David Clark

Ennis Homes was on course to flourish in 2005. Riding the crest of the housing boom, Brian Ennis’ Porterville, Calif.–based company had built new division offices in Fresno and Bakersfield, Calif., and bought enough land to grow from doing 300 to 500 homes a year into a 1,000-unit-a-year juggernaut.

But before Ennis opened in Fresno, the market went south and the company had to shutter it and the Bakersfield division and retreat back to its headquarters office.

“We had all the office furniture, computers, we had a phone system, we were wired in so we could do video conferencing—we were ready to rock and roll,” Ennis, the ­company’s president and CEO, says in a monotone. “We had to shut it down and never even moved in.”

In two years, Ennis Homes shrank from a company of 130 employees and $140 million in revenue to a staff of 50 with revenue of maybe $50 million—as bare bones as he could make it, Ennis says.

But as he watched the market nosedive in 2006, Ennis would have made an even more drastic move if possible.

“If we could have just pressed the pause button and stopped, we definitely would’ve done that and then come back when things improved,” Ennis says. He thinks cocooning would have been an option but for all the land the company bought in preparation for its growth plans, and the bank loans it took on to make the purchases.

Cocooning, an idea pitched by numerous industry consultants over the last 12 months, would have a builder fire almost all its staff, sell off all or almost all assets, and suspend operations until market activity improves. The builder, who might spend the downtime shopping for land deals using money gained by selling off assets, could then rehire staff or hire new staff, buy distressed assets, and resume operations when the market started to improve.

Such a move is not for everyone. Ennis, in order to keep up with the company’s debt payments, is planning to build through the down cycle. He will sell off commercial property the company has developed, as needed, in order to keep the home building operation afloat.

One major reason he decided against shutting down, even temporarily, was family.

“We’ve been at it a long time, and our vision was that this is a business that was going to be generational and carry on into the future,” he says. “So it’s very difficult to just pull the plug and stop.”

Which builders can cocoon depends on where their debt is, how many people they employ, and how many on-going projects they have. In particular, if a builder has debt with banks, it may be nearly impossible to suspend operations, unless the banks are willing to take less than what their loan is worth, an unlikely proposition.

“They need to be dealt with, and they like to be paid,” says Steven Friedman, Ernst & Young’s national director of housing. “So the question is, do you pay them off in part? Do you pay them off at a discount? They’re not going to allow you to sort of cocoon the operation without dealing with them on a real-time basis.”

Large public builders, which have Wall Street debt, might be able to cocoon divisions—keeping one person in a market while the company otherwise pulls out. But a ­public builder has far too much inertia to stop building entirely, not to mention stockholders who would never stand for it.

Medium-sized builders, such as Ennis Homes, may be in the worst position to try cocooning, and banks are the reason. Truly small builders, those doing just a few homes a year, may be in the best ­position to make such a bold move.

“It’s easy for a small-volume builder because you have a superintendent, a bookkeeper, and yourself,” says Chuck Shinn, president of Littleton, Colo.–based Shinn Consulting. “You don’t have a whole bunch of land or a whole bunch of land debt.”

But no matter the size of the builder, there will be complications. Even an operation that has been shuttered must have somebody to manage lingering aspects of the company: watch over assets not sold off; maintain owned office space; manage warranty issues; and handle post-employment and insurance benefit problems of former employees. There’s also the matter of ­having to pay off all the costs incurred while closing up shop.

“There are lots of issues to think about, it’s not a simple process,” Friedman says.