California, the country’s most populous state, contains a wide scope of living environments—beaches, mountains, and cities. But while it’s a desirable place to live, it’s also a tough place to build. Housing and land aren’t easy to come by, which leads to a tough real estate market, with plenty of sharks in the water but not many fish for the taking.
But those waters are where Steve Kessler founded his development company in January 2013 after more than 20 years in the industry. Los Angeles–based Renasci Homes builds houses, entitles land, and develops sites that it then sells to other builders, exclusively, for the time being, in Northern California, particularly around Sacramento.
So how does a builder with a new company, less capital, and a small staff make a name for himself in a notoriously difficult region, all while navigating the murky waters of deal making with private equity lenders and banks? Kessler would suggest, “Don’t mind the hair.”
Kessler was no stranger to the competitive California market. Prior to launching Renasci, he worked at West Coast Housing Partners and Trimark Pacific Homes, where he served as Los Angeles and Ventura division president. Over his career, he’s built more than 2,200 houses and has been responsible for the acquisition, disposition, entitlement, development, and/or home building of more than 9,500 residential lots and 3 million square feet of industrial space.
Even with all that experience and know-how, starting a new venture wasn’t easy for Kessler and his CFO, Omar Badawi, who was previously involved with the financing and ultimate complex restructuring of Emaar-owned John Laing Homes and recapitalization of City View. The two hashed out the tent poles of a business plan in July 2012 during a weekend at Kessler’s home.
To secure the necessary capital, Kessler went through his contact list of friends, family, and former associates. Then he made his sales pitch. “It was a lot of hand-holding, a lot of flights all over the place to meet people, and basically convincing them of the opportunity,” he recalls. “It was a huge challenge but we ultimately got it done right on our schedule,” which was about five months.
The plan for Kessler was to duplicate what he learned while working for private builders. As a partner in West Coast Housing Partners, the focus was home building and underwriting and acquiring distressed single-family residential land or defaulted notes. That helped him develop skills competing with publics and working with unattractive properties, which he used when Renasci closed its first land deal in El Dorado Hills, Calif., about 30 miles from Sacramento, in December 2012.
The First Land Purchase
The El Dorado Hills deal has turned into three projects, each with its own size and scope. The Willows is a 19-home development comprised of homes in the mid-$500,000s; The Elms has 48 higher-end homes in the mid-$700,000s; and The Oaks features 15 executive homes with price tags as high as $900,000.
One reason Renasci secured the deal, Kessler says, is because there wasn’t much competition for it. Once purchased, the land needed complex hillside grading, he explains, that “was pretty challenging to underwrite and get through. A lot of publics didn’t want to get into that level of land development, but that’s the kind of thing that we do.” Also, according to Badawi, Renasci had to put down a $500,000 deposit in March 2013 prior to the final 63 lots being fully entitled. Since the company was founded just two months earlier, the deposit was a big undertaking.
At the time of negotiations, and the ultimate close, Renasci hadn’t been officially founded. “You need a project to start a home building company,” Badawi says. “You have to say, ‘Here’s my launch project.’ But to get a launch project you have to convince a landowner or seller that you will be able to buy this land with a company that you don’t yet have formed. It’s like landing two aircraft on an aircraft carrier at the same time. It’s definitely a balancing act.”
Setting Themselves Apart
Kessler knows he can’t compete with the large publics in a bidding war, so he thinks outside the box. “I’m willing to take on stuff that has more hair on it,” he says, referring to entitlements that need to be secured and land that will need work before a home is ever built. “If a project has a pretty bow wrapped around it and is a no-brainer,” Badawi says, “we’re going to get outbid every time.”
So Renasci develops land, then decides whether to sell it to another company to build on or do the building itself. “We have to do things that they’re not willing to do,” Badawi adds, referring to publics. “And one of those is to be a developer and take on both entitlement and development risks.
“We’re a developer who has a home building function in-house,” he says.
But even when Kessler and his team identify a piece of land they’d like to acquire that will require some heavy lifting to develop, it’s still a burden to get the funding. Kessler has to find a private equity firm willing to get involved and “marry” it with bank debt to ensure his investors will meet their minimum return threshold.
“You have to balance the bank debt and those terms with what the private equity guys want to make,” Kessler says. “Each component of the capital stack has its own dynamic, and at the end of the day you have to be the orchestra conductor bringing them all together on the same song sheet. It is not easy.”
The first homes in El Dorado Hills, The Willows, have six left to sell. The Elms and The Oaks product lines will open their models later this month. Renasci will bring two more projects to El Dorado Hills—a 28-lot high-end community that should come to market in the coming months and a 317-lot mini-master plan called Saratoga that should have its entitlement approvals in the second quarter and start development in 2017. The company expects to close on more than 500 lots in Rancho Cordova, another suburb of Sacramento, in April, and a niche opportunity in Marina for an initial 68 lots that could grow to a multiple of that unit count in March.
With Renasci, Kessler seems to have found a path for a small company to succeed in a hyper-competitive market. But despite his successes, Kessler remains concerned about the future of small builders in California as they try to find equity and compete with big companies. “Unless you’ve got a massive balance sheet behind you it’s a tough business.”