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HomeMy WebLinkAboutInformational Item - Silver Spur Mobile Home Manor PALM DESERT REDEVELOPMENT AGENCY INTEROFFICE MEMORANDUM DATE: January 23, 1996 TO: EXECUTIVE DIRECTOR, HONORABLE CHAIRMAN AND MEMBERS OF THE REDEVELOPMENT AGENCY BOARD FROM: TERESA L. LA ROCCA, HOUSING PROGRAMS COORDINATOR SUBJECT: INFORMATIONAL ITEM - SILVER SPUR MOBILE HOME MANOR On December 9, 1996, Mr. Bruce E. Bedig, Silver Spur Reserve Partner, contacted Carlos Ortega requesting that the City/Agency author a letter to him describing the Palm Desert Redevelopment Agency's power to use eminent domain for the conversion of mobile home parks, from private ownership to tenant ownership. Mr. Bedig stated that he is currently in the initial stages of negotiation with the tenants of the park on their proposed acquisition and is requesting that the Agency provide him with a letter as part of the negotiation which would allow him reinvestment benefits upon sale of the property. Given the prematurity of this request and concern over potential issues relative to inverse condemnation and possible liability to the City/Agency, staff contacted Frank Allen who is a member of the Board of Directors at Silver Spur, for input on the negotiations with Mr. Bedig, advising him of Mr. Bedig's visit and request of the Agency. Mr. Allen submitted two letters, the first dated December 9, 1996, from Mr. Gerald Gribbs, Homeowners' Attorney, addressed to the Home Owners Association, recapping a General Meeting which was held at the Park. The second letter, dated December 19, from Mr. Gribbs to Mr. Bedig advising him of his firm's retention by the Board of Directors (see attached). It is staffs position that an "arm's length" approach should be taken at this time until negotiation between owner and tenants are closer to completion. It is unclear whether the Agency will be requested to participate. Should this be the case, the Conversion Policies will have to be met. Page 1 of 2 • Subject: Informational Item - Silver Spur Mobile Home Manor Mr. Allen will keep us in the loop with regard to ongoing negotiations as the tenants move forward toward possible acquisition. Please note that the Agency has made absolutely no financial, written or verbal commitments to the tenants or the owners in this matter. Reviewed and Concur: ,ice - TE . LA ROCCA CARLOS L. ORTEGA Executive Director TLR:lw Page 2 of 2 • GI III) R. (,llH GIBBS &J cI -I1IS .I. c;lhlt lllrin L. (;Irh, ATTORNEYS O 1, \ I'p ,, ,.,I III II 12 1 IO IiA�I 1',Ilinn�, til Ilr ?OI "Ir, IIII NI — (— I i ) A5O A ! 011%11H\,I/ C.l1Hl'(1H.1/7(1\ ( I I) 19 -3hO- OIH F/l.l:' A'n. 2101.01 December 9, 1996 Ron Gorman Silver Spur Homeowners Association, Inc. P.O. Box 4341 Palm Desert, CA 92261 Re: Silver Spur Mobilehome Park Purchase Dear Ron: I was very pleased to meet with you and the other members of the Board of Directors. The turn-out at the general meeting was excellent and the residents certainly seemed enthusiastic. I am writing this letter to recap the highlights of the general meeting. I hope you will be able to use the information to discuss the process with those who did not attend. It may also be used as a reminder for those who did attend. The process of park conversion is very complex and can be confusing to everyone involved. Certainly, the first ingredient is a willing seller. As Mr. Bedig stated at the meeting, he and his partners are interested in selling the park and would prefer that the sale be to the residents. Although we have not agreed on a price, the purchase should be achievable if we are able to negotiate an acceptable price with the park owners. As I mentioned, the price of a mobilehome park is generally derived as a function of the amount of net income produced. This means that if you were looking at a 200 space park with rents of$400 a month, the gross annual income would be $960,000. If the expenses of operating the park (exclusive of debt service) is $100 a month per space, the net operating income would be ($960,000 - $240,000) $750,000 per year. If you were to buy a business that earned that much net income, you would pay anywhere from $9,000,000 to $7,000,000 for that business. The variable is what is referred to as the CAP rate. Generally, the cap rate will be lower for a top quality park (business) and higher for a lesser quality park with a great deal of deferred maintenance or poor location, etc. The lower the CAP rate, the higher the price. • - GIBBs k GiBBS ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. �RAA'fr/v December 9, 1996 ,/. Page 21 N As you know, ow, most residents generally look at a mobilehome park as an investment in real estate. That is often not the case with investors, and the above approach is employed as a valuation technique. Additional techniques which are complementary and also employed are the replacement cost of the park and comparable sales of other (similar) parks. Generally, more weight is given to the income approach which tells us that every rent increase, increases the value of the park. Stated another way, the sooner the residents purchase a park, the better the price will be for the residents, because rent never seems to go down. When organizing residents to purchase, we consider two basic methods of conversion. I will discuss each of them below and give you some of the pros and cons for your consideration. The first method employed is what we refer to as a "non-profit corporation" purchase. Under that approach, the residents form a mutual benefit, non-profit corporation and that corporation purchases and operates the park. A special state statute exists which allows residents of a mobilehome park to purchase in this fashion, while other groups would generally be required to fully process a subdivision (which I will discuss below). With the corporate purchase, each resident who desires to be involved purchases a membership. The membership is in effect "stock" in the corporation. After the corporation purchases the park, each member will also receive a long term lease which assures that member the right to stay in the park for as long as he or she chooses. The membership and the lease are transferable to someone who buys your home if you leave. That membership cannot be owned by someone who does not own a home in the park. On the positive side, a mutual benefit non-profit corporation is considered because: 1. It is faster; and 2. It is less expensive(overall); and 3. There is much less government involvement (i.e., red-tape); and 4. The process can be accomplished in a very short period of time. On the negative side, we must consider that: • • 111 • GIBBS CSC.' G IB13S ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. December 9, 1996 Page 3 1. Financingfor thecorporate co po ate purchase has become very difficult to obtain. This includes the original purchase as well as the sale of individual memberships in the future; and 2. This approach requires much more up-front cash (i.e., at least 30% of purchase price); and 3. The technique has very little recognition in the traditional real estate market. It is akin to a cooperative and as such not well recognized at this time; and 4. The approach will not allow persons who are not residents of California as members. In Silver Spur, that limitation would be very harsh because you have so many "winter" residents. You could consider a two step process in which a number of residents initially purchase the park and then subdivide; but, the last point above nearly makes the corporate purchase unavailable to Silver Spur residents. The second major form of conversion to resident ownership involves what is termed a "subdivision." Most persons are familiar with a subdivision but do not really recognize it as such. Since the late 1930s, the State of California regulated the subdivision of land (i.e., creation of small parcels out of large parcels of land). The typical neighborhood housing is the result of a subdivision. Either a larger land owner or a developer took a large parcel and "split" it into a number of lots and then sold each lot to the homeowner. In earlier times, land was "subdivided" on paper without any regard for streets, utilities, and other forms of services required to have a housing development. In fact, the area surrounding Palm Desert was typically parceled off and sold without government intervention. As such, people bought lots without access or services. To prevent these problems, the"Subdivision Map Act" was developed by statute. That Act, as later modified, controls subdivisions in this state. Another act which was passed is called the "Subdivided Lands Act." That Act is a consumer protection act which requires that subdivided land be sold only after the California Department of Real Estate issues a Public Report. In the case of a mobilehome park, a subdivision can mean several things which vary from the ownership of each space to the center of the earth, to something called a condominium. The typical park is subdivided into the condominium format. y S S - GIBBS & GIBBS ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. December 9, 1996 Page 4 The condominium subdivision, in the typical situation, would require full compliance with both acts (i.e., Subdivision Map Act and Subdivided Lands Act). This can be very, costly in terms of processing costs as well as city or county "extractions." Since a mobilehome park exists and has utilities, streets, access to public roads, etc., the need for full compliance with the Subdivision Map Act was reviewed and found unnecessary. On that basis, the California Legislature created an "exemption" from the Subdivision Map Act for mobilehome park residents if the residents are buying the park in which they reside. With a subdivision, the buyer actually receives a deed to his or her space as well as a portion of the rest of the park (common area). The advantages of the subdivision are generally: 1. The up front costs are much less; and 2. You achieve individual space ownership rather than a membership in a corporation which owns the park; and 3. The subdivision is recognized in the traditional real estate and financing market place; and 4. The entire process is monitored by the California Department of Real Estate and as a result is a much more disciplined process; and 5. It is much easier to finance both the original purchase and the later sale of individual spaces. The negatives that are observed are generally that: 1. The subdivision process takes longer; and 2. The total cost is more (i.e., the added engineering for maps, etc.); and 3. There is more governmental involvement (i.e., both the city and state); and 4. The unsold spaces must be financed without a blanket loan on the park (i.e., each space that is unsold is the security for the loan). • S GIBBS OL GIBBS ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. December 9, 1996 Page 5 When we subdivide a mobilehome park for residents we can achieve an exemption from the Subdivision Map Act. This special statute is available if two-thirds of the current residents sign a petition to the city requesting the exemption. We will meet with the residents again in smaller groups to discuss the petition which is used to gain this exemption. What the exemption does is save a large amount of money for you as residents, but it is premised upon certain factors being true (e.g., that there are no health and safety hazards in the park). If we are able to obtain two-thirds of the residents to sign the petition, we will save both time and money for the residents. In spite of the exemption statute, park residents will be required to comply with the Subdivided Lands Act and obtain a Public Report through the Department of Real Estate. That document will be approved only after a full review of the project documents (Covenants, Conditions and Restrictions (CC&Rs), homeowners association Articles and Bylaws and the Condominium Plan). The Condominium Plan is effectively a map which will describe each space by its dimensions as well as the common area. The common area includes the streets, clubhouse, etc. The Public Report also includes the budget for operating the homeowners association. No matter which form of resident purchase, the park will be operated by a professional management company employed by the Board of Directors of the homeowners association. The homeowners association members vote for the Board of Directors on an annual basis. The Board of Directors oversee the management company and the operating budget for the association. The homeowners association annually reviews and approves an operating budget. All homeowners, even if theyhavepaid cash for their space or memberships, p must pay homeowners dues. These dues are spent to operate the park and fund a reserve for replacement and repair. The cost of operating for a resident owed park is generally less than a proprietary park because the park is operated on a non-profit basis. Homeowners dues and reserves generally run between $90 to $120 a month. If you purchase under a membership in the corporate mode of ownership, you would pay homeowners dues plus a pro-rata share of any loans on the park. If you purchase your space in a subdivision you will pay your homeowners dues and, if appropriate, a loan payment to the bank for your space cost. If you pay all cash for • • GII3I3S Ci-113I35 ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. December 9, 1996 Page 6 your space, you would only pay homeowners dues. In either situation you no longer pay rent. At the present time the park owner pays real property taxes on the park itself. If the residents purchase the park, the residents will benefit through a special exemption to Proposition 13. This exemption allows residents to have the same real property tax payment level as the prior owner. This exemption saves residents a great deal of money. If someone else buys the park, the taxes increases and the residents would pay that increase, even with rent control. When the residents buy the park, the taxes on the park that are presently in the rent the residents pay, will be billed separately. The residents' taxes or license fees presently paid on their homes would not change. Under a resident purchase, those who do not wish to buy would simply stay on as tenants with the same terms they have today. No one will be pushed out of the park due to the resident purchase. A discussion of all of the financial aspects of a resident purchase in this letter is impossible. I have, however, included two charts which reflect the difference between buying and renting in a hypothetical situation. The charts reflect in one instance a purchase with no down payment and in the other with the typical 20% down payment. With a down payment, it can be less expensive to buy than rent, from day one. With no down payment it takes several years and then buying becomes increasingly less expensive than renting. The sooner you buy, the better off you will be and when you buy you will be able to sell that advantage when you sell your home. Overall, our experience has been that park purchase makes much more sense than continuing to rent with no ownership of the land. Certainly, all homes have depreciated in value with the market down turn we have experienced over the last few years. In spite of the down turn, rents have not gone down and in many cases continue to increase. If you buy your space you can stop those increases and obtain the benefits. Please consider these benefits carefully. I will be discussing the cost to purchase with the Board of Directors shortly and if you elect to proceed, will negotiate a purchase contract with Mr. Bedig. We will require 1111 S GIBBS OG CTIBBS ATTORNEYS Ron Gorman Silver Spur Homeowners Association, Inc. December 9, 1996 Page 7 funds to do this. Should we fail in our attempts to negotiate with Mr. Bedig, the balance of the funds collected will be returned to the residents. Please call with any questions. Very truly yours, GIBBS & GIBBS, Attorneys GE DR . IBBS GRG: lc Enclosures MINN\C\DOGS\W4WM,OOHOME151LVERSRGORMWI.D05 SR..,.17N/9E 14 41 • GI:K.ILI) R. G111n1 -I$$ S IIIII313 S T,11urii1. J. GInn1 D.I VID L. G1nn.1 v. u. Pn, i'tj'sn,N.\I. Onii.I,Inc, ATTORNEYS ► t,► S,�,,�: 30 SAN C.LENIEN E. CA 93673.3956 Tr:Lrrnu�r: — ( l i) i93-iiil) 4 PRUFIi.S.Sf)V.IL CUHPUK.Iru,,'i V VAr.si%tii., — (7 Li) _i92-3(,9— 014? Fi,.li IVU. kem u./ 2101.01 December 19, 1996 Bruce Bedig, Managing Partner VIA FACSIMILE Silver Spur Reserve • 1990 North California Blvd., Suite 940 Walnut Creek, CA 94596 Re: Silver Spur Mobile Manor Dear Bruce: As you know, I have met again with the Board of Directors and had one general meeting with residents. The Board has now committed to retain our office and I expect the initial retainer deposit on Monday. After several frustrations in this field, I have become a firm believer in client participation. As a result, I will only perform a relatively nominal portion of the upfront activities without an assurance of being paid. The residents have now committed themselves to fund the upfront activity and I believe you and I can sit down to discuss the best method of entering into an agreement. It would assist me greatly if I could receive a December 1997 rent roll with the complete billing information (i.e., rent, utilities, R.V. storage, etc.). In addition, I need to see the last two years expenses for the park. I do not need your allocations between various parks and partnerships or any personal write-offs. What I am interested in is your best historical cost information for this park. I do not need to know your management fee or other proprietary information. I simply need the factual "on-site" costs. If you have made any large capital expenditures, please note those items. I also need to be sure I can define the utility costs and expenses as well as the real property taxes and any assessments that continue on beyond 1996. I will not share the foregoing with the residents except by way of their review of my pro forma budget analysis which will be based upon, but not a recitation of your actuals. I always treat the park owner's costs and expenses as proprietary information. It may be that the actual cost will be required by the Department of Real Estate to review the budget at some future date, but we will be using an outside entity for that • 111 111 GIBBS (El" GIBBS ATTORNEYS Bruce Bedig Silver Spur Reserve December 19, 1996 Page 2 effort, and the residents will not be privy to the information. I realize that you may have provided much of what I request to the Rent Review Board. I need your best input for my analysis. I really do not care what you may project through the Rent Control Board. As to the city, I understand you have visited some of the city staff to discuss the potential for a Section 1033 treatment of the sale. I am not sure if you have seen the "feasibility study" the city requires, but it is quite extensive. The city will require that study, plus our complete agreement (tentative) before they will definitely provide the letter you need for the 1033 treatment. The approach makes sense in that you do not want it looking like the threat was not in some way a real threat. On the other hand, the city does not wish to issue a threat if no deal is available. They do not want to get caught up as an inadvertent buyer. Effectively the city is looked at as the last push required to make a deal. The city has had a study done by a San Clemente firm which purports to set a policy for conversions. Unfortunately, that consultant is also an "associate" in the Richard Hall approach to non-profit acquisition through a tax free bond. Her policy document is somewhat biased by her own approach. We should be able to work with the city's guidelines, but it could cause problems. I will work with the city and residents to insure that this goes smoothly. If you will get me the information requested as soon as possible, we can meet shortly thereafter. I just need a few days to schedule a meeting. We can then agree on an approach and hopefully a price. Please call with any questions. Very truly yours, GIBBS IBBS, Attorneys GERA D R.. GIBBS GRG: lc bcc : Ron Gorman