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Private Builder’s Plight: Capital or Bust

Dec 1, 2014

By John McManus

Here at what we’ll suggest may be the very end of the beginning of our fits-and-starts recovery from what was the worst housing downturn in anyone’s memory, two kinds of private home builders still subsist in what continues to be a challenging landscape.

One kind—by virtue of a financial investor Sugar Daddy or maybe because of the deep-pocketed wherewithal of company principals—poises itself for more hard-won, brass-knuckle growth in 2015, drawing on a capital structure that gives it options, the ability to spring for a sound opportunity, and, most important, time. This kind is the exception rather than the rule.

The other kind of private firm—far more common than the first—has survived both downturn and early recovery in home building’s equivalent of a cryogenic state—preserved, but hardly animate--with as few expenses as possible, a smattering of highly profitable revenue coming in from whatever has gone vertical in the past 18 months, and an “A&D Cliff” lying some unpredictable, but shrinking distance ahead.

How these companies have lasted through to up to now is a testament to the guts, wile, intestinal fortitude, and sheer resilience that makes home builders the rare breed of individuals they are. Cycles past equipped them with some of the tactical know-how and emotional stamina to endure a siege of some duration.

This one, however, felt more brutal, more extensively debilitating, more final. Even early stage recovery, such that it was, seemed as if it celebrated things not getting worse more than it enthused over a restoration of health and normalcy.

So, for those home builders who’ve been surviving on fumes all these months, what’s the just-around-the-corner mental image that could offer enough promise of better days ahead to merit giving it one last gasp to get to the end of the marathon?

Capital, that’s what. The image of capital actually needing home builders as much as home builders need the dollars is that mental image that could exert just enough punch and power to keep the juices flowing for one more epic push to survive.

Now, capital at this juncture comes in two flavors for private home building companies. Taste one of them and you’re working either totally or mostly for somebody else. Try the other, and you maintain the reins of your business, but have some debt to pay off.

This past week, National Association of Home Builders tax and policy expert Robert Dietz has been combing Federal Deposit Insurance Company and other data to track progress in Acquisition, Development and Construction lending for builders.

Dietz notes progress and improvement from the trough in terms of lending trends and the stock of loans made to home builders, but concludes that the gap between the need and the supply of available capital is enormous. Dietz writes:

Despite the recent uptick 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, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.

Which makes it a good moment for Rodney Montag and John Lincoln—two former Mountain Real Estate Capital executives—to launch a firm that aims to deploy its investors’ funds mostly in project financing for small to medium-sized private home builders.

Fact is, most private home builders don’t do nine-figure project financing deals; their appetites more often, are for high-seven and low eight-figure financing deals that can land them a tract that big publics and well-heeled larger private companies may overlook as too small or too remote or too something-else to be worth the effort.

“Most of the capital that’s still in play in this market is chasing the bigger deals,” Montag told me as we talked about his fledgling operation, which leverages almost three-decades’ experience and scores of relationships with investors and home builders alike as its value proposition to home builders who need capital.

“We’ve both got operational experience, and we’re active investors, which makes us different,” Montag says. “It’s not often that a builder’s walking a potential job site with an investment partner, and I’m not just critiquing the financial structure of the deal, I’m looking at the land plan, the design, the marketing strategy, and the construction process with equal emphasis.”

Montag says he and Lincoln are on pace to announce three closed deals no later than the first quarter of 2015.

“Our guys are calling us,” says Montag. “If they were satisfied with the capital options out there, they would not be calling us. It’s very hard to invest in this business on a week to week, or month to month, or even quarter-to-quarter basis and expect to feel secure in the investment. We’re in it for the longer haul.”

So, private home builders who need capital, take heart. There’s capital just around the corner that needs you probably just as much. Hang in there for 2015.