Private Equity Funds Move to Bankroll Builders

Sunday, 24 Jan 2010 04:39 PM

 

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Take a risk. Put some money on the line. See what happens.

It's a scenario that plays out daily in this gambling mecca. But even by Las Vegas standards, some of the riskiest action last week was happening far from the shimmery din of slot machines and blackjack tables.

More than a dozen investment funds and a handful of lenders held court in a corner of the Las Vegas Convention Center, receiving a throng of homebuilders looking for a financial lifeline.

The event, held over four days during the International Builders' Show, was meant to address a key industry roadblock. Homebuilders have seen land development and home construction loans all but dry up since the financial crisis erupted in the fall of 2008. Many have had to walk away from half-finished projects or even shut down.

Now some private equity funds, seeing the potential to charge up to 20 percent interest, are cautiously bankrolling some projects, despite the danger that the fragile housing recovery could stall.

"It's a very opportune time to make loans," said Craig Manchester, managing partner of Sentinel Capital, a fund that launched a few months ago. Speaking from his office in Newport Beach, Calif., Manchester said he charges builders between 12 to 15 percent, plus fees. "A year from now, two years from now — who knows — there may be other lenders who are competing against us, driving our pricing down."

With rates as high as credit cards, it will be hard for some builders to be able to make a profit on the homes they sell. Still, builders need to start their bulldozers now if they want to be ready for the spring homebuying season.

"We're missing opportunities," said Michael Sivage, CEO of Sivage Homes in Albuquerque, N.M. "I've got three developments right now that if financing were more available, they'd already be under way."

At the trade show, builders lined up in front of computer kiosks to enter financial information. They waited in a makeshift lobby before meeting privately with financial advisers brought in to play matchmaker and, ultimately, fund managers.

Among the investment funds that participated were Hearthstone, KeyBank Real Estate Capital, Encore Housing Opportunity Fund, Greenfield Partners and Yun Capital. Bank of America and Royal Bank of Canada also were on hand.

By Friday, about 255 builders registered to meet with fund managers, said Lisa Marquis Jackson, vice president of John Burns Real Estate Consulting, which sponsored the event.

Still, the meetings appeared to be more financial speed-dating than anything else. Builders got to deliver their pitch and investors got to scout potentially favorable deals, but organizers said the meetings were just the first step in the funding process.

"There's still plenty of downside out there and there's still a lot of risk," said John Hay, director of KeyBank Real Estate Capital in Washington D.C., who is looking for returns of 20 percent.

Traditionally, homebuilders turned to banks for loans to buy land, cover the costs of preparing it for development and, ultimately, pay for construction. Banks usually used the land and homes being built as collateral against the possibility the builder defaulted.

But that approach hit a snag when the housing market went bust, sending land values and home sales into a freefall. And just like many homeowners who suddenly found themselves owing more on their mortgages than their homes were worth, many builders were stuck carrying loans on properties that were worth significantly less.

The credit crunch squeezed banks further, and they pulled back on real estate loans.

Up to 85 percent of builders said access to credit has been getting progressively worse in the past 18 months, according to a quarterly survey by the National Association of Home Builders.

"They can't get financing," said David Crowe, the trade association's chief economist.

Even the New American Home, a house traditionally built in conjunction with the International Builders' Show to spotlight state-of-the-art design and construction, ran into financing trouble.

The builder on the project wasn't able to get a loan to finish the 6,078 square-foot house in Las Vegas in time for the show.

Some banks might be receptive to lending money to build homes that have been presold, but many won't take the risk of financing construction on an unsold home that could sit on the market for months without attracting a buyer.

That's been the problem for Don Eyler, owner of E&R Construction in Terre Haute, Ind.

"There is no money, not hardly," he said.

Home construction loans were down 51 percent in the third quarter last year from the peak in 2006, according to data compiled by the FDIC.

Delinquencies, meanwhile, hit 27 percent in the third quarter of 2009. For condos, they were even higher at 41 percent.

Sivage, who also builds homes in San Antonio, Texas, is hoping to line up financing through a fund.

The builder is having trouble getting the money it needs to expand even though it sold 300 homes last year — a 20 percent increase from 2008 — and is profitable.

"In a normal market, we'd have bankers beating down the doors to get our business, but not today," he said.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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