In early October, The St. Joe Co. chairman and CEO Peter Rummell initiated a restructuring program that would transform the Florida-based company from what he called an "end-to-end" developer to an "asset-light" land bank. The transformation calls for shedding some non-core assets; ceasing the day-to-day operations of its hospitality, recreational, and golf assets; and moving roughly 500 employees off its balance sheet.

In a note to investors, analysts at Raymond James & Associates called the the transition "a prudent decision," but noted that it underscores "the depressed market conditions St. Joe is likely to face for an extended period of time."

But St. Joe is hardly alone in feeling the pinch from the housing market's slump. Builders have all but stopped buying land, and, in fact, many are trying to shed lots as impairment charges continue to crop up like blemishes on their balance sheets. This radical shift in the business has many developers scrambling for solutions to the difficult riddle of how to turn their land inventory, signaling the start of significant resets in land values.

Albert Praw, Landstone Communities' CEO, says he's seeing builders retrench to merchant builder models. Sacrificing potential land profits to lower land risk, they're moving to buy just-in-time lots rather than developing parcels themselves. With fewer builders competing with developers for prime parcels, "what that provides to some of us [developers], particularly the well capitalized, is the ability to buy land at values we haven't seen in several years," Praw says.

However, for the developers with lots to sell today, the pressure is on to rethink land sales strategies. Those unburdened by a heavy debt load or impatient equity investors can afford to reposition their communities, amend amenity offerings, scale back infrastructure, or re-phase development. However, others have to make more drastic moves, sometimes going so far as to seed community development themselves by introducing their own home building arms.

Randall Lewis, a principal with the Lewis Group of Cos., says, when under pressure, the simplest thing for developers to do is offer builders better terms on land deals, either in terms of price reductions or more flexible takedown agreements. If that doesn't work, many will try to entice builders with a joint venture. A developer will often provide a builder with a lot or agree to financ the construction of a home on a particular lot, if the builder takes care of the construction and sales process and then gives the developer a portion of the profits on the home sale.

"More extreme is hiring a builder on a fee arrangement," Lewis says. In this type of transaction, a developer will pay a builder a flat fee to build a home on a lot, assuming all the risk if the home doesn't sell and taking all the profits if it does.

Because of the heightened risk involved, Praw sees a fee arrangement as a strategy of "last resort" for developers.

Neither Lewis nor Praw say they are hearing about this type of deal being put together today; however, they don't discount it from happening in the future, particularly if the market continues to deteriorate. Fee arrangements became a strategy often used by distressed developers in the last down cycle.

–Sarah Yaussi

Mortgage Misconduct

Beleaguered Beazer Homes uncovers federal law violations in its mortgage arm and internal accounting irregularities.

Investigators recently turned up evidence that employees in Beazer Homes USA's mortgage arm violated federal rules related to FHA-backed loan origination. The violations reach back at least as far as 2000 and pertain to employees' handling of down-payment assistance programs for FHA loans. Company officials would not elaborate on the findings.

Management estimates that a settlement with regulators could cost between $8 million and $15 million; however, that figure excludes the potential costs of subsequent civil lawsuits, reimbursements to affected buyers, and repayments to mortgage purchasers or HUD.

Forensic accountants also unearthed accounting irregularities that require the company to restate earnings from 2004 on.

Beazer accountants put more reserves and accrued funds into land development costs and the costs to complete closed homes than would have been appropriate under generally accepted accounting principles. Those funds were "partially and improperly" released into income during 2006. As a result, pre-tax income will increase by more than $25 million for past years, but pre-tax income will then decrease for fiscal year 2006 by $20 million.

Accounting errors related to Beazer's model home sale-leaseback program will reduce 2007 pre-tax income through June 30 by $20 million, which will reappear on the balance sheet in future periods.

Executives also announce that Beazer will put down $108 million in cash plus other company assets to collateralize its revolving line of credit.

Management renegotiated with lenders after the company violated covenants by not issuing a timely financial report for the quarter that ended June 30.

–Teresa Burney