PE Firms, Others, Ready to Finance Builders But...

Private equity funds have their pockets full of cash for builder loans, even in areas hit hardest by the housing downturn, according to a survey released at the Pacific Coast Builders Conference. "Despite their problems, that's where we are seeing increased activity," said Jeff Meyers of Meyers Builder Advisors, Corona del Mar, Calif. Pension funds, private funds and even high net worth individuals are eyeing places like California, Arizona and Las Vegas because there is a relatively high barrier to entry in those markets, so their returns are better, Meyers explained. Hammered by huge losses on tract development loans, commercial banks have either exited the sector or severely tightened underwriting terms. According to the Meyers poll, investors that are willing to extend credit want to make 20%-25% or more on their money over a three- to four-year period. Not only that, Meyers said, but they typically also now want builders to have some skin in the game. Some are looking for their builder clients to co-invest at least 5%, while others want builders to maintain as much as a 20% share in their developments, the survey found. Equity investors aren't afraid of land deals, either, according to the poll. In fact, they are actually looking forthem—"Preferably those with improvements already in the ground," Meyers said—because they see them as coming with a great exit strategy. Over the next two years, more than half the equity funds which participated in the survey said they will deploy $100 million or more in the homebuilding sector, a signal Meyers is taking as the return to the market of institutional investors.