When I talk to homebuilders and real estate developers about what they really want for capital, their most popular answer by far is that they want a programmatic and scalable institutional equity source to help them grow. CEOs typically describe that they are 70-80% focused on fundraising and only 20-30% on the business, and want to ideally reverse this ratio. They describe how high net worth individuals have been a successful funding source for their businesses, but also how that capital source can get capped out, its challenging to expand it to keep pace with their growth goals, and also tough to be competitive on land deals when you have to raise capital deal by deal. They know they want a programmatic institutional equity source, but also aren’t that familiar with those structures and also sometimes struggle to find the hours in the day to get going on a process.
Good news is that institutional investors are open for business on this structure. Right now, there are about 15 investors I work with closely who are active on these deals but I keep meeting new investors every week that I’m adding to the list. Housing has performed well in this most recent cycle and the tailwinds around a housing shortage are generally well accepted by investment committees. As interest rates normalize, the willingness to provide common equity capital instead of mezzanine debt or preferred equity is also increasing. These investors are focused on similar criteria, which is the best builders or land developers in the best markets (generally Sunbelt), non-luxury price points, established companies with track records, and attractive lot pipelines. The equity can be utilized for acquisition and development of unentitled land, entitled land, and/or construction of homes. In negotiating these deals, investors are very focused on alignment, which means they want builders to have a meaningful amount of capital in the deals with them and don’t want much in the way of fees being paid to builders that don’t connect to performance of the deals.
Carefully targeted approach to about 15 large institutional investors that Cedar Porch Capital works with closely. These institutional investors have many billions in assets under management, view residential real estate as a high priority asset class for investment, and are actively reviewing investments in line with this term sheet for high quality private builders in target markets.
[Homebuilder or Land Developer] with strong track record of developing lots and building homes in Target Markets and with sufficient pipeline to require the Investment (per below).
$20-100MM+ in equity from one of the Investors. Investment will be either (1) directly into Builder (“Parent Company Investment”) or (2) a separate joint venture entity which will own residential real estate assets being built by Builder (“Joint Venture Investment”).
In case of Joint Venture Investment, services agreement to be signed between JV entity and Builder for development or construction of the homes. The Investors can also make debt investments as needed as well
The Investment will be utilized to fund lot acquisition, development, and construction costs for properties consistent with Builder’s strategy. Goal is to make attractive investments in residential real estate and help the Builder scale its business towards a potential exit. In case of Parent Company Investment, will be made based on a valuation of the parent company of $[ ]MM.
18 months - Initial use of proceeds will be $[ ]MM for identified pipeline projects of [ ], [ ], and [ ]
In case of Joint Venture Investment, Builder to make 5-10% capital commitment alongside Investor.
Builder balance sheet to provide sufficient financial strength to provide Investors confidence that pipeline homes will be successfully completed.
1-2 additional recycling periods using initial equity contributions, subject to mutual agreement between Builder and Investor.
Distributions will periodically be made as sales are achieved
In case of Joint Venture Investment, all capital to be returned at the end of the 60th month of the JV.
In case of Parent Company Investment, Builder and Investor to discuss mutually agreeable parent company exit strategy.
Sunbelt markets (Southeast, Florida, Texas, Southwest) are a priority, however Investors are open to builders who have strong track records in other markets as well.
Maximum cost per home of $[ ]MM (not luxury home focused)
In case of Joint Venture Investment, maximum construction management fee / hard cost markup of 10-15% of hard construction costs.
Two options:
1. Pro-rata between Investor and Builder based on ownership.
2. 10% preferred return to Investor and, thereafter, higher profit share to Builder.
Securities are offered through Hollister Associates, LLC, Member FINRA, Member SIPC. Cedar Porch Capital and Hollister Associates, LLC are not affiliated entities.
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