We need new land development financing techniques

Implications: I find the most interesting news in the subject article to be an estimate of real inflation at 9.5 % per year in the first years of this century. Talk about working against some long odds in maintaining wages or keeping up with costs to build. At the same times, the Las Vegas Sun recently noted that Clark County cities are consistently falling behind in providing health, safety and welfare services by not being able to raise fees on housing construction to permit pay as you go funding. Earlier, the Sacramento Bee recently reported more or less the same item regarding Northern California counties.

Analysis: Elsewhere, changes in the money supply as offshore capital flees U.S. investment have been noted. The Saudis have stopped pegging their currency to the dollar as the money piles up in the oil rich nations. The capital markets are fearful of the results to be expected in the near term. The U.S. dominates the worldwide financial arena, but China and the Middle East are taking big positions in the equity of the exchanges and Private Equity and Wall Street. A new world order in the rankings of financial power is underway with the current changes wiping out at least part of the results of the previous century. The U.S. consumer will be challenged to keep up with his/her past living standard and U.S. businesses will increasingly be forced offshore to meet profitable growth markets. U.S. cities will seek private capital to meet infrastructure needs. Keeping the peace will require modern techniques of analysis and resource allocation like the police chiefs and sheriffs are using in the large metro areas.

The results in the housing markets from these and other financial effects mean that the capital markets now have the opportunity to recapitalize the home building business. Clearly, there are a large number of private equity funds now being organized to especially take over the development of defaulted acreage primarily in the west and the south. These opportunity funds will see significantly lower land acquisition costs than their predecessors in the previous market. But they will also see reduced staff and higher processing costs and development fees from the government. The cost of insurance as we continue to build in areas affected by hurricanes and tornadoes and earthquakes and floods is now higher since we might now have a clue regarding the underwriting of catastrophic risk. Building materials may be more dear as we have stripped the world of its easily accessed natural resources. Water resources particularly in the western U.S. will be stressed to support urban growth not to mention the food supply.

At this point, I don’t see a definition advertised from capital seekers of the way a new order in land development can be handled from a financial risk standpoint. Why is it we may think that we can crap shoot again by investing short term funds in what are long term business models? To illustrate the timing of land development, during my entire forty year career in real estate the Irvine Ranch in Orange County, California has been under development. This original +/- 88,000 acre development occupies 1/3 of the county’s area and is sited smack in the middle of the county. It stretches inland from Newport Beach and Laguna Beach coastline to the Cleveland National Forest some say 20 to 30 miles inland. Over its development life span, it has spawned a major University of California campus, a major commercial airport, thousands of acres of business park space and all kinds of housing. But it still has about 25,000 acres left which should translate into 12,000 acres buildable. This growth has occurred in one of the most remarkable markets in the history of mankind in relatively benign business conditions compared to what may be faced in the future. When it comes to 50 year or longe development plans, it seems to me that we need a new financial market to finance the acquisition and development of acreage so that the valleys can be negotiated as successfully as the peaks in land development without the anguish of defaults at the property specific level. After all, the same building professionals are going to staff the new effort as managed in the default period. They do nice work for the most part and only the interruption of poor financial planning has impeded their progress.

I guess what I’m saying is that the losses in land development should be restricted to the financial markets rather than the property specific arena in a manner which models the banking arena by putting the speculative cost of capital risk to the financial markets non-recourse to the property. It’s done to a limited extent by such profitable developers as Forest City, but it doesn’t seem to be the universal thought in land development financial planning. The risks are so huge now and come so quickly as to possibly be univesally unmanageable without such a financial system. And yet I don’t know of any single study underway to assess the land development financial markets risk similar to that undertaken for catastrophe insurance that would allow a continuation of development entities when markets require more and then less building. It seems to me that we need a better way of getting it done financially than we have in place now. Maybe our first order should be such a plan rather than now recapitalizing the problem with another problematic solution.