In 2006, things were looking good for Lennar, America’s second-biggest homebuilder. That year, before the U.S. housing market’s epic collapse, the Miami-based giant pulled down $15.6 billion in revenues and closed sales on 29,568 homes. The ink was just drying on a massive and potentially lucrative deal to transform Treasure Island with new housing complexes, and the well-connected Lennar already had secured a deal to develop the Hunters Point Shipyard that the Navy was turning over to San Francisco.
Business was booming and Lennar’s books looked good — but the financial page was about to turn to a depressingly long chapter that Lennar and other homebuilding corporations helped write.
Before the deluge, Lennar parlayed its profits — and considerable political capital — into securing the trust of San Francisco leaders, who have bestowed two major military base redevelopments on the corporation. But substantial evidence suggests that Lennar’s finances, much like Treasure Island itself, are not exactly resting on bedrock.
An examination of Lennar’s financial documents, and a raft of well-documented critical reports, suggests the company suffered especially deep wounds from a home-mortgage crisis that Lennar and other builders helped fuel through speculative over-building and their widespread issuing of subprime loans through subsidiary underwriting firms. Then, in a calculated bid to shore up its balance sheet, Lennar turned to Congress, the tax code, bank regulators and high-risk debt for financial salvation.
Lennar’s recovery strategy so far has included successfully lobbying Congress for nearly $1.5 billion in tax rebates, buying up distressed properties and partnering with the Federal Depository Insurance Corp. in high-risk investments in thousands of delinquent loans from failed banks. Rating Lennar’s corporate bonds "junk," Morningstar, one of the nation’s premier financial analysts, wrote in late May that the company "has been one of the more controversial homebuilders over the past few years because of its preponderance of offbalance-sheet joint ventures."
While all perfectly legal, Lennar’s subprime mortgage push, lobbying for tax relief and its high-risk/high-reward investment strategy raise caution flags as the company embarks on another multibillion-dollar redevelopment about which important financial, seismological and ecological questions remain unanswered.
Despite repeated requests for comment, Lennar’s sole spokesman, national Vice President Marshall Ames, chose not to speak for this story. In an e-mail response to questions about Lennar’s financial health in the housing recession, Ames wrote, "Thank you for the invitation but we do not offer comments on the subjects which you request."
A HOME-GROWN CRISIS
As the U.S. housing market crumbled throughout 2008 and 2009, Lennar found itself in perilous financial straits and sinking deeper into the quicksand of the Great Recession. More than other major homebuilders, Lennar was slipping fast: it laid off 44 percent of its workforce, lost $3.4 billion over three years, and its stock posted anemic returns far below industry averages.
In just three years, Lennar’s homebuilding revenues plummeted to $2.8 billion in 2009, 82 percent below 2006. Though revenues shrunk throughout the industry, Lennar’s decline outpaced that of top competitors such as Pulte Homes and DR Horton.
Research of government home loan data by one of Lennar’s chief labor union adversaries, the Laborers International Union of North America, shows the company aggressively promoted precarious home mortgages that stoked the growing housing market inferno.
Citing data obtained under the Home Mortgage Disclosure Act, the union’s 2008 report shows that Lennar, through its home-lending subsidiary, Universal American, increased its use of subprime mortgage loans by 157 percent from 2005 to 2006 while reducing prime loans. As a result, the percentage of riskier, high-cost mortgages the company was carrying more than doubled, from 9.6 to 22.6 percent, the second highest in the industry.
“The homebuilders’ mortgage lending was a key factor in how the builders contributed to the current housing and foreclosure crisis,” Laborers International said in an April 2009 report on foreclosures at Lennar. “The exponential increase in homebuilders’ origination of subprime and exotic loans enabled builders to continue to sell homes even after markets were overbuilt.”
While Lennar and others expanded high-cost loans and subprime mortgages, they also overbuilt and, as the union put it, “ignored real market conditions in order to maximize profits.”
The union wasn’t the only critic of the speculative building push. The National Association of Home Builders, the industry’s main trade group, acknowledged in December 2007 that some builders “were chasing the gold and pursuing the brass ring, and they didn’t heed the market warnings as quickly as they should have." Without mentioning names, the NAHB stated, "some builders were probably overly aggressive. There’s no question about that.” During this period, Lennar ranked second among U.S. homebuilders with 29,568 home sales in 2006.
MONEY FOR NOTHING
As the housing tsunami hit with full force from 2007 to 2008 and Lennar’s finances evaporated, the company scrambled to shore up its books and beef up returns to shareholders. Beyond its flagging homebuilding endeavors, Lennar fixed its sights on two key sources of income: tax refunds courtesy of Uncle Sam, and potentially risky investments in distressed debt.
Its first creative maneuver came in November 2007, two months after the company posted its largest quarterly loss in its 53-year history. Lennar secured a nifty last-minute land deal that netted massive tax relief. Just two hours before the end of its fiscal year, Lennar finalized the sale of 11,000 lots in seven states to Morgan Stanley at far-belowmarket rates, according to Builder magazine.
"By selling land at about two-fifths of its estimated book value of $1.3 billion, Lennar can apply that loss to taxes paid two years back or 20 years forward," Builder wrote. "Its tax refund could be between $250 million and $300 million.” In fact, Lennar expected to gain as much as $800 million in tax-relief dollars from the deal, the Wall Street Journal reported.
The Sunlight Foundation observed that the builders’ lobby was also "ramping up its sales pitch for a $250 billion stimulus package called ‘Fix Housing First,’ arguing that financial markets won’t recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner’s mortgage rate.” Lennar and the building industry landed a host of subsidies, not unlike the auto industry and bank bailouts.
With tax-refund dollars in its sights, Lennar pumped up its lobbying operation and its top executives plowed big dollars into congressional coffers. After registering merely a blip on the federal-lobbying radar in previous years, Lennar nearly quintupled its political spending to $1.1 million in 2009. It also tapped Washington’s revolving door, hiring a former assistant secretary of the Department of the Interior to help lobby his former agency and Congress on land and water issues.
During key months of 2009, Lennar CEO Stuart Miller flooded Congress with generous campaign contributions and "single-handedly gave more than $96,000 to Democrats in 2009, including $3,500 to Sen. Patty Murray of Washington, who chairs the Senate’s powerful appropriations subcommittee on transportation," according to the Center for Public Integrity.
Both Lennar and the homebuilding industry are a potent presence on Capitol Hill. Citing federal campaign contribution data, non-partisan Opensecrets.org noted that homebuilders "should be relatively welcome on Capitol Hill" and that the NAHB "has spread around $1.7 million in contributions over the past two years … a vital tool in obtaining bailout bucks." In 2008, homebuilders doled out $9.15 million to federal officeholders and candidates.
Lennar was the industry’s largest single-firm political contributor that year: its spending spree far outflanked that of other big homebuilders. And it paid off, big time.
In November 2009, Congress passed, and President Obama signed legislation delivering some $352 million in tax relief to Lennar for that year alone, with similar fiscal beneficence flowing to other major corporations (Pulte Homes netted some $800 million in tax refunds, while DR Horton tapped the IRS for $352 million, according to Builder magazine). Over three years, from 2007 to 2009, Lennar grabbed up nearly $1.5 billion in tax-refund money, straight from public coffers.
Lennar’s lobbying-to-tax-windfall ratio ($1.1 million spent, for a $352 million return) didn’t surprise veteran lobby monitors in Washington. “This is really what lobbying is all about, this is why every corporation in this country is represented by a lobbyist,” said Craig Holman, government affairs lobbyist for Public Citizen.
In its 2009 annual report to shareholders and the Securities Exchange Commission, Lennar acknowledged the importance of winning these federal dollars as it promotes itself as a leading homebuilder with the financial solidity to take on big new projects in San Francisco and across the nation. The tax relief enabled Lennar to dramatically reduce its 2009 losses, from $731.4 million down to $417 million — “primarily due to a change in tax legislation,” which allowed Lennar to “recover previously paid income taxes.”
The tax-relief boon, “net operating loss carryback” in fiscal parlance, came attached to unemployment extension legislation. That prompted Rep. Lloyd Doggett, D-Texas, to call it a “corporate giveaway,” according to Congressdaily.com. Even as Congress extended unemployment benefits, its gift to the homebuilding industry and other sectors would cost taxpayers dearly. A July 2009 report by the National Bureau of Economic Research estimated that the tax give-back would cost the U.S. government up to $53 billion, with the major winners “concentrated in the homebuilding, automobile, and financial industries.” The measure enabled Lennar and other corporations in these key sectors to essentially write off current losses due to the recession and recoup taxes paid in the previous five years — directly at taxpayer expense.
In a March 24 conference call on quarterly earnings, six weeks after investing with the FDIC in a $3 billion portfolio of high-risk bad debt, Miller insisted that Lennar and other homebuilders were not using the funds to build yet more speculative housing.
“These government programs work very well as a kick-start to a free-falling housing market, but it now seems that the free market is positioned to take over in orderly fashion,” he said. “While there has been a great deal of talk about potential spec building of new homes to beat the end of the tax credit," most new homes “are still being built to order.”
Like other corporate homebuilders, Lennar was poised to plow many of those tax dollars into new investments. As Miller put it, “Our improved balance sheet enables us to continue to capitalize on distressed land-buying opportunities, which will improve our operating results in 2010 and beyond."
According to Builderonline.com, a key industry information source, the National Association of Home Builders, the industry’s lobbying arm, "estimates that the carryback provision, which will cost the federal government $63 billion over the next two years by Treasury calculations, will be enough to keep thousands of homebuilding and related companies in business. The NAHB estimates that the provision will prevent the loss of at least 30,000 industry jobs."
Of all the homebuilders, none has been as aggressive as Lennar in trying to profit from the real estate crash by increasing and leveraging its debt load — buying up distressed land, properties and unpaid loans. (Management foresees its debt reaching 35 percent to 40 percent versus equity.) "Nobody else is doing what Lennar is doing. Nobody,” the chairman of John Burns Real Estate Consulting told Bloomberg News in March.
In January 2009, the Wall Street Journal reported that Lennar "has about $4 billion in off-balance-sheet debt through 116 joint-ventures, and has typically given very few details about these arrangements."
One notable example is Lennar’s venture with the FDIC, announced in February. Together they took over $3 billion in so-called troubled assets from failed banks for $1.2 billion. Lennar kicked in $243 million, a 40 percent stake. The FDIC put up $365 million, and also extended a $627 million, taxpayer-backed loan to the partnership.
Lennar management "has indicated that it will continue to opportunistically invest in these ventures, as this represents a higher-growth/higher return business than the core homebuilding business," Morningstar wrote last month. In the context of a stagnant building market, this strategy “represents a risk,” but the financial analyst remained upbeat on "the potential returns" of some ventures.
But as the distressed-debt market balloons — echoing some of the speculative investment approaches that helped fuel the housing crash and financial crisis — there’s plenty of concern among mainstream financial analysts.
"Sometimes loans can’t be salvaged," wrote Bloomberg News in 2007, citing big losses by one New York firm that was caught off guard by "higher-than-expected default rates on loans bought in 2004 and lower-than-anticipated values on foreclosed properties."
In addition to concerns about Lennar’s investment approach, two big bankruptcies might give San Franciscans pause about Lennar’s track record of bailing out of projects and leaving investors and communities in a hole.
Witness CalPERS, the giant state pension fund, which lost nearly $1 billion in a land deal with Lennar. LandSource Communities Development, a Lennar-led, 15,000-acre project in Southern California, went bust in 2007 amid the credit crunch — after Lennar sold most of its stake to CalPERS. Two years later, LandSource — itself a Lennar creation — filed for bankruptcy. Lennar then returned “to buy back, at a substantial discount, a chunk of the Newhall Ranch development north of Los Angeles that it sold for nearly $1 billion to the California state retirement system in 2007,” the Los Angeles Times reported in July 2009.
After leaving CalPERS and its partners with huge losses, Lennar reported to its shareholders that "we recognized a deferred profit of $101.3 million" on the deal, according to its 2008 annual report to shareholders.
Lennar secured an additional boon from the LandSource bankruptcy in July 2009: title to 650 acres of the former Mare Island Naval Shipyard, site of another troubled Lennar redevelopment.
The Mare Island multi-use project, which Lennar took on jointly with LNR Property, itself a Lennar spin-off, went south with the housing economy. After building and selling 500 homes between 2004 and 2006 — far short of original plans for 1,400 homes — the firms filed for bankruptcy in 2008. Having reorganized and shed debt, Lennar now controls the lucrative waterfront land.
The LandSource debacle could symbolize more than just poor investing by CalPers and smart dealing by Lennar. According to Builder magazine, Pali Capital analyst Stephen East “suggested in a research note there is a possibility that the LandSource partners could be sued under ‘Bad Boy’ clauses, claiming misrepresentations were made, since the deal deteriorated so rapidly.”
"The bigger question for LEN [Lennar] is what remains for all the other JV’s [joint ventures] sitting out there," East added. "LandSource is one of the largest and most visible, but it could well be a harbinger of things to come.”
Correction: "An earlier version of this story misstated the percent decline of Lennar’s homebuilding revenues. Lennar’s revenues from homebuilding were $2.8 billion in 2009, down from $15.6 billion in 2006, an 82 percent decline."