M.D.C. partnership with private builder praised

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Denver-based M.D.C. Holdings Inc., parent of Richmond American Homes, has embarked on a creative venture with a private builder in the Philadelphia area that experts say could herald a new era of cooperation between publicly traded and private builders.

Earlier this month, John McManus, on his BigBuilderOnline.com blog, described the M.D.C. deal with privately held W.B. Homes Inc. as “trend-setting” and said at least four other similar deals are in the works. McManus added that the deal allows the “voracious MDC,” to “kick start” volume in the coming months at better margins than in 2009 or in early 2010.

Can be a win-win

But whether M.D.C.’s agreement with W.B. Homes, in which M.D.C. made a down payment on 20 acres of land north of Philadelphia where it could eventually build 30 single-family homes, could be replicated in the Denver area, remains an open question. The benefit to W.B. is that with the money from M.D.C. it able to obtain a construction loan on the remaining 40 acres of the site where it plans 139 townhouses. M.D.C., with a $1.3 billion market cap, is larger than KB Homes by that metric, and is the 14th largest builder in the country based on closings, didn’t return a call to InsideRealEstateNews.com on the topic.

However, Mike Rinner, of the Genesis Group, which tracks Front Range housing market, said the concept makes a lot of sense.

“I think it can be a win-win situation,” Rinner said. “A lot of builders right now are looking for lots. In this case, they are buying them from a privately owned builder.”

Can it work in Denver?

But Rinner isn’t sure if there are privately held builders in the Denver area would have land holdings that could benefit M.D.C. and entice it to forge a deal similar to the one in the Philadelphia area.

“The Denver area and Colorado are not closed to them,” he said about M.D.C.

Peter Kudla, CEO of Metropolitan Homes, which is the developer of the Vallagio at Inverness, said that the key would seem to have adjoining parcels zoned for multi-family and single-family homes. “I would think those circumstances are far and few between in the Denver metropolitan area and the Front Range,” Kudla said. And, if the public builder is in some way involved in guaranteeing the entire project, it would have to consider what happens if the private builder is unable to perform. Does it take over the builder? Does it take all of the land, and have the the lots rezoned for single-family units?

“I think the wave of the future is going to be re-platting,” Kudla said. “You do not have to be a rocket scientists to realize that a lot of platted ground is one of the biggest challenges that banks have. If land is zoned for 50-units per acres, you might have to re-plat it to eight units an acres. Governmental agencies want to reduce sprawl with density. But the economic conditions are such that it can be a battle to do high-density projects. Let’s say you have 30 acres of ground near Highlands Ranch that is zoned for 50 units per acre. But you know there is only a market for eight units per acre. That is suburban sprawl, but it’s the only thing that the consumer will buy. So I think the public-private, joint-venture model has a place, but the public company must have an exit strategy. And that exit strategy might be to have a contingency plan for the land held by the private builder.”

But local housing consultant S. Robert August said he thinks M.D.C. could replicate that strategy by teaming up with a Denver-area builder.

“Absolutely,” August said. “There are a lot of small builders in the Denver area that are hanging on by their finger tips like Wile E. Coyote. And basically, banks already have too many bad real estate loans on their books, so regulators are preventing them from making more loans to small builders. There’s still a lot of land tied up with the FDIC and builder-developers. If M.D.C. could get its hands on some of that land, especially if it is partially or completely ready to go lots, it could put M.D.C. that much ahead of the competition. It would be a very clever strategy to grow their market share quickly.”

Also, August said he could envision that a deal could be structured in a way that M.D.C. would financially benefit in several ways. In addition to making money on the land and houses it buys, it could potentially take a percentage of the entire development, and give the private builder access to its mortgage subsidiary and design center, both profit centers for M.D.C.

Small builder starved for cash, can’t get loans

Big builders such as M.D.C. are better-positioned financially than small, privately held builders, said Gene Myers, president of the privately held New Town Builders in Denver, which builds energy efficient homes in Stapleton and elsewhere.

“Almost every public home builders I know of is sitting on cash and they have their access to debt on Wall Street that smaller builders do not have,” Myers said.

In addition, a little heralded part of TARP, Troubled Asset Relief Program, the $700 billion government bail-out plan, provided tax breaks to builders that few, if any, small builders were able to tap, Myers said. Losses builder took during the slumping years of 2008 and 2009 could be applied against taxes they paid on profits going back five years, instead of two years, under the law.

Tale of two builders

“It’s really a tale of two builders- the big nationals, and the small privates ones,” Myers said. “Basically, TARP allowed builders to take their write-offs on bad assets and dumping them, creating losses, and then going back and re-capturing their prior taxes they paid on their profits,”before the financial meltdown.

“But I don’t know of any small builders that had profits in those years, so they have no taxes to recapture,” Myers said.

M.D.C. reported a $142 million tax refund at the end of the first quarter. It also reported in a SEC document that it has about $1.8 billion in cash and securities and its net loss had fallen to $20.9 million, from $40.9 million in the first quarter of 2009.

Relationships key

While it is virtually impossible for a small builder to get traditional bank financing, Myers is not sure that M.D.C. can fill that void in the Denver area.

“Will that Philadelphia-kind of model really work in Denver? I don’t know of any small builders that have the holding that these guys (at M.D.C.) can’t go out and find a reasonable facsimile of on their own,” Myers said. But he said there might be a one-off type property that would intrigue M.D.C., especially if the head of the private company had an existing relationship with Larry Mizel and David Mandarich, the two top executives at M.D.C. McManus, of BigBuilderOnline, a Hanley Wood publication, said that Bill Bonenberger had a long relationship with M.D.C.

“I think that kind of things that might drive a deal like this one, starts with mutual trust and respect,” Myers said. “I think a lot of times that happens to be the most important asset to make these things work.”