations; banks can be fined $1,000 per property per day.

“People were taking sinks, the air conditioners. For someone who wanted to do no good, it provided an opportunity,” she said.

There’s something hideous about the slow looting of a helpless white elephant.

Dead but still got some tasty bits

The bank repossessed the development in August, Hester said. Demolition permits were granted April 9.

This is California, remember, where you can’t build it without permission, and having built it, you can’t tear it down without permission either.  It’s the housing production paradox run riot.

The wrecking crew showed up near the end of the month. Forrester was not officially part of the demolition team. His nephew, who got him the job, operated the backhoe that tore through the houses with the destructive ease of a mechanical Godzilla.

Easy on the symbolism, guys!

Anyvon referenzing de Terminador vill be destroyt

Forrester’s job was to chase vandals away and sell what he could to bargain hunters.

“uh, gentlemen, could I interrupt your pillage for a moment?”

Very strange profession, like the caretaker in an empty hotel.

Eviction time!

He slept in the model homes until, one by one, they were gone. By Friday, the crew was on the last house — a hulking two-story model with a floor plan blown open by demolished exterior walls.

The place looked as if it had been hit by a hurricane, but it was only the splatter of the burst housing bubble. Folks driving by on U.S. 395, the highway from Hesperia to Reno, saw the wreckage and stopped by to see what they could salvage.

Scavenging, however informal, is a natural human trait that finds its expression in the ragpickers who make a tiny living in the world’s large cities.

Indian ragpicker

Forrester was happy to oblige them. Whatever they would take “saves the dump fees,” he said. “I gave one guy a granite counter for $40, gave another dual-pane windows for $20 a piece.”

In effect, the unit value of each item is depressed by the search/ carrying costs of finding the buyer.  Bargains by the roadside achieve the same purpose.

A fellow with a dually pickup and trailer showed up asking for some studs. He declined to be interviewed, nor did he want to talk about what he would use them for.  Used building materials are prohibited for use in new construction, so lumber from the site would have to be for personal projects.

Again, note the unintended consequence of a well-intentioned law.  What is ‘used’?  When we were fitting out our new offices, we were able to buy ‘used’ work stations that had, in fact, never been uncreated from their boxes and assembled; they’d been delivered to a law firm who no longer needed them, and resold for a fifth of their retail price.

Forrester sold him a trailer full of 2-by-4s for $40.

This is an important phenomenon; manufactured goods are reused, and in the arbitrage between retail price and resale price, the market clears.  Markets always clear, markets must clear, and the faster they clear, the better.

(We are having a problem now in LIHTC because the market’s clearing is being inhibited by the above-market tax credit exchange program about which I’ve fulminated elsewhere.)

A bit later, Marla Bowers and Candy Sweet drove up, also looking for lumber. Bowers said she wanted to build a shed. Sweet needed to repair some termite damage.

“A dollar for clean ones, 50 cents if they’re dirty,” Forrester offered. When Bowers hesitated, Forrester lowered his price. They settled on a six-pack of Corona.

Ron Willemsen, president of Intravaia Rock and Sand, the Montclair company handling the demolition, said he was glad to see people finding uses for the materials. But wrecking a pristine house troubled him.

“It’s a waste of a lot of resources and perfectly good construction,” he said.

If you can’t move it in toto, then you have to disassemble it and move the pieces.

This isn’t cheap either

Willemsen, whose family has run the business for 50 years, said it was the first time the firm had demolished a new housing project to return a potential neighborhood to soil.

Typically, the company demolishes vacant properties when they’ve outlived their usefulness and other construction projects are set to take their places.

His firm also recycles the demolished structures, as it will these former dream homes. The concrete will become base material for parking lots and roads, the wood chipped into mulch.

“Have you seen the side of the 210 Freeway?” Willemsen said. “That’s our product.”

And its epitaph:

July 4, Gettsyburg, 1863

Pile the bodies high at Austerlitz and Waterloo.
Shovel them under and let me work –

I am the grass; I cover all.

And pile them high at Gettysburg
And pile them high at Ypres and Verdun.
Shovel them under and let me work.
Two years, ten years, and passengers ask the conductor:

What place is this?
Where are we now?

I am the grass.
Let me work.

– Grass, by Carl Sandburg

Let me work …

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Better to mulch it before the scavengers take everything

Among the many ways land is unique as an asset class is that its physical holding costs are zero – it need not be maintained.  Every form of improved property requires some maintenance to prevent deterioration, so every form of improved property has an implicit caretaker (owner, tenant, management company) and an implicit revenue source (rents, mortgage payments).

Land does not.  Land holds its value even as the tumbleweeds roll over.

No maintenance costs

Vacant improved property thus has negative holding value (and thus, potentially, negative equity); vacant land may not.  (All forms of land and property have a carrying cost of real estate taxes, but that’s usually a small number for unimproved property.)

Thus, when you change the relative costs of holding vacant improved property, you can condemn it to death, as unwittingly illustrated in this little story from the Los Angeles Times:

Housing crunch becomes literal in Victorville

Crunching a pencil just won’t do it

A bank cuts its losses on a failed 16-unit project by having the homes demolished.

By Peter Y. Hong

May 5, 2009

Curtis Forrester moved into a brand-new house in Victorville last week, but there was little time to enjoy the Jacuzzi and designer kitchen. He was there only to see it destroyed.

Like the human body, which is an entity comprised of organs, a house is an entity comprised of components. 

An entity, but also components

The Jacuzzi and designer kitchen will be surgically removed and carted off. 

One kidney, worth about $15,000 as a transplant?

Even with this salvage, value is being destroyed as you watch:

Just a few days after his arrival, the two-story residence and three other luxurious model homes were crushed and hauled off for scrap, the latest fallout from Southern California’s real estate crash.

Saluting a fallen comrade: the house goes under in Victorville

The homes were part of a planned 16-unit project in this community 100 miles north of Los Angeles. The Texas bank that owns the failed development decided to demolish the houses, a cheaper alternative to completing and selling them.

The alternative described is incomplete.  The Texas bank doing the foreclosing would actually have to do three things:

1. Complete the property

2. Hold and protect the property during the sales period

3. Sell it. 

Holding the property has become more expensive thanks to the perverse consequences of a recent anti-foreclosure California law, SB 1137:

California today [July 15, 2008 – Ed.] enacted legislation [SB 1137 – Ed.] aimed at minimizing the adverse effects of foreclosures on local communities.  The legislation increases the responsibilities of lenders owning property acquired through foreclosure. 

[Snip]

[A]uthorizes government entities to assess fines of up to $1,000 per day per occurrence for failing to maintain property acquired through foreclosure.  Items subject to fine include:

1. Permitting excessive foliage growth

2. Failing to take action to prevent trespassers or squatters from remaining on the property

3. Failure to take action to prevent mosquito larvae from growing in standing water

4. Tolerating other conditions that create a public nuisance

With words like ‘excessive’ and ‘public nuisance,’ SB 1137 gives localities a self-renewing club with which to beat owners of foreclosed property – that is, out-of-state banks – over the head. 

What $1,000 per property per day can do to your balance sheet

At $1,000 per day per property, it won’t take long for the fines to exceed any conceivable net value from selling.

In effect, SB 1137 signs many properties’ death warrant.

I don’t like the look of this

Forrester was hired to keep thieves away and help sell off the fixtures.

An empty home is a hugely vulnerable thing.  Empty properties invite clandestine occupancy, and readily become houses of crime.  Whole neighborhoods can become crime magnets; indeed, whole slums, such as Haiti’s Cite Soleil:

This story has no happy ending. As a failed state, Haiti profits from clandestine occupancy on a grand scale:

More and more narcotics have begun flowing through Haiti to the United States, law enforcement officials say.  It is Haiti’s weakened state that is the big attraction to narcotics traffickers, officials say.

When protection can be bought, like any other commodity it creates a marketplace.

In a recent report on Haiti’s woeful law enforcement apparatus, the International Crisis Group, a nonprofit group committed to preventing and resolving deadly conflicts, said that without urgent reform “the current escalation of organized violence and criminality may come to threaten the state itself.”

Has threatened the state. Has destroyed the state. Haiti and its dreadful twin Zimbabwe are grim reminders of the cost of allowing homes, blocks, neighborhoods, and even states to secede from humane society.

If only asking could make it so

Mr. Forrester, as local agent in Victorville for the Texas bank, is there to prevent this from happening – and to oversee the dismantling of potentially valuable housing.

“All my life I’ve been building things,” said the 59-year-old construction worker. “It’s kind of fun tearing them down.”

Mr. Forrester is not alone:

The Victorville demolition is one of the most dramatic ends to a bad bet made during the housing boom, but abandoned developments have become an all-too-common sight in California. Nearly 250 residential developments totaling 9,389 homes have been halted across the state, according to one research firm.

As I posted in Rug? What Rug?, developers become upset when they are stopped from using other people’s money because they are allergic to putting in their own:

A developer’s handbook

The builder had announced its intention to go out of business before the bank acted, blaming its financial straits on earlier steps taken by JPMorgan Chase and other banks.

We’re throwing in the towel, have mercy

The New York Times wrote a story headlined Banks Foreclose on Builders With Perfect Records, except that:

The bank cited didn’t foreclose – it appointed a receiver.

The builder didn’t have a perfect record – it was in default.

The builder wasn’t put under by the bank – it had decided to dissolve before the bank acted.

Under those circumstances, if you were the bank, and your money were hostage to unfinished houses being completed by a builder who’s just announced they’re throwing in the towel, would you sit still?

From the New York Times:

An unfinished house is the result of abruptly withdrawn bank financing in a development near Chandler, Ariz.

Whose failure prevented its finishing?  The bank’s or the builder’s?

The same walkaway – rational, you understand, and completely predictable – occurred by the Victorville developer because the arithmetic collapsed:

The developer of the Victorville project had hoped to sell the houses for more than $300,000 as they were being built last year, Forrester said.

That’s the completed and sold cost.  Project (say) $50,000 apiece in costs to renovate. 

But reality quickly diverged from that vision. Home prices have tanked faster in San Bernardino County than any other Southern California county during the downturn. In March, the median home sale price for the county was $160,000, down 43% in a year, according to the San Diego-based research firm MDA DataQuick.

Project (say) a 40% price drop, over $125,000 gone.

Project (say) $50,000 in fines to the cash-strapped town of Victorville (all towns are cash-strapped).  There goes your equity: poof!

Money all gone!

Officials of Guaranty Bank of Austin, Texas, which took over the development last year, were unavailable for comment.  

When you can’t say something nice, don’t say anything at all.

But Victorville city spokeswoman Yvonne Hester said the bank decided not to throw good money after bad.

“It just didn’t pencil out for them,” she said. “They’d have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them.”

Not penciling out?

Curious how Ms. Hester forgets to mention the $1,000-per-day fines that she had the power to levy.

[Continued tomorrow in Part 2.]

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