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The investments are off-balance sheet, their underlying assets have plunged in value and their risks are difficult to quantify. Sound familiar? Many structured investment vehicles would fit that bill. But so would the hundreds – perhaps thousands – of opaque joint ventures formed in the past 15 years by US housebuilders.
After the last housing slump ended in the early 1990s, builders began to use joint ventures to manage land inventories. That, and the widespread use of options on land instead of outright purchases, helped boost their credit ratings. But the proliferation of complicated JVs by some builders, including KB Home, Centex and particularly Lennar, is depressing their share prices and scaring off buyers of distressed land holdings. The top 15 public builders have taken $16.5bn in writedowns since the start of 2006. Of that, $1bn stemmed from JVs, according to Standard & Poor’s.
Housebuilders reveal scant information about their JVs. More worrisome is that the legal and financial structure of each is different, as is the level of recourse lenders have to the venture’s assets.
Investors are not the only ones who find it hard to gauge builders’ JV liabilities. Technical Olympic USA’s own miscalculations have brought it to the edge of bankruptcy. Tousa’s overpriced venture with Transeastern turned insolvent as the Florida housing market went into free fall. Tousa felt its liability was limited. But after lenders threatened to force it into bankruptcy to trigger full recourse, Tousa took on an oppressive $500m of debt to settle the claims.
Builders can provide more clarity on these ventures without giving away competitive advantages – and they should. Tousa’s joint venture was huge, over-leveraged, ambiguous and in a bubble market. That is a lesson in what not to do. But it was not the only builder to wade into the JV morass. Lightning often strikes more than once.