How one builder is coping with the big down-market
Menlo Park, Calif.
Leslie B. Nelson never does anything on a small scale. From the more than 15, 000 condominiums, town houses, and single-family houses his company has built over the last 20 years to his status as one of the busiest developers throughout the West, the 6-foot-5 builder always goes after business in a big way.
Today, however, a depressed housing industry threatens to curb the large-scale style of the L. B. Nelson Corporation. Housing production nationwide has declined steadily since 1978, the National Association of Home Builders (NAHB) notes, making the three-year period the largest postwar building slump on record.
Housing starts in 1981 are at the lowest level since 1946.
To meet these challenges, Mr. Nelson has come up with several innovative and instinctively large-scale programs to spur home buying. These includes:
* A sale-leaseback program with built-in incentives for both investors in, and renters of, condominiums.
* Cooperative ventures with Western cities issuing mortgage-backed, tax-free bonds.
* The purchase of land that is available at bargain prices and for which the closing can be extended over the next six to 18 months.
* Diversification, through acquisition of an Oregon energy research and development firm.
* A 40 percent reduction in overhead, including staff cutbacks.
Under the sale-leaseback plan, L. B. Nelson Corporation sells blocks of condominiums to investors, then manages them as rentals for five years, after which they may be resold.
Tenants may rent the units with a purchase option, under which they will pay a monthly premium in addition to their rent. When they decide to buy the unit, the premiums will be deducted from the purchase price.
The program was first applied in September in Reno, Nev. The $3.5 million condominium project was a huge success -- just the kind that Les Nelson likes. All 53 condominiums were rented three weeks before the closing of the investor sale.
The sale-leaseback program, Nelson explains, ''is mutually beneficial to the investor, renter, and developer.'' It takes advantage of new tax laws which provide for more liberal tax deductions. Investors receive depreciation benefits as well as equity appreciation.
Nelson's plan also helps investors realize a positive cash flow. George McCown, chairman of the policy advisory board of the MIT-Harvard Joint Center for Urban Studies, says: ''With the high costs of building and of mortgage rates , investors typically are looking at a negative cash flow before taxes.'' Yet, he adds, the equity appreciation and the lease payments the Nelson program offer can often convert this negative cash flow into a positive one.
Renters benefit from the plan as well. They can move into a condominium and wait until interest rates come down even more before purchasing the unit. Even with the option premium, their monthly payments are several hundred dollars less than they would be on a home mortgage.
Part 2 of the L. B. Nelson Survival Kit involves a new twist to an age-old concept. The company is working with several cities to issue mortgage-backed, tax-free bonds at below-market interest rates of 121/2 to 123/4 percent.
The company's third program is a strategic plan to purchase land at bargain prices.
''We put down a modest deposit on land with potential,'' Nelson says. ''We handle all the planning and city approvals, and then negotiate with the purchaser for a closing six to 18 months away. This way, we're able to use a small amount of money to control a large amount of land.''
L. B. Nelson is also expanding through diversification. Two years ago the company acquired Advanced Energy Systems Inc., an Oregon research firm that is developing a stored hydraulic energy propulsion system for use in trucks, buses, and cars.
Diversification and modification programs such as these have been unavoidable in an industry which Nelson describes as ''the worst I've seen in the over 30 years I've been connected with the business.'' NAHB figures, which show the failure rate of contractors to be up 40 percent over 1980, confirm his statement.
Yet the builder remains encouraged by one fact: Demand for housing is at an all-time high, he says. US Census Bureau figures show that there are more young people than ever before in the house-buying age bracket between 19 and 30 -- some 50 million of them.
''These people need housing,'' Nelson asserts.
''We're trying to position ourselves for 1982 and beyond,'' he adds, when the NAHB forecasts a 30 percent rise in housing starts.