ASK THE OWNER, PRESIDENT, or CFO of a home building operation, “What keeps you up at night?” One of the most common answers inevitably will be, “access to the capital we need to survive and grow.” In a business environment that separates winners from losers based on the caliber of intelligence an organization can bring to expansion finance, builders had better understand how capital markets have evolved and what capital sources are available.

What can you do today to solidify and account for the funds necessary to fuel growth? Who is the right capital partner? What financing instrument is most appropriate for your business? How can newer financing structures be applied to maximize shareholder value?

For insight into to many of these questions, meet Richard Anderson, president of Investors Mortgage Corp.; Robert Burch, managing director with Banc of America Securities; Raymond Kane, director with Houlihan, Lokey, Howard and Zukin; and James Pugash, chairman and CEO of Hearthstone. I will be hosting a panel with these four executives as part of the “Crack the Code: Identify Strategies for Peak Performance” session during the Big Builder '05 conference Nov. 2–4 at the Mandalay Bay Hotel in Las Vegas.

TO EACH HIS LOAN As former CFO of a home builder, I've been frustrated in the past about by my limited capacity to learn about the myriad capital options available to home builders. Of course, we all know about traditional bank financing, but what if this financing isn't enough? I can't tell you how many times I've meet with lenders and investors who complain they have money to put to work, but don't know how to find the right builders.

After 25 years' experience raising capital, I've developed a theory that four essential propositions prove invariably true. The first: The best time to raise capital is when you don't need it. Second: The most effective capital structure includes a number of different tranches. Third: At different points along a company's life cycle, different types of capital are called for. And fourth: Financial flexibility always trumps the lowest cost of capital.

If you keep these concepts in mind when you meet capital providers, they will provide significant benefit. Let's drill down a bit with our capital gang, see what they offer, and talk about ways their offerings may fit your needs.

EQUITY PLAY Hearthstone's Jim Pugash introduces his firm: “Hearthstone provides equity financing for land acquisition, development, and construction for production builders. Our typical investment is $10 to $50 million per community, [which is to say] we finance large communities. Our builder partners range from many of the largest public builders to mid-size private builders. We structure investments in a number of forms; some are joint ventures where Hearthstone and the builder share the risk and share the profit and losses.

“Hearthstone also provides financing for acquisition of properly entitled land using a ‘land bank' structure. Hearthstone has recently launched a $350 million fund in order to provide funds for the acquisition of land that requires re-zoning.”

JUNIOR ACHIEVERS Ray Kane, a director with Houlihan, Lokey, Howard & Zukin, acknowledges: “Recently, there has been a surge in the amount of junior capital available to home builders in the form of second lien products, subordinated debt, and private equity. The proliferation of junior capital products really took off with the economic expansion that started in 2003. There is a substantially greater amount of funding available, due in part to the entrance of hedge funds into the private debt arena.”

Second lien products fill a void between traditional senior secured bank debt and subordinated, or mezzanine, debt. By definition, second lien debt can be either asset or project specific and can be put into place as a revolving line. Lenders normally affix a floating rate of interest to second lien deals, with maturities that mirror or are slightly longer than the senior debt facility.

Learn more about markets featured in this article: Anderson, IN.