Funding to build or buy SFR hits market as debate rages

The creation of new homes, and for whom they are being built for, is a hot button topic in Washington today. 

On Monday night, in a social media post, President Trump called on the House of Representatives to pass the Senate version of a housing bill which impacts institutional investors' ability to purchase homes, and limit their ability to hold on to newly constructed properties.

What's happening in DC

The Senate bill, the 21st Century ROAD to Housing Act passed in March, includes implementing an executive order he signed regarding large investors owning residential properties. This bill passed with strong support from both parties.

It has run up against Republican opposition in the House, particularly over Section 901, the institutional investor ban.

The housing industry itself is split, with the Mortgage Bankers Association calling on its members earlier this month to urge the House to remove this portion, as well as three others.

On the other hand, the National Housing Conference urged the House to pass its own bill, but build on the Senate's "strong bipartisan foundation." This includes holding onto the institutional investor ban.

"The Senate's proposal to ban institutional investors from purchasing single-family homes reflects not only the President's priorities, but the growing urgency of preserving homeownership opportunities for first-time buyers who are increasingly being priced out of the market," a May 12 statement by David Dworkin, president and CEO of the NHC, said.

Filling the funding void

With this backdrop, one company announced an expansion of its homebuilder financing program, while another stepped up its purchases of build to rent communities with a new joint venture.

Builders Capital Exchange has a $2 billion multi-year annual capital commitment from a global institutional partner. The program is build to own, but those owners can be institutional investors (Builders Capital Exchange does do some build to rent financing).

Estimates vary on how big the deficit is, with the White House putting out a claim of 10 million homes.

While noting the varying numbers being put out regarding the shortage, the end result is one thing, said Robert Trent, CEO of Builders Capital Exchange.

To solve for affordability in the U.S., supply has to be increased. "There's no way to get there other than building more houses, and these builders can't build more houses without more capital," Trent said.

Builders Capital Exchange

The majority of construction funding was handled by banks and other small private lenders, said Trent, whose experience was as a homebuilder in Washington State. During the Great Financial Crisis, he ended up selling to a publicly traded builder because of the capital constraints. The experience led him to create Builders Capital Exchange.

But the banks, with the exception of small, regional credit unions, have been pulling back on providing construction financing in recent years, he said. Today, homebuilders are concerned if their bank will remain in this line of lending. It is just one more bit of worry for the industry, whose March 31 results for many were significantly lower than the year before.

On the other hand, private lenders have maximum concentration limits on how much they will lend to a borrower.  A builder constructing hundreds of homes a year needs to have "dozens of different capital partners" from both sources, Trent said.

"What we do is, because of the size and scale and the partnership we have with institutional investors, is we're able to go in there and offer them one giant facility, if you will, that would replace most or all of those smaller facilities," he continued.

Blackstone recently announced it was providing funding for 50,000 newly constructed homes a year.

Buying certain SFR communities

Separately, RCLCO Fund Advisors formed a joint venture with what it called "a Top 50 domestic pension fund" to make investments in purpose-built single-family rental communities.

It already has closed on an 82 home single-family attached property.

"RFA was an early participant and continues to have high conviction in BTR investments based on observed, and too often unmet, demand for high quality and affordable single-family housing," said Taylor Mammen, CEO, in a press release.

This venture is looking at properties with between 50 and 250 homes. These should be within 30 minutes of a major employment center, with the majority being three bedrooms or more. It also has a preference for amenitized communities with townhomes and/or single-family detached homes.

"We believe the purpose-built single-family rental sector is supported by powerful structural drivers, including evolving household formation patterns, affordability pressures, and strong demand for attainable rental housing options," said Rick Pollack, RFA's managing director, in a press release.