Housing's correction may well shrink the American Dream-come-true business by as much as 40 percent before it's through. Sub-prime mortgage fallout is battering the financial markets, from the home buyer level to the loftiest Wall Street echelons of the money chain, making money more scarce and expensive whether prospective borrowers are people or companies. Cancellations are soaring; foreclosures and investor sales continue to swell new-home inventory levels; and margins are being compressed to below zero as builders look to off-load inventory any way they can.
So, what if you're a home builder and you want to get at the active adult opportunity sooner than later? Or what if you've already got active adult as part of your focused strategy, and you want to tap the accelerator a bit to make the 50-plus segment a greater part of your near- and longer-term core program? As in so many instances, it takes money to make money. To do active adult right, it's a capital intensive game.
"To compete with the nationals in the active adult market, you've got to put the amenities in upfront, build the town center or clubhouse, and build several different sales models," says Robert Young, CFO at Charleston, S.C.?based Summerville Homes, which opted to look outside the company's usual lender lines to juice its burgeoning active adult activities.
Summerville and a number of other builders with active adult operations inplace, or with aspirations to develop age-targeted, age-restricted, or even age-integrated lifestyle communities, have begun to mine private equity money for access to capital for the push.
One such source is a $200 million private equity fund from Radnor, Pa.?based Traditions Capital, which is looking for 10 to 15 home builder subscribers who want to start or speed up their designs on the present and future active adult opportunity. The fund, principally backed by huge Toledo, Ohio?based real estate player, Health Care REIT, aims to support both private and public builders' interests, primarily in their active adult and senior residential construction projects.
Starting with a master credit facility of about $30 million worked out a little over a year ago, Summerville moved quickly ahead with construction project underwriting on four Charleston area communities, two of which focus on active adult. "If you grow based on your own operational cash flow, you're talking about a maximum growth rate of maybe 10 percent to 15 percent. With this type of capital, and the ability to open these communities the right way, we can expect to grow 30 percent or more," says Young. "Also, if you get the absorptions up to six, or seven, or eight a month, you have pricing power that allows you to raise prices by 8 percent or 9 percent a year as opposed to market standards of about 3 percent annually."
How Traditions' management got into the money business is what makes the company different from other capital resources. Partners Tim McCarthy and J.B. Reilly were home builder developers, doing just over 200 for-sale homes, many of them active adult, and initially turned to private equity to fuel growth for their Traditions of America home building operation.
"They've been in our shoes, and they're more in tune with the needs of the home building business than most finance types," says Terry Kyger, CFO at Village Homes, which is planning to avail of Traditions Capital on upcoming senior housing projects it has planned. "We're in a relationship business, and they're a good cultural fit," Kyger says.
Learn more about markets featured in this article: Charleston, SC.