Home to four of the top 10 fastest growing cities in the country, the Texas homebuilding market continues to heat up. One challenge homebuilders face in this hot market is how to maintain capital to build new homes now while also securing lots for future development.
In today’s lending environment, the requirements for a traditional financing structure can stretch a company’s capital resources and balance sheet to the limit. A non-traditional financing option called lot banking assists homebuilders in securing prime locations in sought-after developments while managing cash flow.
Residential lot banking was born out of the recession of 2008 when bellwether banks were falling like dominoes, and those banks that survived faced greater governmental scrutiny than ever before. Investing in residential real estate was not the safe investment it once was, and homebuilders struggled to secure the money needed to complete projects.
This alternative way of financing developers and homebuilders gave rise to opportunity for investors looking to get into real estate investment and to homebuilders who needed help financing new projects.
For instance, a homebuilder seeking a position in a master-planned community needs to secure 50 lots in a new section but will only build on a handful at a time. The builder needs capital on hand to build, and also needs to secure the additional lots for future growth.
That’s where lot banking comes in. A lot bank purchases the extra lots so the homebuilder can buy them back as needed at a certain interest rate. This frees up the homebuilder’s capital to build homes while ensuring they have inventory on hand for the next phase of building.
“To keep up with demand and grow their businesses, homebuilders are scrambling to secure lots as quickly as they can,” said Philip Guyton, director at CBA Land Capital. “Mid-size homebuilders can find themselves in a bind if they commit too much capital on lots and do not have the equity to borrow money for building. On the other hand, larger, publicly traded homebuilding companies need large amounts of lots on hand to show analysts they have inventory to last the next 24 to 36 months and are therefore in a secure place financially. Lot banking can help ease the financial strain for each unique business.”
Last year, Texas boasted the largest increase in additional housing units in the U.S. with 1.1 million. Houston homebuilder Grand Dominion Homes is looking to fully capitalize on the opportunities this market presents by staking a claim in Lago Mar, a 2,033-acre master-planned community in Texas City. At completion, Lago Mar will have approximately 4,000 homes.
“Lot banking has allowed Grand Dominion Homes to invest in the growing community of Lago Mar without dampening our expansion goals for the company,” said Christian Sommer, president and CEO, at Grand Dominion Homes. “We could not have secured these lots through traditional financing, but this method enables us to grow and use our capital wisely.”
With the ongoing housing demand in Texas and Houston, specifically, lot banking will continue to provide growing businesses with a beneficial alternative to traditional financing.
About the Author: Paul Connor, principal and founder of CBA Land Capital, has nearly 20 years of real estate investment expertise. He managed more than $600 million in real estate assets during his tenure at Senterra LLC and McAlister Investments. Earlier this year, Connor founded CBA Land Capital, which works with residential developers and homebuilders primarily in south-central Texas to assist and provide capital structures allowing for acquisition and development of land and lots. The team’s understanding and knowledge of land development, local market conditions and capital markets provides a unique combination of skills to assist with structuring a project. For more information, please call 281-602-0600 or visit www.CBALandCapital.com.