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Builders put financing in their own hands

By , - Last modified: March 1, 2011 at 10:08 AM

New company aims to help developers access capital for new projects

As a lack of access to capital continues to pose a challenge for New Jersey homebuilders, a local industry group is taking matters into its own hands, creating a new funding source to move real estate projects forward.

The New Jersey Builders Association launched last month MXD Funding Inc., a private company that aims to raise capital for local developers who have seen traditional bank financing dry up in the credit crunch.

“We felt there was going to be a need and a niche that needed to be filled in our marketplace, and that was getting capital to our members,” whose projects have stalled as banks have tightened lending criteria, said Tim Touhey, the association’s chief executive.

“Some of these banks are not rationally pricing risk,” said Christopher M. Barr, who was recently named CEO of MXD. Now, he said, they’re contributing a significantly smaller portion of the capital stack — the mix of funding sources that finance a real estate project. “That creates a market opportunity for private money to come in and fill the gap.”

New Jersey Builders began setting up a separate company about 18 months ago, establishing a board composed of two homebuilding members, as well as associate members that are mortgage bankers, appraisers, accountants and investors, Touhey said. The association has made a “minimal investment,” and currently is the only shareholder in the company, he said. The entity will initially be based in the association’s Hamilton headquarters.

MXD will seek to increase investment across all types of real estate, not just homebuilding, Touhey said, calling mixed-use development “the evolution of where real estate is going to be,” hence the name of the company. “We see a consolidation of the industry, meaning that our residential members are also doing commercial and retail and remodeling, and we should be prepared to serve all of those niches.”

The fund is targeted to raise at least $100 million; in general, raising equity can take anywhere from a few months to two years, said Barr, who most recently directed the acquisitions, investments and business operations of New Hope, Pa.-based Scannapieco Development Corp. A brand-new fund may give some investors pause, but he said the entity’s ties to the local development community and potential funding sources “does give us a leg up.”

Investment in homebuilding has been accelerating since mid-2009, as confidence in the housing market began to rise with increasing home sales and stabilizing prices, said John Hay, who oversees a housing investment fund for Key Bank Real Estate Capital, in Washington, D.C.

When investing in a private equity fund, “your expectation is to get better returns than if you’re looking to buy stocks,” he said. But now is “a very challenging time to raise money,” Hay said. Because of declines in real estate values and problems with investing in stock and bond markets, “most institutional investors are taking a cautious approach to making new investments in real estate funds,” he said.

MXD is negotiating with potential investors, including large institutional investors, high-net-worth individuals and pension funds, Touhey said. MXD will be geared toward helping small builders, although “it’s all deal dependent,” Barr said; he and Touhey anticipate investments of at least $1 million, but averaging in the $3 million to $7 million range.

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