Housing Giants - November 10, 2008 - (Page 20)

m&a I explained that 20-40 cents might be too little, just right or too much but no builder-developer worth his salt would ever buy an asset at some percentage on the dollar. I further explained that any of us in-the-know would create a matrix for each asset. We would build the vertical out on paper, entering what could be built and successfully marketed on the property today — its price, use various absorption versus price models — and assume the world of home building was not going to improve much in the next 2 years. In the third year, there might be some absorption improvement; in the fourth year there might be more absorption improvement and perhaps even some price improvement but not more than inflation. We would then add to the mix our IRR criteria and compute what we could afford to pay for the asset — no great mystery and no slight of hand required. Their response was, “That made sense,” and they asked “What else?” Wow, I was hitting on all eight cylinders. I further told them, in order to avoid or reduce the chance of catastrophe, they needed local feet on the ground in each market they wanted to invest in because home building was a local business. I suggested they find local partners with long-term experience and a solid franchise and good contacts who were also willing to have some “skin in the game” alongside their fund. I couldn’t believe my ears. I was being told that also made sense. The next question was if I had any additional wisdom I could present. Yes, I eagerly answered, and then explained that when home building normalized once again, most of us strongly believe that builders would try to emulate the NVR model— just-in-time finished option lots — as closely as possible. Optioning lots would once again become popular and achievable, and investors needed to insert the additional time and risk into their proforma financial models. They bought that one, too. Three in a row. Not bad. After having batted 1,000, I concluded it was time to stop. For the next 18 months, I received a call a month from each private equity group asking when I was going to bring them a first deal. My answer was always the same: “When I have a good one.” HG Michael P. Kahn is president of Michael P. Kahn & Associates, a financial advisory firm specializing in housing industry mergers, acquisitions and capital formation. 20 HOUSING GIANTS 11.10.08 www.HOUSINGGIANTS.cOm http://www.mpka.com/Home.aspx http://www.mpka.com/Home.aspx http://www.housinggiants.com

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