Toll Brothers Inc., home builders to the affluent, recently obtained a new $150 million credit line, but not without a lot of agonizing negotiations.
Though banks are showing renewed interest in lending to the home building industry, credit conditions remain generally tight. And those, like Toll Brothers, that do have access to credit must still jump through hoops to get it.
"In general, there is significantly less available capital with significantly more constraints on it than five years ago," said Joel Rassman, chief financial officer at Toll Brothers.
Based in Huntingdon Valley, Pa., the company builds luxury suburban homes in the Boston-Washington corridor. Most of its houses sell in the $300,000 range. though some cost far more.
Record Number of Contracts
For the fiscal year ended Oct. 31, Toll Brothers reported record contracts for new homes, reflecting what the company described as "tremendous pent-up demand" in the move-up housing market.
Toll Brothers' new unsecured revolver, led by PNC Bank, replaced a credit line that was originally obtained in 1988 and extended several times, most recently in August 1992.
Mr. Rassman said he had hoped that terms and conditions of the new revolver would be less complicated than those in the old credit pact, which was forged with a consortium of banks led by Provident National Bank. Provident is owned by PNC Bank Corp.
Instead, what he got was some 25 pages of "additional descriptions, covenants, and caveats," reflecting banks' heightened concerns about regulatory oversight of their real estate lending, Mr. Rassman said.
Varying Limits on Borrowing
For example, the banks now determine the company's borrowing base using a complex formula tied to the value of various categories of Toll Brothers' real estate inventory.
The company can borrow up to 50% of the value of its unimproved land, 60% of the value of improved land, and 90% of the value of land with homes under construction.
Under the old credit pact, the company's real estate inventory categories were treated essentially the same, and the company could borrow up to 75% of their blended value.
Frank Santamaria, senior vice president for real estate banking at PNC, said the new credit pact more accurately reflects risks in the transaction, limiting the banks' exposure to lending against raw land.
Some Concessions Won
At the same time, he said, the credit was crafted in a way that does not burden the borrower with "unnecessary oversight or meaningless conditions."
And in some areas, the company won concessions from its lenders.
The original 1988 credit pact included a competitive bid option, but the banks took that away in 1992 when the extension was negotiated. Though that remains the case in the new credit pact, Toll Brothers can now borrow up to $50 million from a lender outside the bank group - something the company could not do under the old arrangement.
The borrowing rate has also been reduced in the new deal, to 175 basis points over the London interbank offered rate.
