Builders Can Find Alternate Funding Sources Close to Home
With funding from banks and private investors difficult to secure, real estate finance experts participating in a Nov. 13 NAHB audio seminar advised builders and developers to mine their personal and professional contacts as alternate funding sources.
When seeking capital for new projects, Tom Stephani, of Stephani Enterprises, Inc. and Custom Construction Concepts, Inc., of Crystal Lake, Ill., said that the first source of funding is the builder’s own equity.
“The second place I go is to look at the landowner, who can use their land as a subordinated position to any bank debt,” said Stephani.
He also encourages builders and developers to seek out friends and family who may be willing to invest in a project as well as trades and subcontractors who could be interested in taking a piece of the action because they need the work. Finally, he said, a community lender who knows the people and project involved can take a minority stake. “You don’t even need an appraisal to make it work.”
Stephani added that the way to structure the project and determine profit-sharing arrangements depends upon what the landowner, trades and friends put into the deal. “Whether structured as a percentage interest or a piece of the project, it all depends on what their local worth is,” he said.
Wider Latitude When Working With Private Investors
Troy Taylor, president of the Algon Group in Atlanta, which provides real estate and financial advisory services, said that builders can have wide latitude when negotiating with private investors.
“If there are 100 deals, there are probably 110 different structures,” said Taylor. “What each of your investors wants will be different. Decide on the economic arrangements and with good legal advice you can figure out how to best document what you have agreed to.”
When approaching an alternate funding source, builders need to provide market research and data that is both comprehensive and easy-to-understand, as well as detailed information about their business.
“Alternative sources won’t just look to the real estate deal,” said Taylor. “They want to know who they are in business with, who the developer is and their track record.”
Presented by NAHB’s Business Management Department, Executive Officers Council and The NAHB University of Housing, participants in “Alternative Funding Sources: Ideas and Perspectives to Keep Your Business on Track” agreed that it is difficult to get new investors to inject capital into an existing project unless the primary lender agrees to restructure its bank debt.
Best Funding Source for Builders Still Their Existing Banks
The best source of funding for builders and developers who are seeking to work out loan problems is with their existing banks, said bankruptcy expert Harley Riedel, director of Sticher Riedel, Blain & Prossner, P.A., of Tampa, Fla.
“It’s going to be tough to get another lender to come in without a restructuring and if existing banks won’t restructure, new money is going to walk,” said Riedel.
This vicious cycle, Taylor said, is causing some firms to begin Chapter 11 proceedings in a bid to force banks to make decisions they don’t want to make.
But Riedel warned that this is a risky maneuver.
“You ought to explore every alternative you can before filing for Chapter 11,” he said. “But that doesn’t mean you should not talk to your lawyer about the possibility in advance. You need to know what your rights are. It’s a potential tool you can use, a tool that large, publicly traded companies have already used.”
Asked by moderator Ron Robichaud, principal of Robichaud Financial Services based in Laconia, N.H., about the possibility of securing funding sources from Wall Street, panelists agreed that it would be a tough sell for most large companies and nearly impossible for small and mid-sized firms.
“Wall Street capital would like bigger projects,” said Stephani. “If you go after Wall Street money, the company must be packaged extremely well. In 99% of the cases, you must hire advisors that have credibility with these institutions. They are getting hundreds and hundreds of opportunities, so they can be extremely selective.”
“The ability for most builders to attract Wall Street money is basically non-existent,” added Taylor. “Institutional investors are getting hundreds of loan packages. If they get 200 packages, they will look at 40, do due diligence on seven and fund one or two.”
Avoid Spousal Guarantees in Secured Loans
In today’s market, with banks having the upper hand, Riedel said that unsecured debt is virtually unavailable for existing projects.
“What you will find when going for new loans today are loans that will be secured,” he said. “Most banks or lenders will require personal guarantees — unless you’ve got a lot of equity.”
A personal guarantee is a contract, and each one contains its own unique terms.
“The most important thing is to try to avoid spousal guarantees,” said Riedel. “Avoid pledging an exempt asset like a homestead.”
Taylor urged builders who embark on new projects to limit their capital exposure, even if it adds to their total costs.
“If you want to build 600 units, build 100 units to see how they sell,” he said. “If you have existing projects and you need more capital, you will have to restructure with your existing banks. The longer you delay, the more difficult it will be to restructure what you currently have.”
In closing, Stephani said it is vital that builders stay in touch with their lenders.
“When you do have issues with a bank, the No. 1 thing is to continue to communicate. Don’t avoid them. Keep them up to speed on where things stand. Otherwise, they will think the worst.”