Magazine article Business Credit

Banks and Builders Work Together

Magazine article Business Credit

Banks and Builders Work Together

Article excerpt

It's no secret that homebuilders need cash flow to keep their pipelines full and stay in business. And in order to get the cash they need, they are willing to comply with the higher equity requirements now being imposed by banks. But in return for their business, banks must also be willing to adapt by providing liquidity to the builder earlier in the process. If that doesn't happen, more and more builders will be forced to look to the alternative institutional lenders who are now aggressively seeking their business.

California Public Employees' Retirement System (CALPERS), for example, has opened the door for homebuilding finance from the pension fund community. And Prudential Insurance, in addition to working with CALPERS, is the first major life insurance company to make a foray into the homebuilding industry by forming its own homebuilding fund--Prudential Home Building Investors.

The public equity markets of Wall Street are offering additional competition to the bank lending business, having attracted a number of medium size builders by issuing stock in exchange for a minority interest in their firms. Several builders have also accessed the public debt markets, raising large sums of unsecured capital for five to 10 year terms without the strings of normal project debt instruments.

Flexibility Is Key

What is it that makes these institutional lenders so attractive to homebuilders and so threatening to banks and thrifts? It's certainly not their interest rates, which are up to three percent higher than traditional bank credit lines.

The answer is flexibility. With regulatory changes forcing banks to lower their loan-to-value (LTV) ratios and implement more stringent underwriting guidelines, builders have had their credit requests refused altogether or have been required to put up stiff collateral for previously unsecured lines, problems they do not encounter from these alternative lenders.

In order to stave off this competition, which is eating into their traditional lending business and future profits, banks must work closely with their homebuilder customers to provide the type of customer service that brought them market dominance in the first place.

Higher Equity Decreases Risk

Higher equity requirements are one of the most pressing problems facing the homebuilding industry. Homebuilders who have traditionally been required to invest five to 20 percent cash equity in their deals are now being asked to provide at least 20 percent and often much more, making it increasingly difficult for a builder to get a deal off the ground. …

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