NEWPORT BEACH, CA—California developers face a daunting task when it comes to acquiring land, getting it entitled for their projects and ultimately building on it. Home developers are no exception, especially when it comes to entitling land that had been previously zoned for another use. But experienced and successful developers know a few tricks of the trade for acquiring land in this state.
“When you think about it, whether it be in Southern California or Northern California, the primary employment centers are based in the coastal counties, and most of the coastal counties are very supply constrained and fairly built out,” Matt Zaist, president and COO of William Lyon Homes, tells GlobeSt.com.
William Lyon recently acquired an infill portfolio of residential land from City Ventures LLC for an aggregate purchase price of approximately $174.5 million. The acquisition includes approximately 540 lots in eight new home communities located in Orange, Los Angeles and Santa Clara counties. The locally based firm believes these markets represent three of the most land-constrained markets in the Western US and also demonstrate strong homebuyer demand.
The William Lyon acquisition is expected to occur in phases that began in the first quarter of this year. Three of the new communities are expected to open for sale by the end of 2014, with the balance opening in the first half of 2015. The homes in the portfolio are expected to have average sales prices in the mid-$900,000s and are expected to contribute more than $500 million in incremental revenue by 2016.
Zaist says that most developable parcels of land have been built on, with the “remaining parcels in Orange County held by a few very well-capitalized land owners including Irvine Co., they’re the most recognizable name, and those guys control the supply of lots in those markets.”
In the case of City Ventures, William Lyon was able to make the land purchases from the private builder. “These were eight new projects in great infill locations,” says Zaist. “All of those pieces had previously been designated for some other land use. City Ventures had acquired that land in 2009 and 2010 and had spent a tremendous amount of time getting it entitled for use.”
Getting land re-entitled in infill settings in most cases takes more than two years, a process that involves getting through the municipalities and local entities as well as the federal permitting required, Zaist adds. “As the market has recovered, builders are looking for infill situation, and finding a target site could be a two-year process; then it could be north of three years to get the product into consumers’ hands.”
As a public homebuilder, William Lyon had shareholders who wanted the firm to find opportunities for the right risk-adjusted terms. “It takes a long time to underwrite risk in the housing sector,” says Zaist. “This was a unique opportunity for us to work with City Ventures on this project. We look for great markets, great job demand, and we were fortunate enough to be able to look at this portfolio in a very productive way.”
The public homebuilder has easier accessibility to the capital markets or capital raising for buying and/or developing land, but private builders still have challenges acquiring capital from traditional financing sources, says Zaist. Therefore, private builders can be a useful land source for the public market. “As a public builder, with most of us being very well capitalized in terms of cash on hand, we can tap public debt and raise capital quickly. City Ventures is a great example. It would have taken us a long time to buy eight separate deals—it’s much more efficient to buy from one private company.”
Sal Provenza, SVP with Colliers International, who has consulted with the parties involved in William Lyon’s recent land acquisition—although he was not involved with this particular deal—tells GlobeSt.com that private and public builders used to be in competition when bidding on land. However, since the recession and subsequent recovery, private firms are having trouble competing with public firms because of the cost of capital. Therefore, they are selling land to brokers or directly to owners after entitling it. “They’re looking to sell to homebuilders who can pay a lot more for it.”
Provenza adds that most land teams at the building firms were fairly thin between 2009 and 2011, but “now that there’s more activity, there’s been a lot of hiring of internal land guys. They’re investing more manpower into more deals. They’re looking for land guys to fill their seats.”
Nevertheless, the market for land experts is beginning to plateau, some of it because of dwindling supply, but also because we just went through a strong 18 months of home sales and price appreciation. “The demand is definitely there, but financing costs are there, and it’s still really tough for most people to get a mortgage.”
Price points above $750,000 are far less impacted by interest-rate changes, says Provenza. “I think there will be higher price appreciation in that market.”
At this point, the urban infill market is still highly desirable, particularly for public builders who are excited about building closer to jobs and transportation. “They’re paying a premium for it, but they have a hard time getting to it,” says Provenza. “Using the small private developers as feeders is a trend that will continue for awhile.”