US Financial Corporation, and its land office business

"Essentially, the land developers buy huge quantities of undeveloped land in Florida, Arizona, California, and other exotic sounding sunshine states. They then turn their agents, brokers and salesmen (and sales ladies) loose on vacationers who are in a mood to speculate on land values and on those dreaming of a retirement haven at the end of the rainbow. The sales techniques might well serve as a basis for movie scenarios...the hard sell after a day's outing by plane, boat, bus, with luncheon or dinner thrown in."
Abraham J Briloff, Unaccountable Accounting: Games Accountants Play, page 164, in describing the late 1960's and early 1970's land office business.

Typically, the contract of sale for those speculating on land value called for a fairly small up-front payment to the developer, the remainder payable over a longer term, often up to 10 years, in small monthly payments. For the developer company, accounting rules allowed for some interesting sleight of hand. The developer, quite legally, was permitted to count as revenue, the full value of the contract of land sale, in the year the contract was signed. As the 1960's progressed, a trend developed. It was seen that such accounting could produce for a company quite a lovely set of books, that when tallied for shareholders as distinct from the tax department where naturally the contract revenue was only reported when actually banked presented a robust picture of a growing business.

By the end of the 1960's, reports Briloff: "This combination of front-end loading of income and the exaggeration of the amounts being recognized, produced a most ebullient financial picture making these companies the 'love children' of 1969." (Unaccountable Accounting, page 163.) This wasn't the only accounting trick available to land developers either.

Land companies could, and did, claim as a deduction for tax purposes the expenses of interest or any property taxes payable on the land they were banking for subsequent development, though in reporting this to shareholders, such expenses became 'pre-paid', qualifying them as an asset of the business, not an expense, further enhancing the year's 'profit' figure.

This is what Penn Central was doing in its chase of Great Southwest Corp, with its interests in property; gerrymandering and contriving earnings, if Briloff's case is to be believed. (See page 217 for the nitty gritty, which will not be further detailed here.)

In the case of US Financial (USF), the corporation was doing all the same things mentioned above and more. USF was a builder of homes. From its 1971 prospectus, the corporation noted: "USF conducts a significant portion of its single-family home production as a participant in joint ventures. Typically, USF's joint venturer is an independent general contractor and developer who is familiar with local industry conditions and regulations. Such joint venturer contributes half the equity capital (which may be borrowed from USF, if secured by the pledge of collateral), his skill as general contractor and administrator of the project, and, in some instances, the land to be developed. USF typically invests the remainder of the equity capital and provides interim financing and related services. USF controls the design of construction, the rate of development, cash disbursements and accounting, and preforms a wide variety of other related services. At December 31 1970, USF was a participant in 67 joint ventures."

With some joint venture accounting tricks of the time, USF was able to rather than use consolidation principles account for any profits using joint venture accounting rules, but at the same time put the risk of any failed developments back onto the joint venturer and not USF itself. A failed development could therefore avoid disclosure to shareholders in other words. All done, often legally, to overstate income, inflate the earnings per share and hence underwrite the stock price. The tricks were uncovered towards the end of 1973.

Further References:

Briloff, Abraham J. Unaccountable Accounting: Games Accountants Play, Harper and Row, 1972.


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