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Demand for Acquisition, Development Capital Picks Up

Apr 5, 2017

With all the attention in higher volume home building these days focusing on a hyperactive mergers and acquisitions market, it begs another question, especially in what's emerging as a strong Spring market.

What's a builder to do who may not be interested in selling the company, but needs to re-stock the land pipeline, get some lots out in front of it for the near- and mid-term future of what could be a sustaining recovery?

The entity deals for some of the sellers serve as a deep pocketed capital partner, allowing those operators to bid competitively on lots even in markets crawling with other builders so that they can model continued growth and scale in their operating footprint.

Lacking a vested partner like that, private home building companies who'd rather stay independent make use of their own cash from operations to reinvest in new undeveloped or finished lot, or they can turn to financial partners--either bank lenders, who qualify loans for land acquisition and development, or to private funds who offer financing to operators on a deal-at-a-time basis.

Recently, National Association of Home Builders chief economist Robert Dietz wrote that while AD&C lending grew almost 2%, by $1.2 billion, during the fourth quarter of 2016, a consecutive run of increases that extends now for 15 quarters, he also noted that the growth was losing heft. Dietz notes that while AD&C lenders have come a long way up from volumes in 2012 or so, they're still at less than half their lending levels pre-Recession. He writes:

"Despite the steady increases in residential AD&C lending, there exists a lending gap between home building demand and available credit. This lending gap is being made up with other sources of capital, including equity, investments from non-FDIC insured institutions and lending from other private sources."

One such opportunity is RAM Real Estate Capital, which announced this week it has amassed funding for a RAM Re Investments II, and has actually found a Bay Area operator worthy of a first investment. Rodney Montag, RAM ceo and managing partner, offered this perspective overall:

"There's plenty of capital out there for the big publics to access through their structures, but just as demand is outpacing supply on the new home availability front, there's also a huge demand for capital among builders that exceeds the supply of it in the market right now."

According to Montag, in a market that's showing pace and volume, what many builders mistakenly do as they reach out to compete for land for their near and mid-term future sites, is to apply current price change modeling into their return rates on the new lots.

"Builders are in a tough position. Land prices are high, and everybody's trying to get essentially the same ones. We have to be careful that a builder is not being unrealistic about what they're willing to ante up for a parcel, based on reality-based pricing, pace, and absorption rates, rather than escalators that build land appreciation into the model."

Montag's RAM fund looks for builders who're willing to take a couple of chips off the table on the profitability of their deals for access to the acquisition and development capital they need to make them happen.

Montag and five high-level lending and finance executives will explore a series of key issues and trends around capital supply and demand in home building as part of our Housing Leadership Summit, May 8-10, in Southern California. Rodney will be joined by Bird Anderson, Executive Vice President, Wells Fargo, Tony Avila, CEO, Builder Advisor Group, Theodore Karatz, Director, GTIS Partners, Ethan Leibowitz, Managing Director, JEN Partners, and Anthony McGill, Advisory & Capital Market, Zelman & Associates.