Financing master-planned communities (MPCs) requires a balance of creative mechanisms and strategies to fund the community infrastructure and development necessary to grow. The space has changed significantly, with communities trending smaller, special district financing becoming more prevalent, and a gradual shift in appetite toward safer investments by partners.
Pfilip Hunt, owner and partner at Wrathell, Hunt and Associates; Dan Hatten, senior vice president of finance and investments at Ashlar Development; and Aimee Martin, senior director at GTIS, will participate in a panel discussion during the Financing the MPC: What’s Working and What’s Not session at Future Place from BUILDER and parent company Zonda, Oct. 3 and 4, in Dallas. BUILDER spoke with the panelists to get a sense of how financing in the master plan space is evolving.
BUILDER: What are your responsibilities in relation to financing MPCs?
Hatten: My responsibilities for Ashlar Development include managing our capital relationships, asset management, and acquisitions/investments.
Martin: GTIS Partners is a real assets investment firm with a U.S. focus on residential and industrial/logistics investments. I am part of the residential acquisitions team here at GTIS and focused on originating investments with developers and builders in residential land development, including larger MPCs, and home building in our target markets across the U.S. These investments are typically structured as joint-venture equity or some form of structured finance, such as land banking. GTIS also has a build-to-rent platform that we are continuing to expand primarily in Sun Belt markets, so I am actively seeking opportunities to invest in and acquire those sites and projects that are located in and out of qualified opportunity zones.
Hunt: My roles are different in Florida and Texas. In Florida, I am primarily in charge of business development and assist in initial bond structuring ideas. In Texas, I help developers interface with cities and counties to identify strategic benefits of public financing tools, primarily public improvement districts (PIDs) and tax increment reinvestment zones (TIRZs).
BUILDER: How has the landscape of financing the MPC shifted?
Hatten: The biggest shifts I’ve seen in terms of investor appetite/behavior have been related to the length of the economic cycle rather than a specific shock in the system. As the economic growth cycle coming out of the Great Recession has aged, the partners we have dealt with have become increasingly focused on investments with short duration, a de-risked business plan, and flexible financing options. The gradual shift in appetite to safer investments has been in preparation for a market downturn and not necessarily in response to a specific event.
Hunt: There seems to be even more use of special district financing since development costs have gotten higher and higher. Many developers tell me the majority of their profit is actually in the special district financing and they’re developing to break even. In Texas, the Legislature has made it difficult for cities to facilitate development using their general taxing authority. Because of this, developers and cities are establishing public/private partnerships through special district structures, which becomes a win-win. The city gets a quality MPC development and future tax base, while the developer mitigates the cost of delivering a great MPC.
Martin: Some notable [changes in the master-planned community space] are smaller overall community size, much more prevalent use of special district financing, and fewer large, well-capitalized land developers with builders now self-developing more projects. The upfront investment in entitlements, planning, and infrastructure required to launch a new MPC has been a growing challenge to capitalize that we are always continually looking for better vehicles and structures. Also, the cyclical nature, complex execution, and unsteady cash flow streams of these types of investments keep many real estate investors on the sidelines.
BUILDER: Have there been any shifts since the pandemic?
Martin: I believe the pandemic has been a tailwind for MPCs by accelerating work-from-home trends and increasing demand for suburban locations. It also further established build-to-rent, both in and out of MPCs, as its own asset class supported by many renters seeking a less-dense living environment.
BUILDER: What trends are developers experiencing in the MPC space?
Hatten: Developer decisions tend to be influenced heavily by availability and preferences of their capital partners.
- What is working well (attracting capital): Short-hold, de-risked, near-term cash flow deals.
- What is not working as well (not attracting significant capital): Long-duration, fringe-market, long-lead time deals.
Coming out of the Great Recession, our capital partners had a significant appetite for large-acreage, long-dated opportunities to “plant a flag” in certain markets. In these instances, there was less focus on speed-to-market or upfront capital outlays because the view was long term and there were expectations of significant lot and home price appreciation after the valuation reset of 2008-2010. The shift to smaller, safer, cleaner deals has been gradual as the positive economic cycle has matured and the perceived upside of continued market growth has tapered.
Hunt: Large leverage without builder contracts is not working. We had a Sarasota, Florida, project that six months ago sold bonds and was able to do that with zero builder contracts, but it was a great market and it was an infill project. Now that rates have gone up and market conditions are tightening in the last few months, that probably would not get done today without builder contracts. In Texas, there also needs to be a special benefit to the general tax base. In other words, how will your development help not only the residents of your MPC, but also benefit the residents of the city as a whole. For example, one Dallas suburb actually ties the size of the allowable PID bond directly to off-site costs the developer is paying for.
BUILDER: There has been a discussion about the increased prevalence of special district financing. Are there any other emerging public or private financing tools?
Hunt: One relatively new trend we have been seeing the last two years is more home builders creating their own community development districts (CDDs) or PIDs instead of just buying lots from developers. In Florida, we are working with five national home builders that are doing their first self-sponsored CDDs.
BUILDER: What trends are emerging in the debt and equity spaces of financing?
Martin: Rising cost of capital, a greater use of special district financing, more conservative terms and underwriting by both lenders and equity investors. I think one of the biggest challenges is capitalizing a long-term project like an MPC with shorter-term debt and equity. This isn’t recent, but it always becomes more of a focus during market resets like the one we are heading into now.
BUILDER: What are your expectations for the future of financing MPCs?
Hatten: It appears as though the housing market is on the front end of a softening. Should recent trends in home sales volume and pricing continue to flatten, I would expect to see a few things in the near term:
- New investors entering the market and old ones unwinding positions;
- Land sellers willing to enter into partnerships or structured takedowns to attempt to hold land values;
- Increased utilization of proven public financing vehicles, including PIDs, et. al.;
- Builders preserving capital by focusing on developed lot positions rather than land ownership and/or self-development; and
- Traditional MPC developers and build-to-rent operators working together to pool sources of capital and add market-appropriate segmentation to their communities.
Hear more from the panelists at Future Place in Dallas.
