What a hot topic this has become. My father, Jerry Gibbs (The Gibbs Law Firm, APC) is actually one of the pioneers in this field, and I have personally invested a ton of time over the past 15+ years in community conversions.
First, let's address the question of what is a "conversion"?
In it's truest sense, a "conversion" is any process by which the residents who live in a land-lease community come to acquire and control the operations of that community. This "conversion" from an investor-owed, land-lease community to a resident-owned community comes in a variety of forms:
- Long-Term Leaseholds
- Cooperative Purchases
- Nonprofit Purchases
- Air-Space Condominium Conversions
- Planned Unit Development Conversions
The first of these, the "Long-Term Leasehold" is, in my opinion, the least favorable, and least effective conversion. This process is often advocated by "converters" (i.e., someone who is in the business of assisting residents in the conversion of their community) who seeks the benefits of more traditional subdivisions, but does not want to be bothered with the extensive work necessary to be performed at the Department of Real Estate to accomplish a subdivision. Also, even though there is much-hyped discussion of long-term financing for long-term leasehold interests in land, I know of only one project in California in which long-term leaseholds were able to obtain favorable financing, and that is because the project owner carried the financing himself. The idea is simple - the residents pay (either up-front, or through the lease) for a long-term lease (35 or more years). In California, a long-term lease is considered to be an "estate in property", though it also recognized as one of the lesser forms of interest in property. The residents of the community, by virtue of having a long-term lease to the space their home resides on, are considered to have a real estate interest in that space, and if the home is placed on a "foundation system", in theory the home can be converted to a fixture on real property, and in theory, financed as real property. The reality is that I am not personally aware of any lender willing to give "traditional" mortgage rates and terms on a leasehold interest (at least when it comes to residential, single family property), and as mentioned above, I am only aware of ONE project in which favorable financing was available, and that is because the community owner actually carried the financing himself.
The second form of "conversion" is the Cooperative, or Stock-Cooperative. In order of preference, this one is near the bottom, however, there are definitely times and situations in which this is the only viable option, and it does have benefits over NOT converting. In a Cooperative, the residents form an organization (typically, an exempt corporation - NOT a nonprofit corporation - meaning the corporation is exempt from State taxation, but is not a 501(c)(3) public benefit corporation, as there is no "public" benefit here). That organization, or entity then negotiates a purchase of the community from it's then owner. The residents generally have to put up cash equivalent to 30% of the total purchase price of the community in order for that entity to then qualify for, and obtain financing to purchase the community. The residents generally put up a portion fo that 30% each by either borrowing against their home, or as has been done in many communities, the residents can obtain an FHA Title I Home Improvement Loan to purchase an interest in the organization that buys the community. When the residents have purchased the community, the community is operated by that resident-formed entity. Each resident continues to lease their lot from the now resident-formed entity - with those members who put up funds and participated generally receiving more favorable terms on their lease, and/or longer terms. With smaller communities, less well organized communities, or where there is an urgency to completion of the purchase, the Cooperative purchase is the best tool available. Cooperative purchases can happen very quickly, and are not very costly (in terms of the conversion costs per space). The downside is two-fold. First, you still remain a land-lease community, so home financing does not change - it is still "chattle" mortgage financing at higher rates, with shorter terms and more difficult underwriting. Second, unless 100% of the homeowners participate in the purchase, this form of ownership immediately creates a split within the community of those who are members, and those who are not. In many instances, this division is a minor irritant, where in others, it can result in lawsuits and all the nastiness that the residents where trying to avoid by purchasing their community. While this can be a useful tool, it must be analyzed very very carefully, and all of the financial ramifications must be given their due consideration before going forward. I'll give you two great examples of where this has not worked:
In the 1990s, there were a string of Cooperative purchases advocated by a "conversion" company based out of southern-california. The conversion company first located parks which were probably not financially viable as Cooperatives, then took advantage of the residents in as many ways as you can probably imagine. Financially, the deals were structured in such a manner as to almost guarantee failure. In many instances, the residents paid far too much for the community. In virtually all of these communities, the residents who elected to participate borrowed roughly $30,000 each via the FHA Title I Loan Program, however, they were allegedly told by the converter that they were not personally liable for these loans (which was not true). The converter took commissions on both sides of the community sale (contributing to the price being too high), and the converter often managed the park after it was purchased. Unfortunately, in many of these communities, due to poor advice when purchased, and poor management after purchase, they ran into severe financial problems within a year or two of purchase. While we worked with several of these communities and residents to help put them back on solid financial ground, at least one ended up failing because the purchase was so poorly structured, and the resident taken advantage of so badly, that the community ended up being sold back to its prior owner, and the residents gave up ownership.
A second, and unfortunately fairly common problem involves communities sold to residents where the community operator did not own the real estate on which the community was located, but rather owned only a leasehold interest. When the residents of these communities formed an organization to purchase their park, they were often times not well informed about the nature of the leasehold interest they were acquiring (leasehold interest vis-a-vis the community), and down the road problems result from any number of issues, including lease terms, lease expiration dates (and the real estate owners unwillingness to sell the real estate), and financial problems which stem from uncertain lease terms (i.e., ground rent escalation clauses). Many residents who purchased communities subject to a ground lease are now coming up on the termination date for the lease, and are facing real estate owners who want to see the park closed because of the much-higher value of the land for other, higher density uses such as condominiums. This not to say that ground-lease Cooperatives DON'T work - we've been involved in a number of them, and so long as the residents have competent advice, and are fully aware of the potential pit-falls of this form of ownership, there is no reason this cannot operate just as successfully as a traditional Cooperative.
The third form of ownership, or conversion is a Nonprofit Purchase. There are a lot of different flavors of this running around. The most common of these is where a qualified nonprofit organization (an entity which has been qualified both by the State and the Federal Government as being a public-benefit nonprofit 501(c)(3) entity) purchases the community for the benefit of the residents. This is not true "resident ownership" and in many cases, simply results in a change of ownership, with little or no benefit to the homeowners. Do not confuse "Nonprofit Purchases" with the use of a nonprofit entity as an accomodator of a full subdivision sale - this is discussed in more detail below, but in some cases a nonprofit may be involved only to accomodate the sale of the community from the owner, to the individual residents, and does not result in long-term ownership by the nonprofit. As stated above, the Nonprofit Purchase is not true resident ownership - the nonprofit buys, owns and manages the community. The better nonprofits will form a board on which the residents and directors of the nonprofit sit to address management issues. The goal of nonprofit ownership is to preserve the community as a stock of affordable housing - in theory the nonprofit has no profit motive, can actually get a break on property taxes and other expenses related to operation, can obtain in some cases better-than-market financing which reduces the cost of operation of the community. In a good nonprofit purchase, these operational savings are passed on to the residents in the form of either lower, or at least stabilized rents. Unfortunately, there are (as with everything) some bad players in this field. Their nonprofit may purchase the community at a better-than fair market price, giving the community owner a big bonus, but leaving the residents to pay that additional cost. Also, there have been some promises made by nonprofits that at the pay-off of their financing, they will give the community to the residents for $1. To do so would be an improper use of the assets of the nonprofit - unless they transfer it to another qualified nonprofit, OR they sell it to the residents, they are probably in violation of the law. Just remember that when it comes to a nonprofit purchase, the community residents are in most cases simply changing from one landlord to another, with hopefully, and at best, a slight stabilization of their monthly housing costs.
In my next installment I'll cover the two more-favorable forms of resident ownership/conversion - Condominium and Planned Unit Developments. Come back soon for more information . . .