At a time when virtually every builder and real estate broker in the country is complaining about the lack of quality finished lots, Brookfield Residential Properties—a leading North American developer and home builder based in Calgary, Alberta—has launched a division called Capital Solutions with the intent of placing loans to fund large-scale infrastructure for master planned communities.
Formed in April 2011 from the merger of Brookfield Homes and Brookfield Properties, Brookfield Residential is active in 11 markets in the U.S. and Canada. To get Capital Solutions off the ground, Brookfield Residential is committing up to $100 million. Brookfield Residential also expects to make available another $300 million to Capital Solutions from a foreign sovereign pension fund, said Don Merlo, Brookfield’s executive vice president of corporate development, who also is heading up the Capital Solutions division.
Merlo called Capital Solutions “the third pillar of the company we’re trying to establish.”
In a recent interview with BUILDER, Merlo said Capital Solutions will be active initially in Brookfield Residential’s existing markets, which in the U.S. include Los Angeles, San Diego, San Francisco, Sacramento, Calif., Phoenix, Denver, Austin, Texas, and Washington, D.C. Merlo added that Brookfield is looking at the Las Vegas market, and possibly other markets in Texas.
He noted that builders and developers in many recovering metros are still drawing from what had been “a fairly large pipeline” of finished lots at the cusp of the housing recession. He noted, too, that builders are returning to projects they mothballed during the housing downturn.
However, there has been little if any investment in what Merlo called “backbone infrastructure” for raw land. In addition, as municipalities have shrunk their budgets and manpower, more builders are running into approval and entitlement delays.
“We feel that over the next 12 to 36 months the housing recovery will use up the majority of the easily developable lots, and new subdivisions will be needed that have substantial financing investment required,” observed Tim Doruch, a real estate analyst with Brookfield Residential.
Capital Solutions will be supplying infrastructure financing at a time when most investors seem focused on putting “significant capital” into vertical construction. Brookfield, Merlo said, also can lend its expertise as a developer, builder, and asset manager. “We can provide a sober second set of eyes” on different land deals, he said.
Merlo expects the bulk of what gets built on the land for which Capital Solutions provides infrastructure loans to be single-family homes. Key lending targets will be “local players and local land owners,” said Merlo, although he did not discount the possibility that “much larger players, even those with access to public money” could be customers of Capital Solutions, as might be Brookfield Residential.
Capital Solutions’ loan-to-value lending threshold would be two times coverage including the cost of infrastructure, said Merlo. The division is not likely to go after smaller (under $2 million) deals, but on the upper end “the sky’s the limit,” he said.
Merlo added parenthetically that Capital Solutions would make some financing available to builders for lot acquisition and management.
As for potential business in Canada, Merlo said Alberta remains a strong master planned community market. Sixty percent of the homes in that province are single-family units, and home starts there have been tracking population growth in “balanced” way. Vancouver and Toronto, on the other hand, have become havens for high-rise development. Over the past eight years, Greater Toronto has been hemmed in by a “greenbelt” development barrier that, said Merlo, has restricted single-family development and construction to the point where “there’s no supply left” of finished lots.
John Caulfield is senior editor for BUILDER magazine.