Sabal Financial Group's nascent builder lending division recently completed its first deal, a $4 million construction loan for a dozen homes in Torrance, Calif. Sabal negotiated that loan with Ball Construction, Keusder Homes of Costa Mesa, and Core Real Estate Services.
“We’re looking to fill the void that the banks have abandoned,” says Tom Farrell, a longtime executive with Bank of America, whom the Newport Beach, Calif.–based Sabal tapped last January to help launch and run its builder lending arm. The company is targeting small to midsize builders in California, Oregon, and Washington in need of construction capital.
Farrell notes that builders are still complaining about their inability to secure AD&C loans, and the unwillingness of banks to make quick lending decisions. Sabal is looking for deals that range from $3 million to $35 million, and will cover up to 80% of a project’s construction costs. Farrell says that his division “has a very strong investor” behind it (which he did not identify), “so I don’t think we’ll be capital constrained.”
Sabal is targeting builders with modest infill projects that are close to employment centers. That’s a niche larger builders have been moving away from as market conditions have improved. “Infill is a tougher deal and takes longer to develop. Smaller builders seem to have more patience,” observes Farrell.
The Torrance deal is an example of the kind of project that fits Sabal’s investment objectives. Farrell first learned about it when he and Wes Keusder, Keusder Homes’ owner, participated on a panel discussion in Los Angeles several months ago. (Keusder did not respond to email and phone requests from Builder for comment.) Farrell says he spent “a lot of time” looking at the market’s comparables and found that the development team was planning to build homes that, at an average sales price of $540,000, would be at or below resales of the same square footage, “with a pretty good profit margin.”
Last month, Sabal Financial Group acquired a $69 million residential loan portfolio from BB&T, which brought its total assets under management to $3.75 billion. The land in that portfolio is concentrated in North and South Carolina, with additional parcels in Florida, Georgia, Alabama, Maryland, Delaware, and Pennsylvania. Sabal’s distressed-asset business could eventually intersect with its lending business, says Farrell, by offering land to builders as well as the financing to purchase it.
While it will focus its immediate attention on builders in the Pacific states, Sabal could expand its lending operations to other markets in Florida “where financial institutions got hurt a lot,” says Farrell, as well as Arizona and Nevada. He sounds particularly enthused about the Phoenix market, “which has recovered much quicker than most people thought it would.”
Farrell also believes that Sabal’s window of opportunity as a provider of debt financing to builders could extend for several years. “Banks are in the business of making loans, but it’s hard to say when they’ll get back into” lending for residential construction and development. He notes that the new Basel III rules, which require multinational banks to increase their capital holdings to 7% of their risk-weighted assets, could make investments in the always-risky real estate market problematic.
John Caulfield is senior editor for Builder magazine.