A rift between the nation's largest home building companies and the National Association of Home Builders regarding lobbying strategy is threatening to grow into a schism that could greatly weaken the organization.
Executives at the nation's largest home builders, which account for more than a third of all new homes built in the U.S., have stopped short of publicly threatening to leave the association but have become vocal critics of the NAHB's effort on Capitol Hill. The NAHB would not disclose the percentage of its revenue that is derived from the dues paid by large production home builders.
The rift is evident on both sides. Earlier this year, an ad hoc group of financial executives from big builders, including Beazer, Centex, Hovnanian, KB, Lennar, M.D.C., M/I, Meritage, Orleans, Pulte, Shea, Standard Pacific, Toll and TOUSA hired an independent lobbying firm, C2 Group in Washington, to represent them, a move which angered NAHB CEO Jerry Howard.
Among the issues cited by big builders is the NAHB's failure to get Congress to agree to include a tax carry-back provision in either the original housing stimulus bill passed last year or the housing relief legislation now making its way through Congress. Such a provision, dubbed NOL, short for Net-Operating-Loss Carry Back, was included in the original version of the housing stimulus bill in the Senate but was stripped out following protests from labor unions, environmentalists and other special interest groups that claimed it was a taxpayer-funded bailout of the biggest home builders in the country.
The bill also includes a limited tax credit for first time home buyers that Congress has targeted to low and middle-income people who could not likely afford homes in the markets that are suffering the brunt of the downturn, which, coincidentally, are markets in which the big publicly held home builders have a large presence. Moreover, as it has to be paid back over a period of years, it is not really a tax credit. Some in the home building industry believe that, as it stands, the provision would do little to help end the housing downturn.
"It wasn't life or death for us, but it [NOL] would have been nice for everyone," said Albert Pisanelli, corporate tax director for Orleans Homebuilders. "[NOL] is not a giveback by any stretch, it just accelerates the refunds that we would get anyway in the next four to five years to a time when companies need it more than they will when profits are on the upswing. It's a time value of money issue."
Regarding the lobbying and public-relations effort, Pisanelli said, "People missed the mark. There was so little substance to what they were saying, and that's at a time when we could have worked hard to put forth a more balanced story. Unfortunately, the powers that be had another agenda."
NAHB's Howard puts the blame for the failure of the tax carry-back provision squarely on the outside lobbying firm (Q&A with Jerry Howard) . "Virtually every industry that is represented in Washington, which is probably every industry in America, is successful when they speak with one voice and there is a unified, solid message," said Howard. "Virtually any industry fails in Washington when they have more than one principal spokesman representing them on the Hill because it's easy to divide and conquer that way."
At the beginning stages of the economic stimulus plan development, NAHB was touting a three-pronged effort that included a tax credit, FHA reform, and NOL. It was dubbed 'Buy, Borrow, and Build.'
"We need the tax credit for the customers to be able to buy, the FHA reforms so the customers could borrow, and the NOL carry backs for the industry to have the capital to build homes," said Hovnanian Enterprises CEO Ara Hovnanian. "We still believe that was the best solution, but we also recognize political realities and budgetary constraints."
But the stripping of NOL from the Senate Bill was not the only recent issue that put the large public builders at odds with the trade association. In February, the NAHB announced that it would freeze PAC spending for congressional campaigns until legislators came to the aide of the housing industry, an unusually bold action that raised eyebrows in Congress as it came perilously close to a potentially illegal quid-pro-quo.
According to sources involved in the discussions, unaware of the association's planned stance, several big builder executives were already in discussions with three ranking Democratic senators about support for housing legislation just prior to the announcement.
"No one told us," said Steve Hilton, CEO of Meritage Homes, one of the big publics. "No one asked us what we thought. It has nothing to do with the issue of NOL, but it goes to the fact we aren't totally in sync with our trade group."
"I don't think this is the tipping point, but I think there are a whole host of issues that big builders are carrying the torch on and not getting credit from the small builders," said Hilton. "There is storm water protection, construction defect litigation, entitlement issues, Florida Hometown Democracy--it goes on and on. We are spending a lot of money lobbying these issues, and I don't think we are getting like-kind contributions from the small builders who are still building more than 50% of the houses in this country."
From the beginning, within NAHB, big and small builders were divided over the NOL issue. "The broader (NAHB) membership doesn't understand the NOL provision and they don't have the inventory that the big builders are carrying--so they have a whole different profile," said a source close to congressional leaders who would not speak for attribution. "But on a macro basis, what Congress cared about was, here are a relatively small number of builders, the publicly traded group. If we could help them, it has a massively stabilizing effect on the housing market and the economy."
Smaller and medium private builders had something to gain as well, depending on their company's structure. "Some privates are set up as an S Corp, and they have flow-through to owners. So, NOL wasn't as big an issue," said Pisanelli. "But any company that has shareholders and is established as a C Corp could potentially benefit (from NOL)."
For the time being, public builder executives are looking to the High Production Home Builders Council of the NAHB, which includes 17 of the big builders, to represent their interests. It was at an early May meeting of the council in Scottsdale, Az. that the NOL issue came to the forefront. Howard flew in to speak to the CEOs and represented to them that there was no support for NOL in Congress. He urged them to stand down on the issue and concentrate on getting substantial improvements to the tax credit, something that would directly stimulate demand.
"If it is a choice, NOL or the tax credit, we want the tax credit," said Hovnanian. "We continue to believe that both are best, but if one was faced with a choice, then that's the best one."
NAHB subsequently dropped its support for the NOL provision. But the tax credit that is taking shape now is less favorable to big builders than was expected.
"Am I disappointed, sure," said Hovnanian. "Again I would have liked both--or if we gave up NOL, I would have liked to have doubled the tax credit. But I have no real idea if that was possible or conceivable."
"I am not happy with the tax credit, but it's my understanding that it's the best we could do, said Hilton.
"It does highlight the need for tighter coordination with NAHB and the High Production Builders [Council]," said Hovnanian. "I haven't been that involved in the past, but from what I hear there is room for improvement. So the question is: Does one abandon it or strive to improve it? I would say improvement would be the way to go at the moment."