Distress in US homebuilding leads to negative land values

Debt related to housing development projects in parts of the US is selling at such a discount that land is often trading at negative values, Dunmore Capital founder Sid Dunmore has said.

The Sacramento, California-based private equity firm has closed on five debt packages related to distressed property developments where the underlying assets – finished and improved residential lots in California and Nevada – are trading for less than the cost of making improvements to the land.

Dunmore told PERE his firm had expanded its strategy from specializing in opportunistic land entitlement investments in northern and central California to buying distressed developer debt saying: “This is a pretty amazing opportunity.”

Private homebuilders were being acutely affected by the credit crunch, he said, with little or no access to capital and substantial debt on projects. “They have no negotiating power at the moment,” he added.

As a result banks were selling “pools of debt” related to the developments at steep discounts. “Just the improvements to land [infrastructure, street work, entitlement, fees] can often cost between $30,000 and $60,000 per lot. What we are seeing in this environment is finished lots where this has all been done going for roughly between $15,000 and $30,000 each. The credit crunch has really created negative land values.”

Dunmore Capital has closed on five deals to date involving around 400 lots and is in contract for another 1,000 lots. Part of the firm’s strategy is to exit the deals by selling to long-term investors once market conditions improve.

Dunmore said the discounts were almost as though the seller was “writing you a check and giving you the land at the same time.”

Recounting the events of the past week, which saw the demise of Lehman Brothers, the sale of Merrill Lynch and the government take over of AIG, he added: “I believe we’re going to see these kinds of deals a little longer than I thought originally, which was for the next six months. I think we could now be seeing these opportunities for the next 12 to 18 months.

“How deep does the financial pain go? I don’t think you can compare this to anything else we’ve seen. We are in a cash market and cash is king. That’s the proven reality of the markets today.”