While builders around the country are selling off land parcels at bargain prices, the nation’s third largest home improvement retailer is proceeding with plans to develop subdivisions around its new stores. Menards, a privately held company, has no earnings to report or shareholders to mollify. Owner John Menard Jr., who now operates 240 stores in 11 states, can sit on his land holdings as long as he likes. And in the current economic climate, the self-made billionaire can expand his new business model—building a store and then developing a surrounding subdivision where local home builders buy both the lots and the building materials from Menards.
“We are a private, family owned company, and we don’t have some of the issues that Lowe’s and Home Depot do,” explained Garrett Caffee, Menards’ corporate counsel. “We have ideas that they don’t have—and the resources to implement them.”
Menards currently has three active subdivisions: one in Indiana and two in Illinois. At 357 acres, the Urbana, Ill., project is the largest. Menards bought the property at a land auction in 2005. The company has been working with the city of Urbana on a master plan, still in its preliminary stages, that would devote half the land to residential use. The other half would contain a Menards store and other retail and commercial developments.
At an “informational” meeting last January, a representative from Menards showed the Urbana City Council a plan for 425 residential units, which would be a mixture of single-family homes and townhouses or condos. “It’s my understanding that [Menards] is looking for a developer to do the residential portion,” said Urbana planner Lisa Karcher. Although the subdivision plans would normally be approved separately from the necessary permits to build a Menards store, the city council is considering both proposals together, Karcher said, so Menards can break ground on their retail unit as soon as possible.
In January, Menards also had a 75-acre development go before the Warsaw, Ind., city council, which approved a re zoning request (vote: 5 to 2) that allowed the project to proceed. Menards has started construction on its new store, a 162, 340-square-foot retail unit in north central Indiana. Projected opening is the first quarter of 2009.
The residential part of the Warsaw project calls for 66 single-family homes on 40 acres. Menards has been looking for someone to buy or develop the lots, which average a quarter to a half acre in size. So far, two outside parties have contacted the Warsaw planning department, according to Jeremy Skinner, a city planner. Both were seeking to increase the housing density, a move that met with opposition from the city council, he said.
Menards has always been reluctant to compete with its customers, and this is the reason it gives for avoiding installed sales. Building houses in subdivisions is no different in the company’s eyes. “No, we don’t do any of them ourselves,” said Caffee, the Menards’ attorney. “We like to help those relationships.”
In a typical subdivision, Menards takes care of the zoning, site preparation, utilities and infrastructure. Then the company sells a group of lots to a local builder, who agrees to purchase a certain percentage of building materials for the projects from Menards.
“That’s part of the negotiation of the sale of the lots themselves,” Garrett said.
Chad Gunderson, CEO of AMG Homes, entered into just such an arrangement with Menards. The Chicagoland builder purchased 130 lots behind a newly built Menards store in Yorkville, Ill. So far, Gunderson has built 116 homes in a development called “Prairie Meadows,” where homes sell for $276,000 to $379,000. The entire subdivision, a 250-acre parcel of former farmland, was developed by Menards.
Initially, Gunderson said, there was some concern over whether Menards could service a home builder as well as other lumberyards. Yorkville is also home to F.E. Wheaton, a large LBM dealer that is now part of ProBuild. “But we’ve been very happy with Menards,” Gunderson said.
In the builder’s arrangement with Menards, he agreed to purchase “a certain percentage” of building materials from the retailer, excluding concrete and “some other items that didn’t make sense,” Gunderson said. He has talked to Menards about purchasing other lots—the subdivision also has 68 townhouse-style condos and mixed commercial approved—but that was before the building slowdown hit Yorkville.
Menards’ attorney agreed that now would be a good time to buy up land, given the rock-bottom prices offered by cash-strapped builders. But the home improvement retailer is only looking for acreage where it can build a store as well as a subdivision that will ultimately grow into a customer base. “It has to be the right circumstances,” Caffee said. “We wait for the right opportunity to present itself.”