Why are equity providers uncomfortable with providing equity in secondary markets now that primary markets are often built out?

Farrell: In any downturn, sales prices soften in general so homes in the primary markets become more affordable—to the detriment of the secondary markets. The average buyer would rather be closer to their work (reduced commute times), so, if they can afford to, they will focus on the primary markets. What does it take to convince equity providers that a deal is worth their consideration?

Farrell: An equity partner is concerned with return metrics, the team’s ability to execute, location and what makes the specific project unique from its competition. Although Oxnard is considered a secondary market, it has a number of compelling attributes including scarcity of lots and a tough entitlement process, which limits supply; existing new-home communities are experiencing significant absorption and are nearing sell-out; easy access to a major thoroughfare, the 101 Freeway, which gives access to employment centers to the north and south; relatively mild climate and recreational opportunities due to proximity to the beach (~5 miles). Once the project financing is obtained, what else is necessary for ongoing success of an acquisition, development and construction project in a secondary market?

Farrell: Timely execution of the business plan, including completing improvements on time and on budget, an effective comprehensive marketing plan to bring in prospective buyers and a relationship with best-in-class mortgage providers that have programs for FHA/VA, low down payments for first time home buyers and for those with blemished credit to insure home buyers can get financing. What else should our readers know about this particular acquisition?

Farrell: It was a legacy property from the last downturn that the new developer was able to shepherd through a very difficult entitlement process, creating an enticing project for potential equity investors.