Hillwood backs new homebuilding fund as AD&C credit tightens

The one thing that’s unambiguous right now in residential development and new construction is that the $80-to-$100 billion homebuilders throughout the U.S. draw on to site and build the new homes they plan to sell in 2026 and each year beyond is harder to get and more expensive to finance.

National Association of Home Builders VP for Survey and Housing Policy Research Paul Emrath provided new data to illustrate that reality in his November 14 Eye On Housing post. 

“Credit Conditions for Builders Continue to Be Tight.” He writes: “Credit conditions on loans for residential Land Acquisition, Development & Construction (AD&C) were still tightening in the third quarter of 2025, according to NAHB’s quarterly survey on AD&C Financing. The net easing index derived from the survey posted a reading of -11.0 (the negative number indicating that credit tightened since the previous quarter). This is in reasonably close agreement with the third quarter reading of -6.6 for the similar net easing index produced from the Federal Reserve’s survey of senior loan officers—marking fifteen consecutive quarters of tightening credit conditions reported by both builders and lenders.“

What lies beneath that tightening, however, is a larger structural shift—one that isn’t temporary. Nor is it likely to unwind even if rates decrease next year. Local and regional banks, once the mainstay of AD&C loans to private builders, are reducing their exposure to land, development, and construction loans. National banks have been pulling back for years. Regulators have increased the costs of holding AD&C loans on bank balance sheets. Capital requirements have become stricter. And after several high-profile bank failures in 2023 and 2024, boards and credit committees are demanding cleaner books, shorter durations, and less concentration risk.

For builders and developers, the impact shows up in every term sheet—lower leverage, more recourse, more cash leaving, slower processes, and tighter covenants. The change has created a financing gap large enough for private credit to fill the space once dominated by banks. Debt funds, insurance balance sheets, and family offices now provide first-lien AD&C loans at a scale that barely existed five years ago.

Increasingly, private capital—not banks—keeps lots of pipelines and pipelines of lots moving.

Against that backdrop, Avila Real Estate Capital’s announcement this morning stands as more than just another fundraising press statement. AREC has closed the first $100 million of a second debt fund aimed at providing project-level land development loans and homebuilder revolver lines for vertical construction, on its way to reaching a $1 billion target by mid-2026. 

The new vehicle builds on a proven model: AREC’s first debt fund closed in July 2025 with over $700 million in commitments and co-investments, supporting many communities and more than 10,000 new homes across the country. 

What’s different this time is who is stepping up first. Dallas-based Hillwood Communities – one of the largest single-family master-planned community developers in North Texas and an active equity and debt investor with partners across the country – has taken the “anchor” role as the lead investor in Fund Two.

In a market where bank credit has been tightening for nearly four straight years, that combination matters.

A $100 billion need collides with tighter credit

In our conversation about the new fund, AREC CEO Tony Avila provides a rough estimate of the annual demand for AD&C capital.

“There’s approximately $80 billion to $100 billion in lots underneath the houses that get sold every year,” Avila says.

That’s the same $80–$100 billion homebuilding firms worry about funding in their own 2026–2027 land and construction plans.

At the same time, as Emrath’s analysis notes, lenders are lowering loan-to-value and loan-to-cost ratios, trimming dollar commitments, increasing out-of-pocket interest requirements, and requiring more personal guarantees. Effective rates on many AD&C loans are still north of 10–12%, even after modest recent declines from their peaks. Builders and developers feel the vise squeeze on both sides: less credit, at a higher all-in cost.

The result: projects that would pencil on a fundamentals basis never get off the ground because the capital stack can’t be assembled on workable terms. That’s the gap AREC is occupying – and expanding – with its second fund.

Targeting “underserved” for-sale housing, not rentals

Geographically and product-wise, Avila is blunt about where AREC’s second fund will aim.

“Geographically, we’re going to target areas that are underserved, where there’s high demand, low supply, favorable demographics, good job creation relative to the number of housing permits, places like these where we’re going to focus on areas that are meeting a need,” he says. “We’ll focus on an area where there’s clear demand. We really want to focus on attainable housing and on first-time home buyers. We will, of course, diversify so that we’re not only focused on entry-level housing. We’ll have move-up and age-restricted in the projects as well.”

At a time when much of the institutional money pouring into land and horizontal development is tied to single-family rental, Avila draws a hard line.

“We will solely focus on for-sale residential. It is our stated focus to say that we want to promote home ownership, and we are not going to focus on funding communities that are developing homes for rent,” he says.

In other words, this is a for-sale housing fund, targeting parts of the market where AD&C capital has been both scarce and costly for private operators – entry-level, attainable, and the more modest side of move-up and age-restricted neighborhoods.

Why Hillwood’s anchor investment matters

From the Hillwood side of the table, the decision to come in as lead investor is not a casual bet on yield; it’s an extension of what they already do in multiple roles across the capital stack.

“We buy land, develop it, and sell these lots to various homebuilders, both public and private, in any of the markets we’re in,” says Fred Balda, president of Hillwood Communities, whose founder and chairman is Ross Perot, Jr. “We don’t build homes at all. We just sell lots. That’s what we do for a living, and we’ve been mainly doing that for most of the last 40 years.”  

During that period, Hillwood not only created many of its own master plans but also provided equity and occasionally debt to partner developers in Florida, the Mid-Atlantic, California, and other regions. 

Balda describes the AREC partnership as a natural progression of that history.

“We’ve always maintained this investment discipline and desire in this marketplace that we’re not always involved in, and in some cases, we’re even the debt holder,” he says. “Investing like that is not unusual. And I know Tony from several years back. When he proposed that we invest in his new fund, the thesis was interesting and credible, and we got on board.” 

After diligence on the AREC first debt fund’s track record and the team’s originations pipeline, Hillwood moved from interest to conviction. “It became a natural progression that we’re one of the lead investors in his fund now, and we plan to keep growing it,” Balda says.

From Avila’s point of view, the Hillwood decision sends a clear signal to the rest of the limited partner universe.

“Based on recent originations, AREC is one of the largest land development lenders in the country,” Avila says. “Having an anchor investor that is one of the largest land developers in the country, backing us as one of the largest land developer lenders in the country today, is a very powerful combination.”

Crucially, Avila notes that Hillwood itself manages many limited partners in its own funds.

“Hillwood’s investment as a general partner is a signal of confidence to other limited partners. It is symbiotic.”

For builders and developers who rarely step inside a Tokyo pension boardroom or a large family office investment committee, this collaboration between an operating land developer and a specialized lender is the key practical point: it increases the chances that Fund Two will actually reach and deploy that $1 billion target.

A first-lien way for firms to move from ‘first loss’ to ‘last loss‘

Avila’s affiliate, Builder Advisor Group, has sold many builders over the years. One reason capital from former builders and developers has followed Avila into private credit is the shift in risk position.

He explains it:

“When somebody buys a piece of land and owns it, they are now in the first loss position. If the land drops in value by $1, they’ve lost $1, and for us doing a first mortgage, we are in the last loss position.” 

The same reasoning applies to construction loans.

“We’re still making a nice return, regardless of the money that’s made by the home builder,” Avila says. “So being in that first mortgage position, if somebody were to sell their home building company and invest back with us, they’ve gone from being in the first loss position to the last loss position, with, you know, a return on their investment via the interest and the fees that we charge.” 

For the private builder or regional developer trying to keep a 2027–2028 lot pipeline on track, the fund is designed to sit in that first-lien position on land development and vertical lines, while builders and equity partners absorb more of the residual risk—but also retain the upside from successful projects and eventual lot or home sales.

Balda views that structure as appealing both for Hillwood’s own return prospects and for the health of the wider development pipeline.

“It puts us in a first lien position as debt. We like that as well. We understand the business. We’re creative in the business, and we’re also conservative in the business,” he says. “So we think we bring a lot to the table for Tony, and he does as well.” 

Filling an “underserved” housing need, patiently

The strategic bet here is simple: the U.S. is fundamentally lacking for-sale housing, and today’s slowdown is more about affordability and financing than a collapse in underlying demand.

Balda candidly notes:

“This entire industry is just so underserved with housing. Long term, it’s really underserved for housing,” he says. “This is another opportunity with this funding, just to keep on adding capital and assisting and building more new-home and neighborhood product throughout the US.”

At the same time, he argues, this is not a moment for reckless growth.

“We could be very patient with this fund. There’s nothing that says we have to close anything tomorrow,” Balda says. He describes “a pretty significant” pipeline in the right locations but stresses the importance of selectivity: “Finding those target markets with those target sponsors is how you manage this cycle that we’re starting to see a bit of a pullback and in some cases, a reset in these marketplaces.”

That patience might be just as crucial as the dollar amount. Builders seek capital partners who won’t panic at the first sign of slower absorption, and capital partners need operators who can adjust product, pace, and pricing without damaging returns.

What’s next

None of this alters the facts Emrath presented: AD&C credit has been tightening for 15 consecutive quarters, and the total cost of debt remains high. However, Avila’s second fund, with Hillwood as an anchor, offers private builders and regional developers an alternative source for their next land development loan or construction revolver – one specifically focused on for-sale housing, attainable price points, and first-lien structures that reflect actual project risk.

For strategic executives, the practical questions now are:

• Does the firm’s capital plan assume a world where traditional bank AD&C credit keeps tightening?
• Are there deals in the firm’s 2026 and 2027 pipeline that only work if someone like AREC provides the debt at scale?
• And, if so, does the enterprise have the nimbleness and agility to pursue deals in the “right markets with the right sponsors” that funds like this are built around?

The capital is not suddenly abundant again. But as this fund launch shows, some of it is at least trying to move in your direction.