[Continued from yesterday’s Part 1].

Yesterday’s post examined the hypothetical of raising property taxes while exempting a particular class of elderly homeowners from the increased costs they would vote to impose.  As shown in a fascinating quantitative analysis, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, published in the Federal Reserve Bank of Boston article in its summer issue of Communities and Banking.

Looks like a Venetian blind, and for the same reason:

The Boston Federal Reserve Bank building

Having chosen three representative Massachusetts mid-size cities – Cambridge, Worcester, and Springfield – the authors were then able to calculate highly interesting granular data on the impact to each community:

To analyze the effects of a property tax increase with the proposed exemption for low-income elderly households, the override simulation froze the property tax bill of low-income elderly households currently paying more than 10% of their total income in property taxes at its current level.  If any such household reached a 10% property tax burden as a result of the override, the property tax burden was capped at that level.

Further, it isn’t just a redistribution of real estate taxes, it’s also an increase:

Clearly, since overrides increase the community’s total tax levy by a specified amount, taxes are higher on taxpayers not receiving the exemption.

The pain will depend on how big an increase:

So NEPPC asked the question, What is the potential impact of a 6% property-tax increase for each municipality?

Cui bono?  The effects of boosting taxes just on some

If the local real estate taxes go up 6% in the aggregate, then the average tax burden has to rise more on the non-exempt, and in all three cities, only a few households are exempt: 5.6% in Springfield, 8.3% in Worcester, and 9.6% in richer, older Cambridge.

According to the analysis, 9.6% of all owner-occupied households and 35.4% of elderly owner-occupied households in Cambridge would benefit from the exemption. That is, their taxes would be lower with the exemption than if the override passed without the exemption. (See “Simulation Results.”)

At least the benefits would be targeted, with just under one in ten homeowners gaining a benefit – and yet, somewhat surprisingly, only one-third of the elderly homeowners would qualify.  (In Cambridge, remember, elderly homes are quite a bit more valuable than even Cambridge’s high average.)  Perhaps that’s because the other two-thirds have incomes above the $60,000 eligibility ceiling.

The median property tax burden of a qualifying household is 23.9%.

That is a big chunk of their budget – one quarter of the spending goes to pay real estate taxes on their expensive homes.

Tails you lose?  For Cambridge’s elderly homeowners, one-quarter of their budget is real estate taxes

Meanwhile, those not advantaged are disadvantaged:

The average nonexempt household in the lowest- income quintile would see its property tax burden increase by 1.06 percentage points, a $170 increase. (See “Distributional Effects on Select Nonexempt Groups,” page 24.)

Who pays more taxes?  Non-elderly poor!

Most striking in the large table above is the non-elderly lower-income (below $60,000) group, where they who are already socked with taxes would see their taxes boosted by $253, while identical homeowners next door, if they have an elderly head of household, would pay no increase whatsoever.  What’s the public policy justification for advantaging an elderly homeowner over an otherwise-equally-ppoor non-elderly neighbor?

The same disjuncture arises in the other two things:

An override exemption would benefit 8.3% of all owner-occupied households in Worcester and 41% of elderly owner-occupied households.

Whereas in Cambridge, only one in three elderly homeowners was poor enough to qualify, in Worcester three out of seven would be eligible.

We’re eligible

We’re not

The median property tax burden of a qualifying owner-occupied household is 18.2 percent.  Of all the households that would not qualify for the exemption, the largest increase in property tax burden—0.49 percentage points, an additional $147—would occur for those in the lowest-income quintile.  The burden of households in the highest income quintile would increase by 0.12 percentage points, or $200.

Once again the non-elderly poor get socked, their taxes rising $206 per household:

Thank you sir, may I have another?

Of the nonexempt non-elderly owner-occupied households, about 6.6% have incomes less than $60,000 and would experience a property tax burden of 10% or higher in the event an override.

As a policy matter, do we really want to give tax-increase waivers to elderly people who own valuable homes? 

Proposals for exemptions protecting vulnerable groups may help municipalities successfully pass overrides.

While I understand the political imperative to relieve elderly distress, we could be confusing cash-flow limitations – fixed or slowly-rising incomes – with actual poverty.  If the house has that much value, the owner could sell the house and move to something smaller, or failing that take out a reverse mortgage. 

A reversal of my fortune?  Would be monstrous!

Don’t forget, the elderly more than likely have reduced mortgage payments.  They are no longer paying for children’s food, clothing, and education.  A larger portion of their annual income can go for shelter because smaller portions go for other things.

In other words, by granting cash-flow relief at no cost, we will be subsidizing the asset-rich cash-poor elderly in the manner to which they have become accustomed – at the expense of families who probably have higher household expenses (such as raising children).

However, other groups vulnerable to overrides—say, non-elderly low-income households with severe property tax burdens—may be motivated to vote against such proposals.

[We could also detour into an exploration of 'who benefits from municipal services'.  Families with school-age children obviously benefit more than do the childless; conversely, since they have more to protect, the rich benefit more than the poor from services such as police and fire.  That would take us far afield, so we won't. – Ed.]

Don’t go there so late in a blog post

I don’t mind subsidies.  I mind invisible subsidies, and I mind surcharges concealing themselves in the absence of subsidy.

You can look at it two ways, can’t you?

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Once we have accepted the principle that tax burdens should vary by taxpayer group – and everyone except a few economists have so accepted, at least in the world of political reality – we must choose who gains the more favored treatment – and how we package it.

Long ago, when I matriculated to Our Fair City, I was ecstatic to be awarded financial aid, and being young and capital-short, I made no mental distinction among its three forms: scholarship aid, on-campus employment opportunities, and student loans at generous interest rates. Many, many years later, long after I’d repaid the (government-funded) loans, I realized that if the university was trumpeting its delivery of financial aid to a high percentage of its students, what the typical student paid must more or less represent the education’s cost.

Which ones stand out?

Seeing the economics in a reverse light, what had seemed a generous discount for my benefit could also be viewed as a surcharge on other parents richer than mine were.

How ’bout now? Who’s got the advantage?

This didn’t bother me at the time – after all, I was the beneficiary – though it increased my cynicism regarding college administration. And then when I started thinking about those ‘legacy’ admissions, and realizing they probably came from richer families and hence were paying full boat, I came full circle. The surcharge being invisibly imposed on those richer if less quick-witted students were funding the scholarship for poorer smart kids like me.

When you turn it upside down, who’s advantaging whom?

So it is with local real estate taxes. To balance its basic budget algebra, the municipality needs to raise a totality of taxes from all its taxpayers. For a host of reasons that seem like a good idea at the time, some groups will be charged less (per dollar of property value) – meaning that others will be charged more. It gets especially tricky when, as in Massachusetts, the votes in their infinite wisdom have enacted a hard cap on real estate taxes (Proposition 2½), which can be increased only by a town override, as explored in an interesting Federal Reserve Bank of Boston article, Massachusetts Proposition 2½, Simulating Overrides with Low-Income Elderly Exemptions, in its summer issue of Communities and Banking:

In 1980, Massachusetts instituted Proposition 2½, a law limiting increases in local property taxes. Nevertheless, municipalities facing revenue shortfalls have repeatedly sought overrides—votes by community residents to approve levy increases higher than 2.5 percent. Of the approximately 1,180 override attempts since 2000, nearly 51% have passed.

After all, if you don’t tax people more, services have to be cut:

Proposition 2 ½ overrides offer a tempting solution for Massachusetts cities and towns searching for new revenues. When override ballot questions fail to pass, however, municipalities are left with budget shortfalls causing cuts in public services, school programs, public workers, and the like.

[Whether in good times we took on new municipal services as luxuries that we should now rethink is a discussion beyond the bounds of this humble blog post. – Ed.]

Overrides being hard to enact – they represent people voluntarily taxing themselves more – localities have devised means of buying votes by exempting some groups, particularly those with high voting rates, such as the elderly:

Now legislation has been introduced to exempt low-income elderly homeowners from property tax increases authorized by overrides.

Give people a discount and every will want one, so the proposed legislation carves a precise keyhole:

Let’s be precise about whom we let in

Three criteria must be met:

[0] The household must own a home.

I’ve added condition zero as a reminder: we are talking only about households that own a home – which is not insignificant since the home is a huge financial asset, and that asset is the sole cause of the tax burden for which this legislation proposes relief.

[1] The head of the household must be 65 years of age or older

[2] The total household income must be $60,000 or less

The first two criteria are easily comprehensible: you need an oldster at home, and the oldster must have limited income (although many people would consider $60,000 family income fairly decent, especially for elderly homeowners who probably have little or no mortgage remaining on their homes). The third is trickier:

Not that tricky at all

[3] The ratio of the household’s property tax to income (the property tax burden) must be 10% or greater.

Word can obscure arithmetic, so let us pause to calculate.

We’re going to make it perfectly clear

The household’s maximum income is $60,000; say $50,000 for the typical beneficiary. 10% of income is $5,000, and under Proposition 2½, that cannot exceed 2.5% of property value; since the legislation is aimed only at overrides, we can safely use the 2.5% ceiling, meaning that $5,000 in annual real estate taxes will be paid if your home is worth $200,000 or more ($5,000 / 0.025). With the Massachusetts median home price well above that – it was $300,000 back in 2005, and is likely higher than that now – just about every elderly homeowner will be eligible.

In effect, seniors who own their homes and have a fixed or moderate level of income are generally granted an exemption.

Try ‘every income-eligible elderly homeowner.’

Everybody’s eligible to be liked, anyway

To study the implications, the New England Public Policy Center [An arm of the FRB Boston -- Ed] developed a circuit-breaker analysis. The analysis was based on publicly available data from the 2006 American Community Survey, published by the U.S. Census Bureau. With its up-to-date demographic and economic data, including total household income and total property taxes paid, the ACS enabled the NEPPC to analyze the number of households that could benefit from the exemption and the potential effect on the property tax burdens of nonexempt households.

Thus the clever fellows at FRB Boston wanted to figure out how many people get real-estate tax scholarships, and conversely how many others pay how much surcharge.

So for purposes of simulating potential override effects, the NEPPC chose three municipalities that lie within their own PUMA—Cambridge, Springfield, and Worcester. (Although these three are not among those that regularly propose or pass overrides, they are useful for demonstrating the simulation tool.)

For Cambridge, just find Boston J

The three cities are a good choice, since they’re all large (Cambridge 100,000 people, Worcester 175,000, Springfield 150,000), scattered across the state, and in property markets that are great (Cambridge), weakening (Worcester), and downright awful (Springfield).

Average home $400,000

The authors find some interesting facts:

A tale of three cities: who pays what?

In Cambridge, elderly owner-occupied households have a much larger median income, are less burdened by property taxes than their counterparts statewide, and have more than double the median property tax burden of the city’s median owner-occupied households. Cambridge also has a larger percentage of owner-occupied households headed by elderly residents.

In Our Fair City, the elderly are rich, own big houses (double the tax burden), and numerous. (Cambridge is also a predominantly rental city, with only 39% owner-occupancy, compared with 48% in Worcester and 52% in Springfield.) Not the people for whom one would ordinarily wish to targeting subsidies, would one?

Average home $140,000

Property values rise and fall faster than changes in municipal budgets, so rich towns tax their homeowners less (percent of value) than do middle-income or poor ones. At least that’s the case contrasting Cambridge and Worcester, where Worcester’s lower-value markets, even with Worcester’s lower municipal budget, impose on property owners a higher tax burden, both in percentage of income and even in absolute dollars.

In Worcester, elderly owner-occupied households are more severely burdened then their statewide counterparts. Compared with the median owner-occupied household, the median elderly owner-occupied household in Worcester has exactly double the property tax burden.

Average home $100,000

Springfield’s got a lower budget – taxes are only $2,150 per house, instead of $2,650 in Cambridge and $2,750 in Worcester – but the highest tax burde4n because values are so low.

In Springfield, elderly owner-occupied households have a lower median property tax burden, lower median income, and a slightly higher percentage of all owner-occupied houses.

In Cambridge, the elderly pay higher taxes than average ($4,050 versus $2,650) because they’re richer in terms of assets: they own 50% more valuable homes. In Worcester, they’re poorer – $2,450 in taxes versus $2,750 average. In Springfield, they’re about the same ($2,050 for elderly homeowners, $2,150 for the average).

With all that data, the researchers were then in a position to do what legislatures should do more often: to quantify who gains and who loses from their proposal, and in each case by how much.

Pick a direction

[Continued tomorrow in Part 2].

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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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