“Realistically, capital has dried up for home builders,” says Jon Janecek, who specializes in real-estate transactions with the California-based law firm Newmeyer & Dillion. “Requirements have gotten tighter. It's like the early '90s.”

Janecek knows he's preaching to the choir. In the course of the current market downturn, home builders have watched traditional cash spigots go from a flow to a trickle to a painfully slow drip. Builders need cash for their projects, and an alternative source of capital may be emerging for them: private equity funds. It's not really a new source of capital for the wide world of real-estate; private equity has been fueling commercial, industrial and high-rise residential development for more than a decade. But it hasn't been until fairly recently that private equity funds have set their sites on home builders and the single-family residential arena.

Reports have been surfacing that massive amounts of private equity funds are being pulled together to take advantage of the opportunity that the free fall of home and land values is providing. At the time this article was prepared, sources interviewed indicated that the majority of funds out there are sitting on the sidelines.

“We know people have lined up equity commitments,” says Kelly Toole, partner in the Washington, D.C.-based Beers + Cutler accounting firm. “We're still at a point where they're waiting to jump in.”

Toole's observation is echoed by others. “We haven't seen a lot of activity yet, but that doesn't mean it doesn't exist,” said W. Hobson Hogan, an associate with the Raleigh, N.C.-based real-estate management consulting and investment banking firm FMI.

Hogan cautions that due to the highly cyclical nature of home building, there may be a limit to the number of institutional investors and private equity players who will want to enter the home builder space. “They'd have concerns about catching the falling knife. There may be more interest in the home builders from those firms who are more opportunistic in their investment thesis, or contrarian investors or wealthy families or sovereign wealth,” Hogan says.

When these funds do come around, builders — as much as they want and need the cash to move forward with their developments — will want to be cautious. Private equity investors are not the same animal as the local community bank.

“There are different cultures. Builders are entrepreneurial. Financing people are bottom line. It's not like the good ol' days where things were done on trust,” Janecek says. “Finance people operate deal-by-deal. It's more black and white. Private equity firms are looking for a return, and there's a gap between what home builders have been used to and what these types of lenders are asking.

“There are controls and caps on the deals that are structured,” he said, citing the well-publicized cash infusion that Standard Pacific Corp. received earlier this year. “You have someone requesting a certain portion of the money you aren't used to giving up.”

Toole supports the notion. “You want to understand who your partner is and how they do business. You'll want to know their parameters — what are they going to want to see in terms of reporting? These private equity funds have a high level of sophistication. Builders might not be set up in their current accounting infrastructure to handle the demands of the private equity investors.”

Other pitfalls, Janecek says, include limitations. “There are limitations on contracts, limitations on other financing. At some point you want to know if you can regain control of your company. What are the exit strategies? What are the rights of redemption?”

The primary benefit that home builders can expect from private equity is cash, Janecek points out.

But depending upon the private equity investor, other benefits can be gained for the home builder. “Not all private equity funds are created equal,” he says. “Some are financial engineers, others will have an operational bent, and they will come in to help the builder's management team formulate a strategy,” he says.

So exactly when might home builders expect to see private equity funds as a viable source of capital? “We are in a tough time,” Hogan says. “Yes, there will be deals, but at the end of the day, private equity is likely to sit on the sidelines until they feel there is a bottom.”

And when that happens, what is the best advice home builders can take away?

“Know the structure of what you are getting into and the length of time that will be involved, and what it does for your firm,” Janecek says. “Look for lawyers, accountants and advisors who can guide you along.”