UNITED KINGDOM-BASED TAYLOR Woodrow Homes arrived in the U.S. in the 1930s as a builder and developer. To this day, the company's North American division, based in Bradenton, Fla., develops a “significant portion” of the lots it controls. But CEO John Peshkin also notes that his division continues to have “very good long-term relationships” with developers such as The Irvine Co. in California. “We're very comfortable purchasing finished lots,” he explains. “But you can't build your business around buying finished lots because there aren't enough of them.”

That inventory shortfall can be traced to the late 1980s, when overleveraged developers fell by the wayside in serious-enough numbers to raise concerns about the viability of developers in general. The developer shakeout through the next decade forced builders to develop land themselves to ensure they had sufficient inventories to meet their production and sales goals. As growth-minded builders have amassed land assets to avoid being hamstrung by entitlement delays, the line separating them from developers “is blurring,” contends Dennis Gilkey, CEO of Bonita Bay Group, a Florida-based developer. Few of his counterparts would likely dispute Gilkey's observation.

Large builders are morphing into complex entities to meet the demands of a housing market defined by shifting demographics, and the availability and expense of land. The frantic pursuit of choice real estate can make adversaries of builders and developers in one deal, partners in the next. Their mutual self-interest lies in their efforts to learn what buyers want today, and what they'll want in the future. On that plane, the indispensability of developers to builders lies in the quality and breadth of the market research that informs the design and marketing of their communities.

“We help builders understand the psyche of the buyer [as well as] understand the lifestyle of the whole community,” says Bob Karan, president of Symphony Development Group in Owings Mills, Md. Gilkey adds that his company is, “looking at where the neighborhood will be five to seven years from now, [whereas] most builders only want to know where the market is today.”

Prove Your Worth Developers concede, however, that validating their worth is a full-time job these days, as more builders become comfortable with and even adept at developing the property they control. WCI Communities, for instance, has long been a hyphenated entity, a developer that builds homes. The Drees Co. develops about two-thirds of the land it controls in Cincinnati, its headquarters market. And Toll Brothers, which builds in 21 states, develops “at least 75 percent” of the land it controls, says senior vice president Doug Yearly.

Novi, Mich.-based Crosswinds Communities develops most of its entitled land in four of the seven states in which it builds, including its 865-acre, 7,000-lot Bellevue Ranch master planned community in Merced, Calif., that Crosswinds will build out with Kimball Hill Homes, California Homes, and Ryland Homes. “We made sure that we had ‘show and tell' meetings with each [builder] to see its site plans, because there are different sized lots for different builders,” explains Crosswinds' CEO Bernie Glieberman.

“I don't know of any major builders that don't have development departments that either go over developments or do their own,” says Jim Kraft, a former site acquisition manager for Pulte Homes who now is a Miami-based land broker. John Burns, the California-based real estate consultant, has seen a shift in builders' senior-level management from being primarily comprised of entrepreneurs and dealmakers, “to MBAs who prefer to spend money on research before spending $50 million on land and infrastructure.”

Some developers may wince when they hear builders talk of land development as another profit center. But builders insist that developing provides them with the land-flow flexibility they need to sustain their expansion. “Merchant building is not the model that builders are adopting today,” says Scott Stowell, president of Standard Pacific Homes' Southern California region, which develops about half of its entitled lots. “Land development for us has become a core competency, and is particularly relevant in California, where controlling land is such an important asset.” In 2004, Standard Pacific entered into a joint venture partnership with St. Paul Insurance and Institutional Housing Partners to develop the Black Mountain Ranch community in San Diego, where the first finished lots should be ready for sale by mid-2005. (Standard Pacific can purchase 1,300 of the community's 3,000 lots.)

Stowell once worked for The Irvine Co., and he's quick to point out how developers remain integral to the housing market's vitality. He cautioned that developing land can be disadvantageous for builders when they must reconcile their land management division's profit prerogatives to generate the highest yields from finished lots with their construction division's objectives to build on developed lots at the quickest pace and lowest cost. As the entitlement process takes longer and longer to complete, builder/developers also risk having land assets lingering on their balance sheets at a time when their companies must adhere to stricter asset-reporting requirements.

“Under FIN 46, we're pretty popular,” says Ralph Grebow, CEO of The Atlantic Co., an Iselin, N.J.-based land acquisition and development firm, referring to the recent accounting rule that redefines how public builders report what land they control. Atlantic's builder partners select the land it purchases, develop it, and sell it to them under what Grebow calls a “structured plan payment, so builders can take down land at their own speed.”

Learn more about markets featured in this article: Los Angeles, CA.