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Show Summary
In this conversation, Pete Alford, a partner at Waterloo Associates, discusses the innovative approach of structured land financing in real estate investment. He explains how this strategy mitigates risks associated with traditional land banking, the efficiency it brings to home builders, and the investor experience with monthly returns. Alford also shares insights on networking strategies for growth and future plans for fund development, emphasizing the importance of building relationships in the investment space.
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Pete Alford (00:00)
So the home builder Michelle will then say okay let’s move this forward and we’ll say we’ll do three things day one. We’re going to buy the land at cost and get it off their balance sheet because that’s the key area that they want. They want this land off their balance sheet to be more efficient with the large lines of capital they have to buy land and then build theirbuild their widgets on the other side of this. So they’ll come to us and we’ll say we’re gonna buy the land and take it from you at cost. So at your 10 million dollar original cost. It’s now fully entitled so it’s probably worth 20 to 25 million and we’ll then say home builder. We’re gonna do that and then there are two other things that you’re gonna do, three other things that you’re gonna do on day one. You’re gonna write us a deposit check. Usually it’s about 20 % to get it off their balance sheet. 20 % of the total price
project costs. So again, the total project cost was 50, 10 costs for the land, 40 million to do the horizontal development, so 50. They’re going to pay us 20 % of that 50, which is 10 million. So we’re now in it for zero cost basis.
Michelle Kesil (02:34)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil, and today I’m joined by someone that I’m looking forward to connecting with, Pete Alford, who has been making serious moves as a private equity firm in the Austin, Texas area, and yeah, currently working on some unique land development strategies. So, excited to have you on the show today.Pete Alford (03:04)
Great to be here, Michelle, thank you.Michelle Kesil (03:05)
Of course, I think our listeners are really going to take something away from how you’re focusing on land development and yeah, everything you’re doing in relation to that. excited to dive in.Pete Alford (03:20)
Fantastic, look forward to it.Michelle Kesil (03:21)
Perfect. So first off, for those not yet familiar with you and your world, can you share what your main focus is these days?Pete Alford (03:31)
Sure. So we’re Waterloo Associates and we’re a private equity real estate firm based in Austin, Texas. ⁓ The firm itself has been in existence since 2016-17 and this is our third closed-end fundraise we’re out raising for currently. ⁓ We do all verticals in real estate but right now we’ve come up in the past several years with a unique strategy in what we call structured land development or structured land financing. So we’ve taken the risk, Michelle, out ofhistorically what people know as is land banking. We can do that as operators and developers ourselves, but we don’t see that as a unique area right now in the market whereby you have the risk of a home builder walking while you’re trying to own the land, get it entitled. And we’ve taken that risk out where the home builders actually the top 20 to 30 home builders in the U.S. in the Sunbelt regions where we’re focused are coming to us with fully entitled land and we can walk through kind of the strategy in more detail.
So it’s a unique strategy in our fund three, 100 % devoted to this strategy. And we’re a little just under halfway raise of our $200 million raise. we’d like to get the word out and see if other investors may be inclined to talk to us.
Michelle Kesil (04:45)
Awesome, that is so exciting. Can you share a bit more about why this particular strategy works and what drew you to it?Pete Alford (04:53)
Sure.Yeah,
so ⁓ our first fund, let me just backtrack a second, give some history to our firm. ⁓ It’s a private equity real estate arm with the owner David Osborne and his managing partner Mike Stewart. Mike is ⁓ the man running and managing partner running this and I work closely with Mike and he’s the one who created this strategy. Mike hails from Texas teachers as well as Bowpost, a large hedge fund out of Boston. So he’s got both structured finance and operating experience that he’s brought to the table for David and the
⁓ We’re a small team, 10 people, eight of which live and work in Austin, two are up in Dallas. And again, we can cover the country on all aspects of real estate, but we’re focused here in the Sunbelt region with this structured land financing. So essentially, Michelle, what this is is ⁓ home builders are coming to us. So what happens is, let’s say a home builder is out in the Houston area, Northwest Houston, and has had a plot of land from Farmer John for a number of years and has owned it with ⁓ Farmer John.
and has gotten it entitled. So it’s now ready to go to market and build that community. Let’s say it’s 400 acres. This is a unique deal and one that we actually just did earlier this year. And let’s say this acreage was 10 million cost and then 40 million horizontal to develop it. So a total project cost of 50 million. ⁓ The home builder will come to us and say, Waterloo, will you work with us and do the horizontal land development for us? And we’ll not immediately say yes. We’ll underwrite it as though we’re going
to take it on ourselves and can get out of it because we can do that. So we’re going to underwrite it ourselves and see if we like the deal and if we like the deal we’ll go back to the home builder and say yes we like the deal we’d like to move forward.
So the home builder Michelle will then say okay let’s move this forward and we’ll say we’ll do three things day one. We’re going to buy the land at cost and get it off their balance sheet because that’s the key area that they want. They want this land off their balance sheet to be more efficient with the large lines of capital they have to buy land and then build their
build their widgets on the other side of this. So they’ll come to us and we’ll say we’re gonna buy the land and take it from you at cost. So at your 10 million dollar original cost. It’s now fully entitled so it’s probably worth 20 to 25 million and we’ll then say home builder. We’re gonna do that and then there are two other things that you’re gonna do, three other things that you’re gonna do on day one. You’re gonna write us a deposit check. Usually it’s about 20 % to get it off their balance sheet. 20 % of the total price
project costs. So again, the total project cost was 50, 10 costs for the land, 40 million to do the horizontal development, so 50. They’re going to pay us 20 % of that 50, which is 10 million. So we’re now in it for zero cost basis.
That’s one. The second contract they’re going to sign, Michelle, on our papers is going to be a guaranteed max price contract, meaning they’re going to guarantee taking down the finished lots at set times in the future in months 14, 18, 20, et cetera.
and no matter what happens, whether costs go up, whether there are delays, etc. It’s on their books, if you will, and they’re guaranteeing that that’s going to take place. there are no outs on this and we can come to that later on. And then the third and final contractor, if you will, the option fee agreement they’re going to sign with us is going to be a 12 to 15 percent, as I said, fee agreement where they’re going to pay us monthly ⁓ fee as the construction draws go out. They’ll pay us on that and as the lots are taken down,
they’ll pay us back the principal. So that’s the sort of the tenure of the timeline for the investor. So a unique deal where if you will the home builder is quote-unquote fully pregnant in this deal day one. ⁓ So it’s very lucrative for us as a firm to help them be land light, get this efficiently done for them so that they can go out and make their real margins building their widgets ⁓ in the future. Let me stop there and we can come back to more detail but that’s the essential structure of this unique offering.
Michelle Kesil (09:44)
Yeah, amazing. Sounds like such an exciting opportunity to be working on right now.Pete Alford (10:25)
Yes, very much so. Yeah, we’ve gotten some great interest both institutionally, just to give the audience some idea of how we’ve raised money in the past. It’s really, yes, family and friends initially in the RIA, Registered Investment Advisory or Financial Advisory world, some family offices and also institutions. So we raise in our closed end fund ⁓ that way. Then we also have large direct institutions that don’t want to necessarily invest, Michelle, in that strategy, but want to come to us directly in a joint venture or separately managed amount.managed account or fund of one if you will, and they’ll write large checks just to go into specific deals and not be in the fund. So we’ve got those two ⁓ equity raises going on that are sort of side by side as we’re doing, but we’re really focused on this closed end fund right now.
Michelle Kesil (11:13)
Yeah, absolutely. What are some of the main maybe questions or concerns that investors have when they hear this idea that maybe make them hesitate before joining?Pete Alford (11:24)
Sure.Yeah.
Yeah, great question. ⁓ I guess a couple of things and let me start this. Why would a home builder want to do this one? It sounds too good to be true, but ⁓ it’s really structured and it they’re high barriers to entry. Mike’s Mike Stewart’s created the unique vehicle here, Michelle, because it’s really tough to get into this industry this way because the home builders are signing our contracts. We’re not signing theirs. So that’s really unique. And it’s taken time to get that legalese written and really all the all the bells and whistles, if you will, tightened up so that we’re really secure in this.
this investment. So the investor would say why would a home builder do this? Well essentially they’re really doing it just again to be land light. They want to be efficient with the hundreds of millions of dollars of capital they have. So there are four key things that they want to do. They want to buy the land, they’ve got to get it entitled, they’ve got to then do the horizontal development, and then they’ve got to sell the homes. They’re building to sell the homes. Those first three things are the first and the last thing are very, ⁓ they could do that with their own capital and or their lines of capital or the
banking relationships. Those middle two getting it entitled as well as doing the horizontal development they’re ⁓ unfriendly if you will to banks. So we’re coming in as they will as their bank essentially we’re not we’re owning the land but that’s essential what they like. They like the way we’re efficient in getting the horizontal development done for them because we can look at the draws and get the money out etc. We know how to do that as well. We can also structure this deal that is ⁓ protective not only to them but also us.
It’s a creative to them in the long run too and people would say well, why would they pay 12 to 15 percent? Well, actually ladies and gentlemen, they’re capital to the operating expense to do the horizontal developments about 22 to 26 percent So they don’t mind paying us that 12 to 15 to get it off their balance sheet and be very lucrative and efficient getting those Sites and finished lots ready to go so they can come and build build sell build sell and be very efficient with their ⁓ if you will
manufacturing process of the homes. And then the other thing an investor might ask and a couple more things here, Michelle, would be one, what is a risk, real true risk here? Well, if they were to walk, it would be the best deal we’ve ever done because we have the deposit, we have the land at cost. They paid us monthly fees and we don’t want them to, but it would be the best deal we ever done and nothing, no one has ever done that. So that’s great. ⁓ I think the worst case scenario would be a more of a GFC like we had in 08, 09.
a great financial crisis or even more devastating where everything shuts down, they do default or go bankrupt, then what we’re doing is we’re left holding the land, as I may have mentioned to you before, which we’re only paying now, we own it at cost, so now we’re only paying insurance and taxes, which is very minimal with just land, and we’re operators, so we could either develop it ourselves or we could go with another developer if it’s not too bad out there in the market and work with another home builder, or if it’s really devastating,
just sit on it and just wait, which as home builders did that in 9-10 and they were very lucrative holding that land back then and then being able to come out to market several years later and be very ⁓ incentivized and lucrative for their own models. So those are the two. And then one last one I’ll mention, Michelle, is kind of what’s the investor experience. ⁓ It’s a five-year term with two one-year extensions, but what’s unique about this strategy, everybody, is that
you’re getting your interest paid monthly right away. You won’t see it right away because we’re calling capital, but month 10, month 12, right in that area after the first capital call, you’re starting to see mailbox money come through and it’s paid monthly.
And the second thing is when do I get all my interest and principal back? It’s usually in around years three and a half to four and change because what you’re doing is there’s a set guideline, remember, there’s a set guideline when these home builders are taking down these lots. So it’s not susceptible to any cap rates or interest rate risk down the road where some other
real estate verticals are susceptible to so we feel it’s well protected there as well. So I think hopefully the investor will have a great experience and our track record proves that as well.
Michelle Kesil (16:20)
Yeah, absolutely it sounds like you have a strong game plan and foundation for what investors can expect on their journey with you guys.Pete Alford (16:33)
Yeah, yeah, we’re pretty excited about this. It’s just really trying to…It’s not everybody can kind of understand it, but even the most sophisticated investors do get it, but it takes a while to just walk through because everybody thinks it’s too good to be true. But when they truly hear it and see ⁓ how we’ve been vetted institutionally, how we’ve really responded with some of the largest several trillion dollar investment firms out there that are coming and wanting to invest with us, it’s nice accolades there. So it’s just, you know, like everything out there raising capital, it’s a grind, but ⁓ we’ve got a great team. ⁓
strategy and that’s what’s exciting about being in a spot like this with this firm and the strategy and down the road in a future firm we like the strategy we think it’s got a long runway it’s still got a good 10 to 15 year runway we believe and we have a back inventory what do we call a
reinvestment inventory whereby the, actually the home builders, remember Michelle, are coming to us with entitled land. So it’s a reverse pipeline. We’re having the home builders come to us. So we’ve got about a 750 million to a billion plus pipeline that we’re ready to go with this fund. So we’ve closed one project in July that’s already paying dividends and income right away. We’ll have our next close next week on another ⁓ project just here north of Austin in Georgetown. And then we’ve got another two to three
in December, January, that’ll be four to five deals going in this fund in the early part of next year. So we look to have probably 10 to 12 plus deals in this fund too, this $200 million raise when all said and done.
Michelle Kesil (18:13)
exciting. Those are some big goals that you guys have set for yourselves.Pete Alford (18:18)
Yes, yesthere are. And then eventually I think the fourth fund that will come out with Michelle just to give them a little excitement will probably be we’ve got a lot of ⁓ positioning to maybe do an evergreen fund where we can not only have this strategy but one or two others and ⁓ sort of the market out there is wanting evergreen funds where you can you know get out quarterly and you can truly ⁓ sort of have that as opposed to a longer lockup. But we still believe that this you know quote unquote lockup is ⁓ very doable at three and half four plus years even
even though we say a five-year term with two one-year extensions. So there is an end to this, and they’re getting current income right away.
Michelle Kesil (18:59)
Yeah, amazing. That’s an awesome incentive for the investors that choose to work with you.Pete Alford (19:06)
Very much so.Michelle Kesil (19:08)
Yeah, when you’re working on your business and finding investors, like, what has that growth journey looked like? Have there been specific, like, strategies that have worked well for you?Pete Alford (19:21)
Yeah, great question. We’re fortunate to have, we use Juniper Square as our investor portal, so there’s nice communication to be able to get out with that, but it all comes down to ⁓ the good old…networking and being at unique either RIA events or events here throughout Austin, San Antonio, Houston, Dallas, or when myself and other partners are in other cities, we’re making sure we’re networking. I’m fortunate to have had 35 years in private banking and investment management, so I’ve got a nice Rolodex also to work on, but it’s never ending to continue to network and meet people. And I always take a meeting no matter what, even if someone’s not interested, ⁓ they may say it’s not
right up my alley right now, Pete, but you’ve got to talk to this people and that’s how other doors get open. just a traditional networking and making sure that we’re communicating and staying on people’s radar, continued follow-up, get to a quicker no and move forward. there are lot of ⁓ our RIAs and investors out there that are captivating the private investment world and we’re hopefully there to ⁓ help them get out there. We’re also on a unique platform. We’re on Fidelity and Schwab’s custodial platform.
which helps as well for a lot of investors. As well we’re on another platform called Conway Investment Solutions. It’s like a smaller version of an iCapital but more boutique. usually those ⁓ emerging type managers which we are not necessarily emerging but we’re ⁓ not a behemoth like a BlackRock or Blackstone but ⁓ we feel we’re pretty nimble and have a great strategy so we’re on that platform and making headway there as well.
Michelle Kesil (21:02)
Awesome, I love that. relationship building is everything in this space. Yeah, absolutely.Pete Alford (21:06)
Very much so.Always.
Michelle Kesil (21:13)
What are you most focusing on now when it comes to scaling ⁓ this next part of your business? Is there like a specific strategy or action plan that you guys have to scale? I know you mentioned the four different funds, but yeah, is there anything else you guys are working on?Pete Alford (21:34)
No, think we’re really helping. ⁓ We’re focused here on our third closed-end fund, Fund 3, our structured land financing strategy. That’s the utmost focus to get that closed and done here in the next four to six months. ⁓ We do have the opportunity with certain other real estate, if you will, operators that may have deals that are sideways or capital stacks that need some revisiting. Mike Stewart’s Acumen and ⁓ very intellectual thought process.And our backing from some of our institutions can come in and help some of those on senior debt, Meas or Pref. So we can do that as a sort of ⁓ a nice gesture, if you will, also to help them come into our fund. So we’re consultants in that way as well, if you will, with our backing and our expertise. that’s one sort of offshoot that we have that we have available to us. But our third closed end fund, fund three here is our priority. And then I would say fund four and five into the evergreen
world is something we’ll be thinking about into next year, the latter part of next year, probably into 2020, late 2026, 2027, with this strategy and possibly others depending on where the real estate markets are landing at that point.
Michelle Kesil (22:50)
Awesome, makes sense. Yeah, you guys have a lot to focus on with this.Pete Alford (22:56)
We do, we do.Michelle Kesil (23:00)
Awesome. So before we wrap up here, if someone wants to reach out, connect you, learn more about investing or whatever you guys are working on, where can people find you and connect with you? ⁓Pete Alford (23:15)
Yeah, sure.I’m not a big social media person, so I don’t have all those accounts, but I would say just, they could look at our website, Waterloo Associates, and see what we’re up to there. But just contacting me directly at palford, P-A-L-F-O-R-D, at waterloo-associates.com. ⁓ And you may or may not have that on your fee here, but hopefully again, that can resonate. I’m on LinkedIn as well, connect with me on LinkedIn, palford, ⁓ as well.
And then again, just email addresses really the best way ⁓ and we’ll get back to you right away and get you caught up and up to date with what we’re up to. palford at waterloo-associates.com.
Michelle Kesil (24:00)
Well, I really appreciate your time, your story, and your perspective. Thank you so much for being here. Of course. And for those listeners tuning into the show, if you got value from this, make sure you’ve subscribed. We’ve got more conversations with operators like Pete who are building real businesses, and we’ll see you on our next episode.Pete Alford (24:08)
Michelle, thank you and your team for having me. Appreciate it.
