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Taylor Morrison's House of Mirrors Jumps on IPO

Stocks in this article: TMHC XHB

NEW YORK ( TheStreet -- The market is apparently so thrilled to buy shares in newly listed homebuilder Taylor Morrison (TMHC) that investors seem reluctant to see what's behind the curtain.

Fresh on a successful initial public offering, shares of the Scottsdale, Ariz. homebuilder gained 4.7% on its first day of trading to close at $23.04.

Let's take a look at this company. First, the ownership structure warrants inspection. Taylor Morrison was acquired in 2011 by TMM, referred to as "affiliates of the principal equity-holders" in filings with the SEC. TMM then decided to make an acquisition that was rather pricey: a $1.2 billion deal for two homebuilders Taylor Woodrow Holdings and Monarch Corporation.

Then, TMM/Taylor Morrison brought in private equity managers Oaktree and TPG which each took a 49.1% stake in the company. Just prior to the IPO, this arrangement was flipped and now Taylor Morrison owns TMM. Of particular importance to investors, TMM is based in the Cayman Islands, presumably to limit taxes paid to the U.S. government. Taylor Morrison plans to build in the U.S. but call the Islands home.

CEO Sheryl Palmer says the decision to locate in the Cayman Islands was made because its Canadian partners -- the company also owns homes in Canada -- and the private equity firms have international holdings and the Caymans made the whole structure more efficient. Of course, the Caymans is also a tax dodge for U.S. wealth. It's to the U.S. what Cyprus is to the Russians.

This is important because while Taylor Morrison insists it backs the construction quality of its homes, there have been numerous complaints to the contrary. The company is facing lawsuits for using defective Chinese drywall in Florida homes, which to be fair was hard to know until after the fact. Nonetheless, that's little solace for Florida homeowners. Taylor is blaming its subcontractor and trying to get the insurance company to help pay for the damages. The Better Business Bureau in Florida has yet to give Taylor Morrison accreditation.

As recently as 2010, there were eight lawsuits in California against the company and in May 2012, an additional lawsuit was filed by Anderson Schoech in Deer Ridge, Brentwood, Calif., alleging construction defects. Palmer countered that following the housing crisis it has been difficult to get quality laborers.

The company also has a financing arm that has received numerous complaints charging that homeowner earnest and deposit money wasn't returned. These can be found at the Web site Palmer said this was not a main part of their business and they only provide financing as a service to their consumers.

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