Enact Partners recently unveiled a brand-new product for residential subdivision construction projects: revolving construction loans.
Normally, loans for large subdivisions are split into phases. The Fund’s recent 63-unit Merced project is a good example. We funded six separate loans to finance construction of about 10 homes each. The builder constructed 10 spec homes at a time, marketed them for sale, and once homeowners purchased those 10, the Fund would close the next phase loan for the next 10 homes.
The Fund’s newest loan, for the construction of dozens of single-family homes southeast of San Jose, California, is a unique project where phased loans would not be ideal. The area is farm country and the typical buyer for this product are farm workers.
The homeowners can obtain government-guaranteed mortgages with very favorable terms through the USDA. The buyer gets approved for the USDA home loan, then selects the lot, house plan, and interior finishes; signs the purchase agreement; and only THEN does our borrower construct the home. The homeowner moves in 2-3 days after the home is complete. Since the units are not speculative, the builder does not start 10 at a time. He starts each unit as soon as each buyer’s contract is signed. He typically starts 1-2 new homes per week, and eventually closes 1-2 homes per week.
This is the perfect project for a revolving construction loan. Rather than doing nine loans to construct 10 units per loan, we structured the financing like a line of credit. One loan to build all 91 homes, but only 30 homes can be under construction at one time. When a unit is finished and the homeowner officially purchases it, the fund’s revolver is paid down for that unit, freeing up the line for the next home to start construction. The builder can have up to 30 presold units going at one time, and every week the builder will close 1-2 homes and start the next 1-2. He can complete all 91 homes with only one loan instead of nine.
Advantages of this structure include:
- More efficient
- Lower financing costs
- Less borrower equity required
- More consistent cash flow
- Simple disbursement process
Flexibility and Sophistication
We marketed this new product to our broker/builder network and received a lot of positive feedback. Very few lenders have the flexibility and sophistication to structure a loan like this. It takes more work up front but makes things very efficient and smooth once the loan is closed. This is just another example of the Enact Partners mindset: quality over quantity.