The Official Online Weekly Newspaper of NAHB
Gone are the days when LIBOR — the London InterBank Offered Rate — was the driving force behind your cost of funds.
During the last several months, the LIBOR portion of the cost of funds could be likened to a meager tip left to wait staff for bad restaurant service. Prior to the financial meltdown that began in late 2007, the one-month LIBOR hovered above 5%, but as of this several weeks ago, it was .34%.
While inter-bank lending rates like LIBOR and the Fed Funds rate have been pushed to historic lows by coordinated foreign and domestic central bank policy actions, private credit markets are still very expensive.
Our experience is that the cost of private capital is at least 25% to 35%.
Funding sources can vary from individuals and real estate investors to actual private equity funds.
You might be surprised to learn that we receive just as many meeting requests from private funding sources as from home builders and developers. The cash is out there, and though we aren’t hearing the, “We’re waiting for it to hit rock bottom,” mantra nearly as much, most sources are still behaving that way.
These days, private funding sources are seeing huge volumes of deals.
Many interested private equity firms have no background in real estate, so they are ideally suited for partnership positions in order to gain the requisite expertise. For them, having a great relationship with a builder or developer is equally as important as the projected rate of return.
The quality of this relationship is crucial when you have a deal to propose and can make or break your chances of selling it.
If a relationship doesn’t already exist, you might find that you can get your foot in the door with a credible introduction.
As you search for private funding, consider whether you would allow them to purchase your property. This may or may not include buyback provisions.
Also ask yourself if you would consider a partnership and if so, are you willing to give up controlling interest?
When searching for a private funding source:
- Look for a builder in your current neighborhoods. We’ve had a number of builders and developers looking for opportunities.
- Ask your attorney or accountant for introductions to clients searching for these types of opportunities.
- Look for a firm to help you negotiate with your bank and find funding source referrals.
- Search listings of corporate partners associated with various trade associations or other networking groups.
- Utilize social networks such as LinkedIn. It will allow you to search the contacts of your contacts.
Once you have secured a meeting with a funding source, ensure that you take every step to make the most of it.
First, do your homework. The more you know about the potential source the better you will be able to evaluate the possibility of a future relationship with them.
Check their website to see if it provides information on the principals and utilize other Internet resources like Google.
Rather than anticipating a second meeting, bring documentation to distribute if you feel that there is a potential relationship.
Be Prudent: Have a Confidentiality Agreement Prepared
Keep in mind that it’s always a prudent business practice to have a confidentiality agreement executed prior to releasing any information relative to your business plans. Distribution or release of financial information regarding your company and guarantors can wait until there are signs of interest.
It may not be necessary at all if the conversation is strictly about a buyout.
How to Make the Most Out of Your Meeting
In order to make the most of that first meeting:
- Bring information regarding the collateral. Include appraised values, maps, photos, sales history and projections and current loan amounts.
- Discuss your current lender and any negotiations that may be in progress.
- Be realistic with your sales projections. Once the deal is made, you will have obligations to them.
- If you have multiple projects, consider packaging them when marketing to an investor. It is often more difficult to find $1 million in funding than $10 million.
Questions to ask:
- What is the company’s typical deal size?
- Do they have a geographic preference?
- Will they consider taking a second lien?
- Will vertical improvements be financed?
- Is there any interest in raw land or only developed lots?
- If they are interested in raw land, are they looking to develop it themselves?
- What is the expected rate of return?
- How quickly can a transaction be closed once you have agreed on the terms?
Most importantly, keep in mind that obtaining private equity funding will likely be a long and arduous process. Until the credit markets ease up, finding financing for any real estate venture is going to be a challenge.
To be certain, obtaining financing will not be the same as it has been in years past. Regardless of which path our legislators take with regard to the future of banking oversight, we now have a new generation of bankers and bank regulators who have seen the “bad times.”
Lenders will be more cautious even if they are anxious to make loans. Consequently, private capital may be part of the cost of doing business for the foreseeable future.
Maggie Marotta, CPA, is a principal with Apogee Partners, LLC, based in Plano, Texas. Apogee Partners, LLC assists clients with debt restructure, refinance and obtaining private capital. For more information, e-mail Marotta, call her at 972-985-4142, or visit the Apogee website at www.apogeepartners.net.
Three New Biztools Business Guides Available Free to Members
Three new Biztools builder business guides ― created to help NAHB members manage their businesses more effectively and increase their profits — are now available free to members through the NAHB Web site.
The guides offer members tips on technology, business planning, how to ensure the financial health of their businesses and more.
Produced by NAHB's Business Management and Information Technology Committee and found in the business management resources section of the NAHB Web site, the new 2010 Biztools builder business guides include:
- “Business Management for Home Builders: Poising for Recovery as the Market Turns”
- "Financial Management for Home Builders: Measuring Key Metrics to Plan Your Path”
- “Information Technology for Home Builders: Using Technology to Better Market Your Business”
All three concise guides ― which include lists of other valuable NAHB Biztools resources ― are written by experts in the field and can be downloaded by members for free at www.nahb.org/bbg.
Free Earlier Edition Biztools Business Guides Also Available
The 2006, 2007, 2008 and 2009 Biztools builder business guides are all available free to NAHB members and can be downloaded from the NAHB Web site in a PDF format only.
To view or download these guides, click here.
The “Cost of Doing Business Study, 2010 Edition,” available through BuilderBooks.com, enables home builders to compare their business operations with like-sized builders across the country so they can fine-tune their businesses and boost profits.
The study analyzes several operational business categories ― including volume, operation type and land vs. no land costs ― and enables builders to identify their strengths and weaknesses, increase efficiency, set realistic budget targets and improve business practices.
The categories have been analyzed, where applicable, by average and by the top and bottom 25% of performers by net profitability.
Builders can use the study to develop proven strategies to succeed in an increasingly competitive market.
To view or order the “Cost of Doing Business Study” online, click here, or call 800-223-2665.
NAHB’s Technology Solutions Directory is an easy-to-use comprehensive directory of technology vendors that enables builders, remodelers, contractors and other industry professionals to find information on software, IT solutions and technology services for their businesses.
Listings on the directory, sponsored by the Business Management & Information Technology Committee, are now available at lower prices.
Software and technology solutions providers interested in being listed can sign up for:
- Enhanced Listing — Listing includes company name, URL, e-mail address, mailing address, phone number, company/product description, company logo. Click here for more information.
- Standard Listing — Listing includes company name, software brand and phone number. NAHB members can post standard listings for free. Click here for more information.
For more information, e-mail Agustin Cruz at NAHB, or call him at 800-368-5242 x8472.
The Technology Solutions Directory is solely for educational and informational purposes. Nothing in the directory should be construed as policy, an endorsement, warranty or guaranty by the National Association of Home Builders of the listed software, IT service or the software/IT vendor. The National Association of Home Builders expressly disclaims any responsibility for any damages arising from the use, application or reliance on any information contained in this directory.