Even before Black Orchid Equity closed its deal to buy 1,500 vacant home lots and 1,000 acres of other distressed dirt across the Southeast, the private equity firm had home builders lined up to buy finished lots.

“I had at least two offers on each one [lot] before I closed,” said Blake Whitney Thompson, Black Orchid’s managing director, referring to its Sept. 6 purchase of the land from Rialto Capital, Lennar’s subsidiary formed in the depth of the recession to work out distressed land assets. The purchase price on the land laden with $109 million of debt was not disclosed.

Thompson said Black Orchid had nine home builders signed up to buy the lots scattered through 24 subdivisions in five southern states. The St. Petersburg, Fla.-based private equity firm bought the land through a fund it raised in the last 13 months to buy distressed land assets, he said.

Even as he was gathering investment capital and working out the deal with Rialto, Thompson tracked down home builder partners who can turn the tracts into cash by building homes on them. As a carrot, he offered the builders, many still hampered by lack of bank financing, terms they could afford in an environment where bank financing for land purchases is rare and for vertical construction is dear.

In some cases Thompson agreed to turn the lot titles over to the builders with the agreement they would pay Black Orchid for the land after the home is built and sold. That direct builder ownership makes banks more comfortable with lending cash to build the house. Deferring the payment for the lot means the builder doesn’t need to take money out of pocket for the land.

Other deals were tailored for other specific builders’ needs, Thompson said. And Black Orchid isn’t done. It still has about 3,000 lots to develop and sell on the other 1,000 undeveloped acres it bought from Rialto, plus more land it’s seeking.

“In each one of these markets I want to be 10 times the size we are now,” Thompson said. “We are looking for builders [to partner with] that are aggressive, creditworthy, and looking for long-term relationships.”

Some builders Black Orchid is partnering with to build-out the Rialto lots wanted to grow into new markets. Others had their eyes on the Rialto assets for years, but they were tied up in litigation. Black Orchid provided a conduit to get to them.

“We wanted builders that wanted us,” he said. “I want builders who haven’t had access [to land or capital] to be able to call me and say, ‘I have this great site that a farmer wants to sell and I need development capital,’ ” said Thompson. “Our plan is to go out and create value structured in special kinds of deals.”

H&H Secures Land Deals
For the recent set of deals Thompson reached out to builders. About four or five months ago Fayetteville, N.C.-based H&H homes executives had no thoughts about building homes in Atlanta, much less Birmingham, Ala. Then Thompson called offering land deals H&H couldn’t refuse.

Now the company, which historically has built homes for military families in North Carolina, has hired an Atlanta division president, introduced to H&H by Thompson. It also plans to start building soon in several communities in Atlanta and Birmingham where it gained control of several hundred lots through Black Orchid, said H&H CEO Jack Rostetter.

“Having Black Orchid come along with its portfolio of properties and giving us opportunities for land banking and financing terms has been a great opportunity for us to look at places where you would not look organically without that kind of conduit,” said Rostetter.

Not long after Thompson’s call to H&H, Rostetter and others climbed in a van and traveled 1,600 miles across the South to look at lots Black Orchid was selling. Soon after, Thompson introduced H&H to Kyle Dempsey, a former president of Sivica Homes, according to LinkedIn, who has plenty of experience building homes in Atlanta. H&H hired Dempsey to operate the company’s new Atlanta division, Rostetter said.

The stretch 300 miles from Fayetteville, N.C. to Atlanta is a big one in product as well as distance for H&H. The 20-year-old company’s roots are in military housing, which kept it growing in Fayetteville and Jacksonville, N.C. even during the recession because the military’s base realignment brought more troops to Fort Bragg and Camp Lejeune.

Then, as the military home market began to wind down, H&H successfully expanded east to Wilmington and Myrtle Beach, N.C., and then to Raleigh. Along the way the builder, which constructed ready-to-move-into speculative homes required for military families, learned how to build more presale homes tailored to buyers’ choices.

Black Orchid’s deal structures make up-front home construction far less expensive, giving H&H and other builders with similar deals the wherewithal to expand faster with less capital.

“We would not be expanding that remotely [as far as Atlanta] and that ambitiously if we did not have them as partners on this,” said Rostetter.

Ralph Huff, H&H’s chairman and founder, along with his wife, Linda, believes growing the company is imperative. “Ralph Huff has told his team that it’s like being a small fish in a pond; you get eaten or you grow into a big fish,” recalls Rostetter.

H&H was No. 71 on the BUILDER 100 list in 2012 with 450 closings, and is expecting to close 475 houses this year. In 2014, as its Wilmington and Myrtle Beach communities ramp up, the company expects about 600 closings, not counting any sales it will net from the new Atlanta-Birmingham venture with its Black Orchid partner.

When Thompson contacted H&H about partnering, Rostetter, a CPA, was cynical. He gets a lot of similar calls, he said. “Truthfully it will wear you out figuring out what is real and what isn’t,” he said. After vetting Black Orchid he concluded that the offer was genuine and a rare chance to get lots under such terms at good prices.

“This group of guys led by Blake is taking advantage of being in the right place at the right time,” the CEO said. “This is substantial enough to be a once in a lifetime opportunity.”

 Teresa Burney is a senior editor for BUILDER.

Learn more about markets featured in this article: Atlanta, GA, Birmingham, AL, Fayetteville, NC, Jacksonville, NC, Myrtle Beach, SC, Raleigh, NC.