WORKSHEET HELPS DEFINE COMMUNITY VALUE
1996

Everyone appreciates a versatile tool. Whether it's a Swiss Army Knife, a screwdriver with interchangeable blades or simply a mathematical formula with several helpful applications, we like flexibility and reliability.

The Valuation Calculation Worksheet(VCW) introduced here over a year ago has more value estimation applications than originally conceived. (See "Setting a Value on your MH Community." In the May 1995 issue of The Manufactured Home Merchandiser.)

The VCW debuted as a simple how-to guide for manufactured home land-lease communities. It was designed for the everyday real estate investor and the small-portfolio community owner or property manager in mind. Its anticipated application was, and continues to be, a preliminary estimation of value preceding a complete and comprehensive valuation opinion or report researched and prepared by an experienced real estate appraiser thoroughly familiar with the peculiarities of this property type.

By now, thousands of copies of the VCW have been distributed nationwide, many the result of specific requests. And to date, not a single serious criticism has been made or error has been noted. In fact, without exception, feedback has indicated a close correlation between VCW results and formal evaluations of specific communities.

A sample of what this form contains appears on page 30. The data shown is for a hypothetical 475-site land-lease community enjoying 95 percent economic occupancy.

VCW users are reminded that the system has its limitations. Chief among these is that the value judgements and calculations are viewed from the perspective of the present owner rather than the buyer. The VCW also works best with properties that have economic occupancy level of 85 percent or better. (See the formula shown as part of form's heading.) This does not mean simple physical occupancy.

Users should also be aware that certain items are subject to interpretation and are often affected by local market and regulatory conditions. For example, it's a judgement call whether to include a 2 percent vacancy factor when determining the net operating income (NOI) in Part V. Once concerns such as this are taken into consideration, the form is actually very easy to use.

But what are these new applications? In a word, predictive. Community developers frequently use the VCW to estimate the eventual value of their newly developed or to be developed property -- once it is above 85 percent economic occupancy -- taking into consideration the system's key characteristics and appropriate adjustment factors.

So now, borrowers can demonstrate to lenders how a proposed project is expected to perform and what that cash flow might be.

Purchasers of "turn-around challenge" properties are doing the very same thing: before and after acquiring an existing manufactured home community. Used along with an Income Expense Analysis form tailored to this property type(not shown here), practitioners regularly compare actual with anticipated income and expense figures and measure the effectiveness of key property characteristics and adjustment factors listed on the VCW.

So a good idea becomes even better. What has been your experience with the VCW? Let us know. If you haven't worked with the step-by-step form yet, please call or write to me to request a free copy of the VCW and a reprint of last year's article explaining how to use it.

THE VALUATION CALCULATION WORKSHEET...an easy-to-use, nontraditional valuation tool designed for manufactured home communities(See Table Below).

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VALUATION CALCULATION WORKSHEET (VCW) FOR A HYPOTHETICAL LAND-LEASE COMMUNITY (operating at 85%+ economic occupancy) I. General Characteristics: Number of acres developed: 100 Average monthly rent per site: $140. Age of property: 20 years Number of sites occupied and paid: 475 (+) Total No. sites developed: 600 (=) Economic occupancy rate: 95% II. Key property characteristics: (Seen from the perspective of the owner or seller. Points assigned on six key characteristics from 1/2 point to 2 points) 1. Location: (Remote and poor proximity = 1/2 point; good desirability, accessibility and proximity = 1 point; excellent accessibility and proximity to employment, transportation = 2 points) 1/2 point 2. Number of rental homesites: (5-49 = 1/2 point; 50-99 = 1 point; 100-199 = 1 1/2 points; 200 or more = 2 points) 2 points 3. Homesite sizes: (All single-section, less than 5,000 square feet = 1/2 point; all multi-section, 5,000 square feet or larger = 2 points; 50/50 mix = 1 point) 1 point 4. Utilities: (Old, private, poor condition = 1/2 point, private, OK condition = 1 point; private, in excellent condition or public with fair rates, buried lines = 2 points) 2 points 5. Amenities: (None = 1/2 point; minimal = 1 point; some desirable features = 1 1/2 points; top quality features include swimming pool and clubhouse, if appropriate for local market = 2 points 1 1/2 points 6. Overall curb appeal: (Marginal to fair = 1/2 point; good = 1 point; above average = 1 1/2 points; excellent, with landscaping, off-street parking, adequate setbacks, wide curvilinear streets [vs. grid pattern] = 2 points) 1 1/2 points Add points for all six categories and deduct from 20: 11 1/2 points III. Income vs. costs: 1. Actual rent collected: During last 12-month period, not including miscellaneous or rental home income) $798,000 2. Is there a steady and growing income stream? Yes/No Yes 3. Actual operating expenses: (For same 12-month period, not including debt service or depreciation. Consider including 5% for property management fee and 1% for capital reserves) $315,000. 4. Operating expense ratio (OER): (Divide total operating expense by total rent collected. National OER = 37.8%; model = 40%) 39.5% IV. Valuation and adjustment factors: (Decide whether each factor adds to or reduces property's value by +/- $500.) 1. Density of homesites: (Divide # developed sites by # developed acres -- 7 or more homes/acre = - $ 500; 6 or fewer homes/acre = +$500.) +$500. 2. Economic occupancy: (See above for formula. Less than 84% = - $500.; 85-94% = $0; 95% or higher = +$500.) +$500. 3. Present rent level: (Low for market = -$500.; high for market = $0.; mid-range for market = +$500.) +$500. 4. Proportion of rental homes on-site: (3% or more = -$500.; less than 3% = +$500.) -$500. 5. Adverse landlord/tenant legislation or rent control in effect locally: (Yes = -$500.; no = +$500.) +$500. 6. Contiguous undeveloped land available and zoned for like use: (Yes = +$500.; no = $0.) $0. Cumulative total of valuation adjustment factors: +$1,500. V. Valuation calculation 1. Rent collected ($798,000) - oper. expenses ($315,000) = net oper. income (NOI): $483,000. 2. NOI ($483,000) ÷ key point total (11.5) x 100 = preliminary value: $4,200,000. 3. Preliminary value ($4,200,000.) ÷ # occupied and paid homesites = value per site: $ 8,842. 4. Value per site ($8,842.) + cumulative valuation adj. factors ($1,500.) = adj. site value: $ 10,342. 5. Adj. site value($10,342.) x # occupied/paid sites (475) = Subtotal A: $4,912,450. 6. Adj. site value($10,342.) x # vacant/unpaid sites (25) x value disc.(.50) = Subtotal B: $ 129,275. 7. Subtotal A($4,912,450) + Subtotal B($129,275.) = TOTAL VALUE OF THE COMMUNITY: $5,041,725. Note: This worksheet is distributed as a self-help guide to estimating the possible value of a manufactured home community. Accuracy of results is wholly dependent on data selected and calculated by the user. The services of an experienced and certified real estate appraiser should always be retained for best results.

George Allen, CPM and management consultant to the real estate and manufactured housing industries, has authored three business texts, including How to Find, Buy, Manage and Sell a Manufactured Home Community. He pens the monthly Allen Letter, as well as columns for the Manufactured Home Merchandiser and Journal. George has corporate clients throughout the U.S. and Canada, is a regular management seminar facillitator, founder and president of GFA Management, Inc., and owner of income properties with his partners.

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