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| Off-Balance Sheet Financing for Home Builders |
| Written by Jonathan Smoke | |
| 08.01.2007 | |
Discuss this article on the forums. (0 posts) On a day when the stock market loses its mind and responds to scurrilous rumors in housing more than facts, I thought it would be good to quiet my keyboard and invite a guest to give us some color on a topic that was raised by one of our HousingIntelligence users.Yesterday we received the following question/suggestion to research: “Very little is discussed about the public builders who used land banking as a way to keep the debt they were incurring off their balance sheets. What is happening to these builders and the debt facilities that are still on the hook for all of this land and debt?”
I thought that was an excellent question. I have never been directly involved in the financial and legal structure of such transactions, so I didn’t feel confident in answering. It did make me think, “Isn’t this sort of environment one in which it makes sense to do these sorts of deals so that risk and rewards are shared with others?” I shared that question with some industry colleagues. Here’s what Gary Saykaly of BridgePointe Advisors had to say: “Due to the slowing demand in the residential market and the excess supply of available homes, residential builders are carrying land on their balance sheets longer than expected. Since land doesn't generate any revenues and is typically financed via a debt facility, prolonged sell-out periods will cause the builder to ‘burn’ through its interest reserves prior to project completion. This situation not only reduces project profitability and margins, but causes increased strain on the builder's overall financial position.
While this market has caused a number of capital sources to reduce their exposure to residential builders, there are capital sources (institutional and private) that will provide builders with a variety of capitalization options to improve their financial position by removing the project or finished lot pool off of the company's balance sheet. Pre-development structures allow the builder to off-load the project to an off balance sheet entity, where the capital partner funds the costs of development. Finished lots are then put back to the builder at predetermined time frames. Finished lot pool structures are very similar, but involve finished lot pools that don't require additional capital. In this situation, the builder wants to free up its balance sheet and reduce its carrying costs until such time as the market can absorb the lots. The lots are contributed to the investor at a set price and bought back at higher price reflecting the investor's return requirement. Return requirements for the pre-development structures (20%+) are higher than the finished lot pool structures (mid-teens) given the risk level of the project.” BridgePointe Advisors is an investment banking firm that provides customized capital and investment solutions to the commercial and residential market nationwide. They have access to capital and investment sources including Institutions, Offshore entities, REITs, Private Equity Funds, Credit Companies, High Net Worth Investors, TICs, Banks, and Private Investment Groups & Lenders. Gary and his colleague Tiffany Britt are members of the HousingIntelligence community. I will share any other responses I receive to my question as well, and I encourage our users to share their own opinions or experiences by responding to this post. And just like what started this article, please feel free to submit your own idea or question. 
We're always looking for feedback from our readers.
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