Upside-down builders holding on for dear life

Boyce Thompson, Editorial Director for Builder magazine, has a great story now posted online at the BuilderOnline.com web site. Entitled "Upside Down," it tells the story of how banks have been working with private builders when the value of their holdings fall below the loan amounts they've extended.

For the current issue of Builder & Developer magazine, I wrote about builders taking on the banks and who insist they're not being treated fairly. According to Boyce's story, however, the larger economic fall-out may have pushed lenders as far as they can go, which will likely mean far fewer builders when the dust finally settles.

In concert with the economists who head up Beacon Economics, MetroIntelligence has increasingly been working with banks, developers and builders to re-evaluate their land holdings and operations against forecasts of regional economic conditions, and we've been finding many of the same issues with our clients. From the story:

Three years into the worst housing downturn since the Great Depression, three dozen major builders have declared bankruptcy. Yet for every builder that has gone under, hundreds more are on life support, hanging on only because their lenders choose to look the other way...

Nearly everyone in the industry knows someone who remains in business, struggling mightily to generate enough cash to pay off debt and fund operations, only out of the good graces of a lender. From a financial perspective, these companies are upside down, without the assets to pay off their debts. As we move into the winter months, with builders and lenders both starved for cash, the pace of builder liquidations and bankruptcies is likely to markedly increase...

The banks, of course, would like an immediate repayment in full of loans they’ve made. But most builders don’t have the money, or the inclination, to do this, especially if they have gone to outside equity for funds, and those equity sources are looking for a 20 percent to 25 percent return.

“That leaves the banks with only three choices,” says one builder who has been negotiating with his banks for more than a year. “They can foreclose and pursue any guarantees, which is likely to put the builder out of business. They can continue funding the build-out of the neighborhood with the hope of maybe getting full repayment or minimizing their losses. Or they can accept a discounted repayment of the debt.”

Click here for full story.

Collateral damage from unfinished new home projects

When I was recently asked by the blog L.A. Land to defend the temporary change in the tax law to allow builders to recapture taxes paid in the boom years to help them weather the bust, I did so partly to gauge the sentiments of the blog's readers. The results? A big PR headache for builders, as the mail ran 40:1 against any type of bailout.

But one of the reasons I defended the 'bailout' was because when a builder goes bust, it's not just the executives and employees who are punished -- it's also the vast army of subs and suppliers, not to mention homebuyers who were buying into what they thought would be a new -- and finished -- community. While the anti-bailout folks would casually dismiss this as Rumsfeldian 'collateral damage,' I think it's a bit more complicated than people either realize or want to know. From an MSNBC story:

As America’s housing market has foundered, homeowners who bought into newly rising projects at just the wrong time have found themselves marooned in stalled, abandoned or largely unoccupied developments with little place to turn, placing a strain on them and municipalities forced to pick up the pieces.

Experts say it’s one of the least examined aspects of the housing downturn, and one that has struck many parts of the country, from areas like Las Vegas, which experienced rampant speculation and overbuilding, to cities where construction was more restrained such as the Jersey Shore and Philadelphia...

One third of over 200 cities surveyed have seen an increase in abandoned or vacant properties in their communities as well as other forms of blight, according to a report released last month by the National League of Cities in Washington.

Nearly 60 percent said lenders have not offered to help cities deal with the fallout from foreclosures and other problems in housing.

“In more cases, cities are picking up the slack by maintaining the homes, mowing the lawns and making sure that neighborhoods with abandoned housing are safe,” said Christiana McFarland, research manager at the league’s Center for Policy and Research. “It’s a strain on resources.”

More than 25,000 vacant and abandoned properties cost eight Ohio cities at least $63 million, as local governments deal with job losses and the foreclosure crisis, according to a February report commissioned by ReBuild Ohio, a coalition of local government, nonprofit and civic groups...

Like abandoned and foreclosed homes, unfinished houses and projects are not merely community nuisances. They also contribute to the glut of inventory dragging down the market...

When fewer than half of the units in a project have been sold, the developer usually retains control of the homeowners association, diminishing the clout of residents if they wish to get things done.