Participants in the Big Builder '08 Land and Design workshops were tasked with nominating three opportunities to improve profitability in their business discipline; that discussion led to the identification of rebooting, restructuring, and reloading as the essentials in securing the best locations, which would in turn drive profitiability.
RCLCO managing director and CEO Gadi Kaufmann offered the following military analogy: “Now we are in the heat of the battle, with the field before us covered in fog, smoke, and fire. We need to protect our base, but not make any bold moves. We have to let the dust and smoke settle, and then reload.”
TO HOLD OR FOLD Many builders are faced with the question of what to do with the land they currently hold—whether owned or optioned.
“This is the lowest hanging fruit, and offerings need to be better in line with immediate demand,” said Kaufmann.
While new or more in-depth market analysis may be needed, the larger problem that currently looms is the fact that some builders hold land in the wrong location, with the wrong product for the wrong price, said Peter Tremulis, principal of Sunesta Resort Communities. In his opinion, builders need to rate and rank all properties on the balance sheet and prioritize capital spending to survive in a repositioned mode.
“Many existing projects focused on larger lots and homes that do not support the falling incomes and financing qualifications in today's difficult market,” noted Jim Harvey, president of Kotler Land Partners. “New, simple, efficient home plans that meet customer needs and fit into a total price point that customers can qualify for today are critical to selling through existing land.”
The possibility of mothballing projects was tossed around, yet it was found to be a feasible option for public builders as opposed to smaller, private ones. For the publics, mothballing is most likely a better option if there is no motivation to sell for a tax carry back, as they are in the position to sit and wait the market out thanks to longer term financing. Private builders, Tremulis said, don't have the luxury of waiting because the banks won't allow it; there is no middle ground.
REALISTIC RENEGOTIATION Once the initial analysis of current holdings is completed, the Land and Design team identified restructuring of financial positions using creative, outside-of-the-box methods as the next logical step.
“Lenders are much more willing to workout a loan if the builder can continue to make sales and progress in the projects versus taking them back and getting pennies on the dollar,” said Harvey.
One significant overlooked opportunity is to have a company's finance department work with the land team to rework current deals, bringing a cross-functional thought process to the table. With the typical finance team being comprised of a younger demographic than the typical land team, those in finance most likely weren't around during the last housing downturn, so the land team may have to step up to deliver a sorely needed history lesson.