Top builder D.R. Horton dumps lots at a loss, reaps tax benefits

A few months ago, builder Lennar dumped thousands of lots at 40 cents on the dollars, thereby setting a new comp in the areas in which it had large holdings. But a major reason it did so was to reap tax benefits, thereby making it a wash from an accounting standpoint and providing it with some much-needed cash. Now it seems that D.R. Horton is doing the same, only on a larger scale. From a Wall Street Journal story:

Horton, the nation's largest home builder by unit volume, is jettisoning thousands of house lots in far-flung areas, partly to reap the tax benefits from selling property at a loss. As builders try to survive one of the worst housing downturns in U.S. history, land buyers and brokers expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other troubled housing markets. The sales also could indicate a shift for big builders: from developing huge swaths of land in the exurbs, to building smaller developments closer to metropolitan areas.

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California's Inland Empire, for $7.8 million, according to county records. William Shopoff, a land investor who bid unsuccessfully for the property, estimates Horton paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers.

(Actually, Desert Hot Springs is located in the northern portion of the Coachella Valley, which includes Palm Springs, Rancho Mirage, Palm Desert and other resort cities. In the last stages of the boom, DHS was an inexpensive alternative for new housing since it was located north of Interstate 10 and had much more vacant land on which to build. But when studying it from a real estate perspective, it's generally considered its own market as opposed to simply being part of the Inland Empire. Something tells me that D.R. Horton didn't due its due diligence on this one or hired a pliable consultant who was concerned more with the fees than the truth about long-term housing demand).

The fire sales are a silver lining in those clouds. Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund. More sales are expected soon because the companies can apply losses only to profits earned as far back as two years and 2006 was the last profitable full year for most builders.

Horton told investors in June that it expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots to a joint venture it formed with Morgan Stanley.

"There's going to be a rash of builders shedding assets," said Tom Reimers, executive vice president of O'Donnell/Atkins, a real-estate advisory firm in Irvine, Calif. "It's all tax-motivated."

By dumping land, builders are chasing cash that allows them to keep current with lenders and pay overhead expenses...

So far, most publicly traded home builders have managed to muddle through the housing mess. One reason is the builders' financing arrangements. Many such large companies have long-term corporate debt that doesn't come due for another year or two, giving them breathing room amid the credit crunch. The builders typically don't need lender approval to keep building as long as they honor certain debt agreements at a corporate level.

Most closely held builders, on the other hand, use project-specific financing, in which they need a bank's approval to start each new development. Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation's small and midsize builders will fold during the housing downturn, which has already forced such private companies as Levitt & Sons of Fort Lauderdale, Fla., and Kimball Hill Homes of Rolling Meadows, Ill., to file for bankruptcy...

Horton's recent land sales also could reflect an industry shift. Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. That contrasts with 2005, when builders bought massive parcels in California's exurbs and earned big profits as land values skyrocketed during the housing boom.

Horton, for example, is interested in buying 50- to 150-lot parcels that are already developed and closer to certain cities in the San Francisco Bay area, says a person familiar with the company's thinking.