Extension of net operating loss carry-back provision to five years are returning millions of dollars to public builders, some of which are using the money to buy land at bargain prices.
Christmas came a little late, but with a huge satchel of gifts for many of America’s largest home builders: Nearly $2 billion in total tax refunds for the last three months of 2009.
On Tuesday, Pulte, the housing industry’s largest builder, reported that its earnings loss for the three months ended Dec. 31, 2009 had narrowed to $116.9 million. That improvement in no small measure resulted from a whopping $800 million tax refund that Pulte gained from a law change that now allows companies carry back net operating losses up to five years.
The net operating loss (NOL) carryback provision was one of the key lobbying points—the other being the extension of the federal tax credit for home buyers—that NAHB and its largest members pushed Congress hardest for to resuscitate the housing sector. Pulte’s tax benefit, which helped offset $925 million in quarterly land impairments and other writedowns, is the largest among the almost $2 billion in total NOL refunds that 10 of the industry’s publicly traded builders reaped in their latest quarters. (See chart below.)
Two other public companies, Hovnanian Enterprises and Toll Brothers, ended their latest fiscal years before the law went into effect, and therefore reported losses for of $250.8 million and $78.8 million, respectively, in their fourth quarters. Both builders, however, intend to take full advantage of the law change. Larry Sorsby, Hovnanian’s CFO, told investors that his company is “now expecting a $275 million to $295 million tax refund in our second quarter of 2010.” Toll believes it will recover $161.8 million in 2010 from filing its 2009 tax return.
Indeed, the tax refunds that large public builders have received so far could be just the tip of the iceberg. D.R. Horton, for one, has submitted a claim for a $352 million refund for the current quarter.
During their first quarters of 2010, Ryland Group is counting on refunds of $99.4 million, Meritage Homes $93 million, KB Home $190.7 million, and Standard Pacific $103 million.
Lennar is also banking on a $320 million tax refund in early 2010. “Our improved balance sheet enables us to continue to capitalize on distressed land-buying opportunities, which will improve our operating results in 2010 and beyond,” said its CEO Stuart Miller.
M.D.C. Holdings expects to do the same. As it was closing the books on 2009, the Denver-based builder raised new capital by issuing $250 million in new debt. M.D.C. also expects to receive a $143 million tax refund during the first quarter of 2010. “Given these enhancements to our liquidity, we are well-positioned to continue making investments in 2010 as we build our land pipeline to support future home closings,” wrote M.D.C.’s chairman and CEO Larry Mizel.
John Caulfield is senior editor for BUILDER magazine.
Company Quarterly net income for three months ending 12/30/09 Tax refund
Pulte $(116.9) million $800 million
Lennar $35.6 million $251.1 million
KB Home $100.7 million $191.7 million
M.D.C. Holdings $127.2 million $142.6 million
D.R. Horton $192 million $113 million
Beazer $50 million $101 million
Ryland Group $39 million $97.6 million
Standard Pacific $82.7 million $94.1 million
Meritage Homes $43 million $90 million
M/I Homes $7 million $31 million
TOTAL $560.3 million $1.9 billion
Tuesday, February 23, 2010
Saturday, February 20, 2010
I received an email update on the progress of trying to resolve the issue of the pool/retaining wall.
“The day I got down here had meeting with 15 people from 5 involved interest standing on the excavated lot below looking straight up 20 ft at my infinity edge pool with water trickling over edge into overflow basin as it should, we were arguing about who was responsible for this mess. The other side was telling me that they didn’t need to drain my pool everything would be fine.
My consultant stated it was unsafe needed to be drained immediately because if it went it go all at once and you wouldn’t want to be standing here [I promise I didn’t arrange this] at that exact moment we all heard screams and look up and saw a large wave of water rushing over the infinity edge. You never saw 15 people scatter in all direction quicker. 3 fell or jumped over edge of 10 ft deeper excavation beside us, rest including me raced in different direction. 2 that went over the edge were injured one broken leg.
Turns out the group staying in my house who bought a week in GU Coach vs. Cancer had ran out of house and did group cannon ball. Every one quickly agreed the pool should be drained.”
Friday, February 12, 2010
A new report from the Congressional Oversight Panel says failed commercial real estate loans could mean the closure of smaller banks, empty buildings and another blow for the U.S. economy.
* Commercial property values have fallen more than 40% in the past 3 years.
* Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing, the report says. For nearly half of them, borrowers could struggle to get new financing because they'll owe more than the properties are worth.
By DANIEL WAGNER
AP Business Writer
WASHINGTON — Over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes, cause hundreds of bank failures and weaken the economy, a watchdog report says.
Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report released Thursday by the Congressional Oversight Panel. The panel monitors the government's efforts to stabilize the financial system.
The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.
Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That's because commercial real estate makes up a larger portion of their portfolio.
The Federal Deposit Insurance Corp., which manages bank failures and insures deposits, is under stress that will intensify over the next few years, panel chairwoman Elizabeth Warren said in a call with reporters.
Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects.
Banks often lent too much for land and buildings whose prices were inflated by a real estate bubble. They also relied on rosy assumptions about the profitability of retail and office projects and did not consider the possibility of a severe recession.
Commercial property values have fallen more than 40 percent in the past three years, the report notes.
Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth. Losses are mounting for banks, more of which will close. That could spell trouble for the economic recovery, said Warren, a Harvard law professor.
“If hundreds more community banks go under, the effect would be to ... dump sand in the gears of the economic recovery,” she said.
Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing, the report says. For nearly half of them, borrowers could struggle to get new financing because they'll owe more than the properties are worth.
The report attributes the looming crisis to failures of bank management and supervision. It says banks made loans based on property values inflated by the real estate bubble. They sometimes acted carelessly “in a rush for profit,” the report says. Banks and their regulators failed to consider the possibility of reduced consumer demand from a severe recession, the panel says.
The panel criticizes the Treasury Department and bank supervisors for not putting smaller banks through “stress tests” like those done last year on the nation's 19 largest banks. Warren notes that Treasury Secretary Timothy Geithner resisted calls to conduct public stress tests of smaller banks.
The Treasury Department referred to comments by Geithner that bank regulators routinely conduct such assestments confidentially.
Warren also noted that last year's tests gauged banks' strength only through 2010. The commercial real estate threat looms largest in 2011 and beyond.
The report says loan failures could weaken the financial system because banks that fear major losses will be less likely to lend. Economic recovery depends on the free flow of credit.
The report offers no specific recommendations. But it calls on the Treasury to enact a comprehensive plan to handle the expected crisis.
The bipartisan panel is one of three oversight bodies Congress mandated for the bailout at the height of the financial crisis in October 2008. It makes periodic assessments of how the government is managing the rescue program.
The bailouts also are subject to review by the Special Inspector General for the Troubled Asset Relief Program and the Government Accountability Office.
Thursday, February 11, 2010
You leave for a week and the neighbor’s contractor removes your retaining wall and over excavates 20-feet down. You notice your pool deck is cracking and may soon become a fixture in their yard. But don’t worry; their contractor says it’s not a problem—for he has installed multiple 2 x 4’s as shoring.
It's a rooming house. You get a single bed, table, chair and refrigerator. No closet and you share a kitchen facility. While older rooming houses dot the City of Seattle a new one hasn’t been built from the ground up for years. At $500-650/month, it’s fully leased out. Will there be more like it to come? Some say the developer used a loophole and the rooming house didn’t go through the environmental and design review like “congregate housing” normally would. Stay tuned.
Real Estate Buzz: Lenders — and tenants — like 'apodments'
Daily Journal of Commerce
By MARC STILES
Real Estate Editor
Those who doubt whether small and humble are good traits to bring to a development project haven't been paying attention to what's been occurring on Seattle's Capitol Hill, where Calhoun Properties and Kauri Investments opened Videre, a congregate-style apartment project, last summer.
The 46 units average 130 square feet. (That's not a typo.) Each comes with its own bathroom, bed, table, chair and fridge. Tenants share very basic kitchens — one for every eight units — and pay $495 to $650 per month, which also covers utilities, including broadband Internet. Videre leased up pretty much right away and today there's no vacancy. So it's no surprise that Kauri and Calhoun have been raising rents.
“Residents speak with their checkbooks,” says Dirk Mulhair, who operates Calhoun Properties with his father, Gary.
Now comes the real stamp of approval from someone with an even bigger checkbook: Sound Community Bank. It is providing permanent financing at a fixed rate of 7 percent for 10 years with 30-year amortization. These days, that's “pretty awesome,” says Kauri Chairman Jim Potter.
Despite the project's solid economics, lining up financing wasn't easy. Community banks are under pressure not to lend on commercial real estate in general. The Videre, with its tiny units — “apodments,” Dirk Mulhair calls them — and communal kitchens, is especially difficult. For Fannie Mae and Freddie Mac, which will still finance multi-family projects, the unique character of Videre put it out of their comfort zone, said mortgage broker Dan Piantanida, vice president of GP Realty Finance, the Bellevue company that lined up the deal.
“We've just never seen a product quite like this,” he said. “It took some education on our part.” Once he went over the economics with Sound Community Bank representatives and had them visit Videre, which is at 216 23rd Ave. E., the deal was done.
Piantanida said it's ironic that these days, when experts say that the region's apartment vacancy rate is headed toward historic highs, it's easier to secure standard financing for apartment projects than nontraditional multi-family developments, such as Videre and Calhoun Properties' other boarding house-like properties.
Calhoun owns a total of 140 units in the University District and Capitol Hill, including the ones at Videre it owns jointly with Kauri. All 140 units are leased, Dirk Mulhair said.
The idea of rooming houses — all that density along with what Dirk Mulhair says is their reputation as “crack-ridden, slum-lord-owned, rundown places” — is enough to scare off even the boldest of investors and the bravest of tenants. He says the key to operating a successful boarding house is a hands-on management style that emphasizes respect and dignity for tenants. “We are very customer-driven.”
Calhoun and Kauri refer to their tenants as “partners.” Dirk Mulhair says he knows every resident by name. The process of signing a lease is thorough. Properties have onsite managers and security systems, and the buildings are regularly maintained.
Residents range from baristas to white-collar professionals who live outside the city but want a place to stay when they're in town.
The formula works in good times and bad, according to Piantanida's research. Over the last five years, he says, the vacancy rate for these kinds of projects is less than 1 percent. Plus, Seattle “needs this kind of housing.”
“There's a very deep market for this kind of product,” says Potter. The key is finding in-city sites close to transit lines, grocery stores and other necessities.
Not surprisingly, he and the Mulhairs plan to build more “apodments.” Potter talks about doing three this year, and says he's talking with the Seattle Housing Authority about a project at Rainier Vista. He has another site lined up in Seattle but won't say any more about that until the deal closes this spring.