In the home building business, the battle is often won or lost before a single foundation is poured. The real battle takes place in the conference rooms and municipal offices, where the language of merger agreements, development agreements and special regional budget documents are drawn up. Smart builders understand this fact: The goals negotiated at the outset determine whether a project delivers strong returns or shyness at the finish line.
“What would you say if you could borrow money that you didn’t have to pay back?” said Carter Froelich, Senior Presentation Manager of Development Finance Advisors.
That provocative question captures the essence of what only private equity finance professionals, like Launch Development Finance’s financial advisors, help developers achieve. With Community Resource Districts (CFD), Municipal Utility Districts (MUD), Community Development Districts (PID), Community Development Districts (CDD) and revenue recovery districts (RD), builders can take infrastructure costs off their balance sheets and include special districts that homebuyers ultimately receive through property taxes without adding debt to the builder.
Development agreements: Where financial power begins
The opportunity starts when the builder starts working with the municipality. Whether you want to adopt a city, negotiate a development agreement or establish a special district, all documents represent an opportunity to embed good financial credit, reimbursement and impact payment.
In my interview with Carter Froelich, he said:
“Load development agreements with favorable public financial returns and development cost language to create flexibility and certainty on the part of the developer.”
This method works because authorities want to be predictable. They need to know if the infrastructure will be built according to their standards and if the property tax will increase. Builders want flexibility in terms of time, quality of returns and certainty that they will be able to cover the rising cost of public infrastructure. Well-structured deals satisfy both parties while positioning the builder to make a big profit.
HousingWire: What makes restitution language so important in these agreements?
Carter Froelich: Reimbursement criteria determine whether the builder is paid for the infrastructure he builds. The language should clearly define the eligible improvements, establish the timelines for when the restoration occurs, and specify the funding sources. Unclear language leads to disputes and payment delays.
Off-balance sheet: A strategic advantage
One of the most powerful benefits of regional financing comes from its ability to be off-balance sheet. This is of great concern to public housing developers. Without going into the accounting too much, often when ad valorem tax-based districts like Metro Districts, Arizona CFDs and Texas Water Code Districts issue general obligation bonds to finance infrastructure, that debt does not stay on the builder’s books, as the builder’s liability cannot be determined in terms of time and amount. This preserves the builder’s borrowing power, keeps agreements intact with primary lenders and avoids corporate and personal guarantees that could expose the company or owners to debt.
Regional financing structures allow developers to build infrastructure without raising capital or incurring guarantee requirements that put pressure on future projects.
HW: How do builders avoid getting stuck with guarantees on county debt?
CF: Structure is important. If the bonds are issued against existing or projected tax revenue rather than the developer’s credit, the developer remains passive. Timing the bond issue to match the county’s adequate assessed value eliminates the need for developer backstops. But here again, you need someone on your team who provides real knowledge in these discussions. If not, you may find yourself negotiating.
The following are some of the strategies Launch has developed over the past 40 years to assist clients in financing infrastructure, reducing costs and reducing risk, all with the aim of improving project profitability.
Reasons for timing and eligibility: Protecting your cash flow
Professional builders pay close attention to the time incentives embedded in financing documents. These provisions determine when bonds can be issued, when refunds are paid and when credits against impact payments take effect. Getting these triggers aligned with the development schedule can mean the difference between cash flow stress and a smooth batch delivery.
HW: What role does eligibility language play in maximizing returns?
CF: Eligibility defines what is eligible for reimbursement. Broader definitions mean that additional infrastructure costs can be reimbursable. We work to include soft costs, real property costs, capital costs, financial costs and certain professional fees as appropriate costs that are reimbursable to a special district or other recovery vehicle.
Transforming infrastructure funding into predictable field delivery
The ultimate goal remains selling homes on time and on budget. Every financial framework, every negotiated provision, every carefully drafted clause serves that purpose. When recovery methods work as designed, builders can better manage their money during the development cycle. When infrastructure costs are financed with tax-exempt bonds, reducing the overall cost of buildings and the cost of capital gains and fees, real estate prices remain competitive, and their returns are bottom-line.
Predictability in financing directly translates to certainty in home delivery, and certainty is what separates successful builders from those who merely survive.
HW: What’s the biggest mistake builders make with county funding?
CF: It has waited too long to engage financial advisors like Launch. By the time many builders are thinking about financing structures, important agreements have already been signed with vague language. The estimate exists at the start of the project before consolidation or before the finalization of development agreements.
A checklist of strategies for builders using regional funding
- Consult a public finance professional before merger or development agreement negotiations beginβnot after the documents are signed.
- Explain the appropriate improvements broadly to all compensation provisions, including soft costs, transaction fees, real property interests and financing costs where applicable.
- Structural timing means synchronizing bond issuance and repayment payments with your development schedule and cash flow needs.
- Negotiate impact credit language that provides certainty about the value of credit facilities and increases the value received from infrastructure investments.
- Avoid personal and/or corporate guarantees on county debt by issuing time bonds to match the county’s adequate assessed value.
- Review all the documents we read with both financial experts and legal lawyers before the execution.
Are you ready to win before the battle begins? Early strategy is key
Architects that consistently outperform their competitors share a common characteristic: they understand that financial engineering begins with the creation of a document. If you’re approaching an annex, negotiating a development agreement or exploring special district options, check how favorable financing language can change the economics of your project. The time to act is before the first public hearing, while the power is still yours.
