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Debt Funds Step Up Land, Construction Financing Pursuits
By Dennis Kaiser
The continued stability of land prices has led a growing number of debt funds to enter the market of high-margin construction and land financing. That increased volume of players and capital in the market is pushing groups to stretch and try to get creative in places where there may be a little less competition, such as land and construction financing.
Connect Media asked Shlomi Ronen, CEO of Los Angeles-based real estate merchant bank Dekel Capital, to share insights into what is driving this trend in our latest 3 CRE Q&A.
Q: What is fueling this renewed competition in the land and construction financing sector?
A: Land has been under-capitalized from a debt perspective because banks generally don’t want to do it. Land acquisition using the more expensive capital from debt funds, ultimately ends up being cheaper than funding it with equity.
The perception of risk deterred a lot of groups from stepping in and getting active in it. The risk still remains, but land prices have remained steady or has continued to increase throughout the cycle, leading a number of debt funds to enter the market as a way to achieve higher yields.
Q: Where did these finds come from and what types of deals are they looking to do?
A: The debt funds that are the most active in land financing are new, post-recession companies. These new groups weren’t around when the industry experienced a severe slowdown in development, which caused land prices to plummet.
Debt funds have also stepped into the construction arena in a much more meaningful way, generally priced for higher leverage loans.
If you ask them to price a construction loan at 60 or 65 LTC, they are not very competitive. But if you want closer to 70 or even 80%, they’re very active in that space. That is where they want to be, and it’s on all asset types.
Q: What do you see on the horizon in this sector?
A: Thus far, we haven’t seen any blip in land prices, and until that happens, debt funds are expected to remain aggressive in both land and construction financing.
For comments, questions or concerns, please contact Dennis Kaiser
- ◦Financing
- ◦Development
