Large homebuilders recouping housing boom-era taxes and eking out profits

Tax gains drive profits for homebuilders

LOS ANGELES — It’s tax season, and the IRS is being particularly generous to some of the nation’s largest homebuilders.

Several publicly traded companies, including Lennar Corp., Hovnanian Enterprises Inc. and Pulte Homes Inc., expect to rake in roughly $2.5 billion in federal tax refunds combined, according to company filings.

Lawmakers amended the tax code last fall to help struggling companies stay in business by essentially giving them a greater opportunity to recoup previously paid taxes. The move has helped some of the biggest builders turn a profit for the first time in years.

But some small builders say the souped-up tax break is primarily giving their large rivals yet another competitive edge. That’s because the latest windfall looks less like a lifeline and more like a war chest. Several large builders are now sitting on more than $1 billion in cash and are snapping up tracts of land to be ready for the next building boom.

“These public (builders) sold hundreds of millions of dollars worth of land and took huge losses and wound up with hundreds of millions of dollars of checks from the government sitting on their balance books,” said Ken Endelson, CEO of Kenco Communities in Boca Raton, Fla. “It was a real bailout. No different than the banks.”

In November, Congress passed a law that lets companies of all sizes that are losing money reach back five years and get a refund for taxes paid when they were making money. Previously, large companies were limited to recouping taxes paid up to two years earlier.

That extension was a boon to builders because the economy and the housing market were flying high five years ago and they couldn’t put up new houses fast enough.

“They were earning bubble profits back then,” said Credit Suisse analyst Nishu Sood.

In recent weeks, builders have reported quarterly results that include the gains they expect to receive from tax refunds.

Among those to post a profit were KB Home, Lennar, Hovnanian, D.R. Horton Inc., Beazer Homes USA Inc., Ryland Group Inc. and Meritage Homes Corp.

Pulte, the nation’s largest builder, lost money in its fourth quarter despite an $800 million tax benefit.

Hovnanian, which is based in Red Bank, N.J., earned $236 million for its fiscal first quarter — its first profit since 2006. But without a $291 million tax benefit, the company lost about $55 million, or 69 cents a share.

Several companies already have received all or part of their federal tax refunds, and some also expect to reap state tax benefits.

Without the tax gains, it’s unlikely most of the builders would have turned a profit because new home sales are still near record lows.

Government efforts to prop up the housing market, such as two tax credits for homebuyers, helped drum up orders last year. But most builders have said sales remain weak, so they’re bringing in less in revenue.

To stay afloat, builders laid off thousands of employees, halted developments and generated cash by selling land at sharp discounts. That led to losses they are using to collect tax benefits now.

It’s not clear how much the expanded tax break is affecting small builders that aren’t publicly traded. Data on the size of tax returns collected by private firms the last couple of years isn’t available yet.

The National Association of Home Builders, which lobbied for the change in the tax code last year, said the tax break is aiding all builders.

“It’s helped a lot of balance sheets, whether you’re big or small,” said Joe Robson, the trade association’s immediate past chairman. But he noted large builders have always had an advantage over smaller companies.

Sood, the Credit Suisse analyst, estimates that a dozen of the publicly traded builders paid about $8.5 billion in taxes between the booming years of 2004 and 2007. As of November, the builders had recouped $3.7 billion in refunds.

At the current pace, the large builders combined are on track to recover at least $6 billion in refunds.

Analysts say the tax refunds have allayed bankruptcy concerns for Beazer and Hovnanian. For others, such as Pulte, Lennar and D.R. Horton, each with more than $1 billion in cash reserves, it’s given them more financial elbow room.

That worries smaller builders like Michael Sivage, CEO of Sivage Homes, which builds homes in Albuquerque, N.M., and San Antonio, Texas.

“They have access to cash, some of which is from (tax refunds),” he said. “They’re taking commanding market share.”

Many large builders have been buying up developed home sites, often from banks that have repossessed the land from other builders unable to make loan payments.

It’s a smart move because the land is cheaper now and homes built on it can be sold eventually at a higher profit. The bigger companies also can afford to wait out the market better than smaller builders.

In addition to soft sales, local builders continue to grapple with tight-fisted banks and loan payments on land worth less than they paid for it. And those loans prevent the companies from selling the property at a loss to qualify for the tax benefits.

“We don’t have the ability to buy a bunch of property right now at a discounted price like (large builders) do,” said Mick Galatio, owner of Desert Wind Homes in Las Vegas. “They’re really getting a jumpstart on the small, private builder and we’re going to have to work very hard to try to compete with that.”