For production builders, performance ultimately comes down to three factors: the land they acquire, the product they build, and the capital they have access to.
Experienced builders are well-versed in the first two areas: buying the best land and creating a competitive product for the communities they build in. If they hope to compete with massive public and private companies, realizing every efficiency possible in those areas is table stakes, says Colin Wright, principal of Cole West Homes. “Every time I build a house, I lose about four points of margin to the big boys—roughly two points from cost of capital, and another two from their hard-cost advantages on lumber and windows.”
With public builders and bigger private ones actively acquiring regional operators, it’s a challenging landscape to operate in.i There’s increasing pressure on builders to either grow to a scale where they can hold their own or position their business for a profitable sale.
For builders looking to stay competitive, the third aspect—capital—is becoming increasingly important. More and more, differentiation comes not from land or product, but from how capital is structured and deployed.
How Capital Needs Evolve With Scale
Many production builders have worked with regional banks for years and wouldn’t consider another option. They like the familiarity, stability, and operational flexibility of a borrowing base facility with a traditional bank.
As builders scale, their capital needs may outgrow traditional lending structures. “Regional banks cannot generally fund $100 million-plus relationships,” says JP Ackerman, chief revenue officer at Anchor Loans. Large banks may not be a viable alternative, since they tend to prefer financing public or large regional private builders. In addition, banks are highly regulated, which has contributed to a pullback from real estate lending. This can make it more difficult to qualify and slower to obtain funding.ii
They may never have used private lending and they might even view it as expensive or transactional, unlike the bank relationships they’ve built over time. In other words, a last resort. “Many builders don’t know the landscape of private lending because they’ve never looked at it as a serious option,” Ackerman says. “They’ve never had to because the banks have always been there. They’re accustomed to just picking up the phone and calling the local or regional bank.”
Unlocking the Capital That’s Already There
But problems can arise when much of a builder’s equity is in land they’ve purchased. Traditional banks hemmed in by regulations introduced in the Dodd-Frank Act place limits on the amount of collateral that can be represented by land, versus vertical units.iii For builders who need the capital to build the houses that generate revenue, this is a problem.
In addition, many banks make depository relationships a condition of lending, effectively requiring builders to bank with them to borrow from them, says Ackerman. “Bigger builders are holding $10 to $30 million in deposits with these banks, then borrowing back a $25 or $50 million line—that’s their own money.”
Private lenders offer the same borrowing base structure builders already know and rely on, with the same day-to-day flexibility. The difference is in what the facility will accept as collateral and what it won’t require of you in return. Non-bank lenders are less hindered by regulatory constraints, making it both easier and faster to qualify for a borrowing base. While private credit costs can vary from one lender to another, Wright says some lenders are able to offer it at just a couple points above bank rates.
They also enable builders to put more land on the line as collateral, gaining more borrowing power against the assets they own. When land can’t go on the facility, equity gets frozen in low-leverage project loans—sometimes for years. “If you put that land into one pool of capital on the borrowing base, you have a lot more freedom of how to leverage it,” Ackerman says. “You can start pulling out some of that trapped equity to grow the business now.”
The Bottom Line: Relationships
The underlying value of banks to builders is the people. Financing, especially at the level needed by these builders, has always relied on relationships and trust. But Wright sees that relationship eroding—a direct consequence of post-2008 regulation: “What really went away with Dodd-Frank was a local banker who understood home building.”
Private lending doesn’t have to be transactional or difficult to navigate. A lender well-versed in the industry can offer true partnership. “Now we’ve got it back with groups like Anchor,” Wright says. “They’re really great to work with, and in the end that is so meaningful. Seventy-page loan docs can be cumbersome and scary, but it really comes down to the humans—how they underwrite, how they process draws, how they view you as a sponsor.”
Capital as a Growth Lever
For builders trying to grow—whether it’s to move to a higher-volume tier, pass a thriving asset on to the next generation, or prepare their business for sale—a borrowing base facility with a private lender like Anchor Loans could unlock the third aspect of their business, giving them the flexibility and working capital they need to expand. For builders feeling constrained by traditional borrowing structures, reevaluating capital strategy—often through alternative lending partners—may unlock the next phase of growth
For more information, please visit anchorloans.com.