By Lisa Marquis Jackson. As the housing industry moves from a time of great market expansion into possible correction, today's economic realities are forcing land developers and builders involved in development to become more creative in what is already a complicated process.

Clearly, the days of buying 200 acres of land, stripping it off into subdivisions, and selling home sites are waning. And supplying infrastructure is no longer enough. Increasingly, it's a developer's ability to add value, either through the approval process or a complex delivery process, that sets them apart.

The challenges facing development today demand a growing set of skills in order to tackle a seemingly overwhelming array of obstacles. Regional and local environmental issues have become amplified and often conflict. And the paradox between anti-sprawl and the resistance to high-density development wages on. As a result, the entitlement process continues to demand new levels of patience, perseverance, and persuasion. Finding and financing land have become creative exercises. To make matters more complicated, the importance and detail of these issues varies greatly by region, state, and even within cities.

"America is a huge country, with tremendous resources of land and, basically, a very productive society," says Ronald Ratner, president of the residential group and executive vice president of Forest City Development, in Cleveland, Ohio. "We've been blessed with population growth and with new populations, and those bring new demands. We have economic prosperity that demands we grow in a lot of different ways. It's too simplistic to say there is one dominant pattern."

That growth in development appears to be moving in two directions: While many big builders don't focus specifically on infill and redevelopment projects, an increasing number are diversifying and including those types of projects in their strategies, recognizing the opportunities they offer; others continue to capitalize on expansion in selected suburban areas. "I wish it was a science and it's not," says Edward Burr, president and CEO of Jacksonville, Fla.-based LandMar Group. "The development industry by itself has a lot of gut instinct to it."

That instinct manifests itself in many ways: Terrabrook, of Dallas, has diversified its business focus to include second homes, resort locations, and infill. La Jolla, Calif.-based Newland Communities is committed to varied densities and includes Traditional Neighborhood Development (TND) neighborhoods within all its newer communities. Forest City Enterprises specializes in urban development. With four strategic business units, Forest City can commit to developing all the retail, office, and residential property within one project. The Empire Companies, of Ontario, Calif., provides a rare service to California's Inland Empire -- a stream of fully-entitled, finished lots on an as-needed basis.

Developer Builders

The nation's large developers aren't alone out there. Driven by market-specific dynamics, builders continue to be involved in the developing business. In fact, fully half of NAHB's builder members indicate that they engage in some sort of land development work -- based on a 2001 member survey -- either for the purpose of building on it themselves or selling it as finished lots.

Trying to quantify that involvement through revenue percentages remains elusive. According to Marshall Ames, vice president of Lennar Corporation, that number is not available. "We run an integrated operation and there is no way to compute it," says Ames. Jim Motta, CEO of Arvida, "won't divulge that information." Fred Cooper, Toll Brothers' vice president of finance, says, "it's intertwined."

A close look at pre-tax margins is often telling. "If you're getting land profits, it'll show in the margins," says Barbara Allen, senior housing analyst with Arnold and S. Bleichroeder Inc. "Typically, those with margins in the single digits aren't getting profit from land. Those that do show margins (percentages) in the teens or up to the low twenties."

For big builders, development issues need to be addressed in two ways: through a corporate strategy and a market specific strategy. As a corporate strategy, Toll Brothers takes a significant stance on land ownership by buying and developing land wherever possible. However, in order to break into some markets, they have had to buy lots. "We're a conservative company," says Cooper. "We've structured our debt so we have no major debt maturities until 2005, and that fits the cycle of our land approval process."

According to Allen, Centex is at the other end of the spectrum, keeping land off the books whenever possible. Although the strategies are very different, neither company has ever posted a quarterly loss. "There is no perfect strategy," says Allen. "What works is when the builder has assessed and planned for the risks inherent in any strategy."

Builders and developers agree, it's all coming down to land; but for most, there seems to be no perfect formula for acquiring it. "In the mid-nineties, you could get out and buy the big pieces very inexpensively without a lot of cash up. That made it easier to do a longer term deal," says Scott Nesbit, president of Terrabrook. "It's tough to get out there and make a commitment to a huge piece of property. With land prices going up and the uncertainty of the market, it's hard to do that unless it's on a structured basis." While the structure of payment varies from deal to deal, cash up front is often replaced today with down payments and a pay-as-you-go type of arrangement.

The perception that land is a non-productive asset is spurring some creative purchasing alternatives. "We've bought land with builders, brought builders into land we've bought, and brought them into joint ventures on land development where they take the lots," says Nesbit. "We'll do more partnering on the home building side." This works when a developer brings a builder capital to help with the land on their balance sheet. For the developer, it helps combine the land development and home building profits.

Competing Together

Another phenomenon is a "co-opitition" arrangement between builders. Several builders get together and share the risk, exposure, land acquisition costs, and the land development costs. Then lots are split on the backside for the home building end. "That's happening around the country," says Burt Selva, CEO and president of Shea Homes. "In certain markets, where it is much more difficult to have the entitlement risk and the cost of land, it's happening more." Shea, Centex, and Lennar have done a "co-opitition" deal for a California Bay Area development. "It's worked out really well," says Selva.

Developers Who Make It Work

Doyle Heaton, president of Delco Builders and Developers, agrees. "We have to be very flexible to compete. We do whatever it takes to get a good piece of land." Sometimes that means creating a network of builders and "parceling things up." Jim Pugash, CEO of Hearthstone, predicts this movement is already changing the structure of the land development industry. In markets where land is really tight, the developer's profits are just about gone.

"You'll find the big, public builders are buying big pieces of dirt and basically squeezing out the developer. They don't need them anymore," says Pugash. After dividing the lots, builders often open the entire community at the same time, instead of rolling out in phases. "The big builders blow through the spec stuff a lot faster by tag-teaming."

For some, buying and holding land is still the answer. For Toll Brothers, the reasons are two-fold. "We produce the profits that some (builders) give to developers, and we give it back to our shareholders," says Fred Cooper, vice president of finance. Plus, there is the control issue. "We like to design our communities to uniquely fit our products. We can be sure to get the lot premiums that fit our purposes."

Creativity aside, one benefit remains -- the industry's assets are real. "Land is not like high-technology," says Heaton. "Land is land. If it's there, it's got real value. It may go up or down in a recession, but when you deal with land and buildings, it's for real and it's long-term."

Lisa Marquis Jackson is based in Flower Mound, Texas.

Published in BIG BUILDER Magazine, February 2003