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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
There are lots of options available today to finance a mobile home park. You've got seller carry, bank, CMBS conduit debt, and Fannie Mae, Freddie Mac. But of all those options, one of the best is often simply to step into the shoes of the current owner.
This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk all about loan assumptions. Now, what does that even mean, the word loan assumption? What that means is you effectively take over the existing park owner's debt. Sometimes it's done very simply and sometimes much more complicated. But the general theme of such a transaction is that it's more advantageous for you as the buyer to step into the debt that's already there than to go out and create new debt. Now, why would that be more advantageous to you? Well, let's say somebody bought a mobile home park a few years ago and they have a very attractive seller note. That seller note, in fact, is a lower-than-market interest rate. It's non-recourse. And it's way better than anything else you're gonna find on the open market. So obviously, if you're gonna buy that mobile home park, you'd wanna go to the seller to see if he would allow you to step into the current owner's shoes.
And if you're a pleasant person and if the seller bonds with you and believes in you, they may well say, "Sure, I'll do that. Why not? I have a first lien note. If you default, just like the guy you're buying the park from, I'm gonna take the down payment and I will take that park and I will put it back on the market. I can't possibly lose." And you've benefited enormously because you were unable to get or match a loan as good as that one. And it's a very simplistic process. All that the note holder has to do is effectively sign a few documents transferring the note from the current owner to you as the new owner, and all of your financing issues are solved.
And you can do the same thing often with bank debt. We've done that before, and it's particularly important as a tool if the park you're looking at buying is a turnaround situation. Because often it may be very hard to get new debt on that property, particularly if it's, let's say, 50% occupancy. But the bank is already holding that debt and they're trying to weigh the options here. They know that maybe the current owner and operator is not the best and that you could do a better job. So as a result, it's a win-win for both parties. You're getting debt you could not get on the open market, and they're getting somebody new on that note that they have more faith in can perform.
And in those type of transactions, when you use an actual bank, the transference of the loan from one party to the other isn't a huge deal. They can kinda of do that internally, obviously, under the supervision of the bank's attorney. But it's not a hugely complicated transaction. As long as they believe in you, they're gonna want to see your financials and hear about your experience and, if it's a turnaround, your plans to make the park better. But those are all things that are easily grasped and easy to communicate to the bank committee, and more than likely you'll get approved. And then you have assuming conduit debt, or CMBS debt, as well as Fannie and Freddie debt. And this takes things into a little more complicated territory. Let's just focus on CMBS conduit debt because that's one of the most assumed types of mobile home park debt.
We've always been huge fans of CMBS debt. I remember well when I got my first CMBS loan back in the late 1990s and I was just so excited I had pulled it off because up till then I'd only been working in the realm of seller carry and regular bank debt. That conduit debt was so much better because it was non-recourse and it was at a lower interest rate, and best of all, it was a 10-year term. And I even liked the fact it wasn't with a regular bank because I come out of the Texas savings and loan crash era and I knew that banks could at any moment fail and call loans. So I love the idea of not actually having a bank as my ultimate lender. But when you go to assume a conduit loan, it's often a lot harder than it was to originally get the loan.
Now, here are some of the things you need to know. When you go to assume a conduit loan, you're gonna be charged a fee typically of about 1/2 to 1% of the remaining balance. So if the loan remaining balance was a million dollars, the loan assumption fee will be somewhere around five to $10,000. It's not totally terrible, but you'll have legal fees involved in them redrafting these loans, and that can run another 10 to as much as $20,000. So again, not terrible, not a bad thing. But where conduit gets really complicated is in this one unique feature because you have to get the approval on your assumption from not one, not two, but three different people. The servicer, the special servicer, and the master servicer. Because on a conduit loan you step into the world of servicing, not your typical kind of loan officer at a bank situation. And they make you go with this redundant three-person panel just to make sure they are not making an error. Because when the conduit package was originally sold on Wall Street as a combination of loans, there was a group of people that approved those loans, but they're no longer in the picture. They took that loan package and they sold it to the average American investor. So to protect the interests of the investor, now we have to have the servicers stick their neck out and agree to drop one person out and take a new person in as the new borrower. So they like to be extremely careful that that is a smart decision. And as a result, it can take a lot of time. How long? Well, I would think in many cases you're talking anywhere from three to four months. But I've actually seen the process take as much as a year. So it can take quite a bit of time.
But now why would you want to assume that conduit loan? Most of the time when people are assuming conduit loans, what they're chasing after is interest rate. And as we all know, interest rates hit the all-time nadir prior to Q1 of 2021. That's the lowest point maybe in interest rates that anyone will ever see. But we're only in 2026 right now. So if someone had a loan from the first part of 2021 at the lowest it's ever been in interest rates, then that loan stretches on to 2031. So if you bought the park and if you assumed that loan right now, you'd benefit because you'd have realistically four to five years of an exceptionally low rate. Even if you didn't buy the thing with a loan that just was freshly on the books in the start of 2021, Jerome Powell and the Fed raised the rates up very aggressively, but in smaller increments. So really all the way up the scale during a lot of those increases is still more attractive than current rates.
So if you're gonna look at assuming those kind of loans, the key question is what's the current rate? And then what is the rate on the marketplace? Where am I between the loan's rate, the current loan, and the outside world? If the answer is the current loan's a whole lot lower, then clearly I'm gonna want to assume it. But there's a whole 'nother reason that you may be more attracted to assuming that CMBS note than going out and getting a new one. And that's from the seller's perspective. 'Cause if the seller sells their deal and they've got an existing loan, conduit loan, they'll have to pay something called defeasance to get out of that loan. It's a prepayment penalty and it can be pretty big based on where interest rates are at. So if you were trying to buy that property and established a new note, then what's going to happen is the seller will have to get a higher price to make up for the defeasance. But if you step into their shoes on the existing loan, it will save them a lot of money and it will correspondingly save you a lot of money.
And another reason that people assume is even if there's a shorter duration remaining, many people are believing, and I'm among them, that the current interest rates are going to come down. I'm not alone in that thought. Most every economist believes that to be true. We just don't know how fast they'll go down or how far they will go down. But we'll all be seeing in the months and years ahead. But if you assume that the rates are coming down, and if a conduit loan lasts for a decade, you might not want to get the loan right now. You might say, "I will assume the existing and ride it for two to three years, and then I will get an all-new 10-year note." So sometimes assumptions are just basically based on strategy.
The bottom line is that loan assumptions are one thing that many park buyers don't think about. They don't think about the fact that you can very easily at least give the attempt, take the shot to assume almost any loan, whether it's seller debt, bank debt, conduit debt, or Fannie Freddie. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.