Does anyone have experience investing programmatic equity with a regional home / townhome developer? I know profit margins are 20%+ per home so the leveraged returns would be really good. I also imagine you can pre-sell homes quickly in this market. Headwinds are obviously interest rates and construction costs.
I'm thinking $10-20MM of programmatic equity with a $10MM line of credit for a small / mid-size regional developer with an established platform with enough scale. After they churn through the equity 3 - 4 times the equity basis would essentially be $0.
Anyone have experience doing this?
Yes, doing it. You’re right on the numbers. Issue is most homebuilders have enough of a balance sheet and just finance through that, not many do individual JVs or programmatic style JVs for their homebuilding.
Interesting...what's the common thread for the home builders that use your balance sheet? How much capital can you put out with each HB? What's the typical timeframe from lot acquisition to sale?
Sorry if unclear, but not what I was saying. Typically they don’t use our balance sheet, they use their own then get lines of credit from lenders (typically banks). The one we’ve done was a growthy play of a builder that couldn’t fund from their own balance sheet as they were growing to quickly to get capital back and tie up everything they wanted.
How does this work regarding cost over runs though? All sponsors / builders want something programmatic, but they all also think their business plans are the best ever without consideration for many risks, some of which are identified above.
If you commit x mm in equity over a year or 2 for x number of communities, how do you ensure their construction costs will adhere to your return requirements on the committed equity?
As far as I know there aren't GMPs in SFH development so you'd have to eat the cost. I imagine cost overruns are funded pro-rata based on the JV % contributions.
I'd want to structure the partnership where we have the option to stop funding equity if the economics get out of whack and the builder is building just to collect fees.
Would you buy the homes from them at CO too or just sell to market? What's your threshold for "established platform"?
We'd want to sell them to a home buyer / investor asap (preferably pre-sale) to recycle equity into new developments (which is more profitable).
I'd say an "established platform" has a successful track record of building at scale to make the whole dollar profit interesting for us. I.e. they have in-place infrastructure to quickly put $10-30MM to work.
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