AMCAL MULTI-HOUSING, A LONG-TIME home builder in Southern California, decided in 1997 to leave the for-sale business. The company wanted to concentrate its efforts on building affordable rental projects that it had financed through the state's highly competitive and complicated low-income tax credit program.

But a new project—and a new financing option—lured Amcal back to the for-sale market. Last year, as the company planned to build a rental project on seven acres in downtown Los Angeles adjacent to the city's subway system, the city asked Amcal to dedicate part of the development to for-sale housing.

Amcal knew how to build and sell the for-sale units from its earlier days, but it needed financial backing. That's when Percy Vaz, Amcal's president, turned to the Phoenix Realty Group, managers of the Genesis LA Workforce Housing Fund. The $100 million fund is believed to be the first to focus exclusively on housing geared toward people earning between 80 percent and 200 percent of the Los Angeles area's median income.

For Amcal, the fund is a great fit. The $6 million Phoenix kicked in for the 165-unit project closed the gap between a bank loan and the builder's own equity, and the Avenue 26 condominium project, the Los Angeles development, will move the builder closer to its goal of closing 2,000 units a year by 2009 (it closed about 900 in 2004 and expects to deliver the Avenue 26 units in late 2005 and early 2006).

OPPURTUNITY KNOCKS: Investment from a new workforce housing fund facilitated Amcal Multi-Housing's Avenue 26 condominum project, which is being built on the former site of a furniture factory.
OPPURTUNITY KNOCKS: Investment from a new workforce housing fund facilitated Amcal Multi-Housing's Avenue 26 condominum project, which is being built on the former site of a furniture factory.

What's more, the Genesis LA Work-force Housing Fund and others like it represent new financing options for mid-sized builders. Too small to acquire other builders and uninterested in growing by becoming part of larger ones, these companies sometimes struggle to find the funding they need to be able to grow at the pace they want. Often, they find they can't rely only on the capital sources they've used as start-ups.

Banks traditionally will not lend a project's full value, and a network of friends and family taps out quickly when builders look to increase production by 100 units a year. Even in these days of rapid profit increases, retained earnings usually fail to provide sufficient capital for builders who want to branch out to new markets or double capacity within a few years' time.

But there's good news for these hungry builders: Their access to institutional sources of capital like the Genesis fund, has increased substantially. After the stock market tumbled, investors began looking for new vehicles, and they've funneled millions into real estate. “Real estate has very much become a favored asset class for pension funds because it's perceived to be safe,” says Nicole McAllister, executive director of development and external affairs at the University of Southern California's Lusk Center for Real Estate.

Mid-sized builders have been lucky, too, that low interest rates have made it less expensive for them to take on mezzanine debt, which many of those new funds issue as short-term, three- to five-year loans. Though it generally comes with higher rates than senior bank debt—which must be repaid first—it makes many projects possible by bridging the gap between bank loans and builders' retained earnings.

Traditional—With A Twist Builders can expect tough competition for those dollars, though. One factor weighs more than most others for both institutional investors and bankers evaluating possible deals. “We think a home builder organization is no better or worse than its management team,” says Bob Johnson, division executive in Bank of America's home builder division of commercial real estate banking.

Bank of America works with 1,700 home builders nationwide, from the smallest local builders to national companies. Regardless of how much institutional capital mid-sized builders can access, they will always need relationships with banks to bankroll large portions of their projects. Johnson's division issues senior debt with a variety of loans for land acquisition, development, and construction.

Learn more about markets featured in this article: Los Angeles, CA, Anderson, IN, Phoenix, AZ.