Residential construction lending is a segment of lending that provides sound collateral and above average risk-adjusted returns for lenders. Construction and lot acquisition loans to homebuilders has long been the almost exclusive domain of the community bank.

Community banks continue to finance this sector, however, regulatory restrictions on institutions, as well as, unprecedented consolidation in the banking industry have combined to limit the availability of capital to this market segment, with the small and medium-size home builder being particularly underserved.

BuilderFinancial Corp. is exploiting this niche opportunity with uniquely-structured financing solutions that solve a need in the marketplace and provide sophisticated investors the ability to invest in clearly defined risk segments of pools of residential construction loans and earn above-average, risk-adjusted returns for the fixed income portion of their diversified portfolios.

Operations and Risk Management

The key to a successful construction lending strategy is to know the market: what sells, what doesn't, what's either planned or being built around you, what is being planed by local government and who the reliable players are. BFC has extensive knowledge of the South Florida luxury real estate market. Additionally, BFC understands all aspects of residential development, including:

• Site Location
• Zoning
• Land Usage
• Demographics
• Construction Techniques
• Marketing Strategy
• Project Monitoring
• Loan Documentation
• Default Management and Workouts

BFC is not a volume lender making a small margin on a mass of transactions, but a specialty lender earning higher revenue over a few transactions. Accordingly, BFC is VERY selective. BFC finances projects with below average marketing times, built by developers with good character and a history of success. There are four major areas reviewed in the underwriting process:

Product - The proposed home plans are reviewed in detail to insure that the floor plan is of the type which is selling routinely, and that the finishing is appropriate for the market.

Builder - The builder responsible for delivering the final product must become an approved BFC builder by demonstrating a solid history of successful projects of similar scope, a history of meeting financial obligations (Credit History) and references from past customers, employers and community leaders attesting to quality of character, as well as, the aforementioned criteria.

Investors - Does the development LLC and its investors have the financial wherewithal, experience, and sophistication to not only meet obligations, but to appropriately handle unexpected occurrences?

To reiterate, the first line of defense, in the BFC (and any well conceived) risk management strategy, is to make the right loans in the first place. Notwithstanding the pains taken to originate quality loans, additional structural methodologies are utilized to mitigate risk, including:

• The establishment and funding of interest reserves sufficient to maintain current interest payments for the entire term of the loan (both first and second mortgage)
• The requirement of a pledge of all LLC units as additional collateral
• Structuring first mortgage notes as assumable to simplify workout strategy implementation, if necessary
• Carefully structuring draw schedules and monitoring of construction progress to insure that sufficient capital to complete the project is always available
• Personal guarantees by principals
• Special purpose entities as borrowers

BFC consciously attempts to minimize overhead costs to the greatest extent prudent and feasible by outsourcing certain functions on a unit cost basis. Loan administration is managed internally and is greatly simplified by the consistent use of interest reserves (e.g., no billing and/or payment processing). The loan administration process is managed by a team of professionals each with an excess of 25 years of direct experience.