Right now, private equity funds are a better option for builders seeking financing.
Last month, I attended the 2010 International Builders' Show in Las Vegas. My company was invited to participate in the Partnership Pavilion set up by NAHB (and sponsored by John Burns Real Estate Consulting) to help match builders with financing sources. After meeting with over 50 developers and home builders during the course of the week, I estimated that more than 70 percent had experienced severe issues with the banks that are funding their construction projects. The most common issues cited were:
- Lines of credit stopped without warning
- Loans were called even though payments were current
- Loans ceasing to distribute funds in process
- Reducing the loan amount and removing the interest carry portion of the loan
- Projects repossessed due to calling of the loan (not failure to make the interest payments)
- Banks unwilling to fund new projects
- Banks taken over by the FDIC; all funding stopped; no representative at the bank to hear builder's pleas
- Banks unwilling to take a modest writedown, but willing to foreclose and sell for 20 cents on the dollar.
It's not my intention to unduly bash banks. I believe that once the federal government creates programs to help banks become more successful and begins to curb regulation, banks will eventually recover and get back in the game. Until then, good companies are being treated unfairly.
Private equity funds are the best alternative for developers and home builders today. More aggressive hedge funds and similar groups are beginning to get back into the real-estate market, but the cost of funds and participation in the company may be hard to swallow for most builders.
Read more blog posts by Douglas Shipman here.