A $362 Million Loan To Buy NoCal Mountain House Assets Closes

In one of the more complex, uncertain, and volatile economic backdrops in recent memory, an affiliate of Builder Advisor Group closed today on a $362 million first-lien loan as lead lender for the purchase of a crown jewel Northern California master planned community's remaining assets.

Despite the scale and complexity of the project, our affiliate demonstrated its ability to move quickly, and close the very large loan within two months," says Tony Avila, CEO of Builder Advisor Group, a sponsor partner of The Builder's Daily.

The loan – to a private family buyer – will go toward the acquisition of more than 5,500 entitled and partially developed lots at San Joaquin County, CA-area Mountain House, a storied planned community, ideally suited to a hybrid work week in the greater San Francisco Bay Area.

A listing of the parcel by land brokerage firm Land Advisors notes:

This picturesque community offers stylish new homes, impressive amenities, and the entire Bay Area is well within reach via Highways 205 and 580. At complete build out Mountain House will be home to more than 44,000 residents and feature a Safeway anchored shopping center (currently in lease up, Safeway opened in December 2022), employment hubs and an array of housing opportunities.

Mountain House is an investment opportunity consisting of the sale of the entity that owns the remaining 3,646 single-family lots, ±120 acres of medium-high and high density residential, ±52 acres of mixed use land, and ±91 acres of industrial, commercial and agricultural land."

The seller in the deal is CalPERS — the California Public Employees’ Retirement System – which invested in acquiring 2,400 acres of the community, initially as a partner of Shea Homes, in 2005 from the MPC's original developer Trimark Communities.

CalPERS' investment in Mountain House took a harrowing roller-coaster ride during the GFC. A cover story we wrote in 2012 included this passage:

In 2008, at the point where the subprime mortgage meltdown had morphed into a foreclosure flood, The New York Times branded the masterplanned community as the most underwater community in America. True, values had gone off the cliff faster than anyone would have expected. And yes, there were far too many foreclosed properties for anyone's liking freckling the once-thriving streetscapes of the community's nascent villages, which had just gotten their start in 2003." Big Builder

However, as noted in this backgrounder, CalPERS hung in and hung on, wisely it turns out.

By May 2010, the $1.12 billion investment by CalPERS had been reduced to 18% of that figure: $200 million. Even though home values had dropped significantly, CalPERS determined that they would hold on to the investment, counting on a recovery of the housing market."

What it means

In a Q2 2023 earnings call last week with investment analysts, Five Points Holdings ceo Dan Hedigan broadly telegraphed an outlook for finished-lot demand, particularly in well-situated masterplan communities:

We see our home inventory remains very low, increasing interest in and demand for new homes," says Hedigan. "While affordability continues to be a challenge, housing continues to be in short supply in our California markets and there is still demand for well-located homes and master plan communities... Land development is a long game, and we are just at the beginning of the game at some of our communities, but they are not making any more land and there will never be an abundance of entitled land in California."

Finished-lot demand among builders has been cresting – as we've noted in stories here and here over the past few days – because of what looks to be a still-solidifying lift in new-home demand due to three factors:

(1) builders have been effective at 'pricing-in' more price-sensitive homebuyer prospects with mortgage programs and incentives, and driving pace with move-up and more discretionary buyers with upgrades and options.
(2) existing home listings are in limbo due to current owners reluctance to let go of under 4% 30-year mortgage rates, and
(3) plateauing "higher-for-longer" interest rates are gaining greater tolerance as a new-norm level; one that many buyers fret about less now because they believe they'll likely refinance at better terms within a year or two.

Visibility into that sustained lift has triggered a generalized increase in builders' appetite for homesites, since their current supplies are getting absorbed – in many cases – faster now than expected. Many builders have built stores of cash ready to put in place for land acquisition, not only to keep their machines fed at the current level, but to ignite growth and earnings.

The latest loan origination from the Builder Advisor Group is one of more than $600 million in land loans the team has completed in the past seven months.

In January, we closed on a $130 million loan that enabled Sun Cal and King Street Capital to develop more than 850 lots that were the Oak Knoll Naval Hospital grounds in Oakland," says Tony Avila. "That was a complex deal as well, and the team was able to close that one in 30 days. Our forte is providing acquisition, development, and construction financing on projects in high-growth markets across the U.S."