Distressed Subdivisions Offer Buying Opportunities

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While the recent home price collapse has been disastrous for many land developers and homebuilders, for John Long and Randy Stevenson it’s a buying opportunity.

Long and Stevenson, two L.A.-area real estate finance veterans who recently formed an investment partnership, are part of a new breed of investor: ready to scoop up distressed assets in half-completed or failed subdivisions. In the last eight months, they’ve put together a $500 million fund and completed five subdivision purchases throughout California.

And they are just getting started.

“As soon as the market recognized this was going to be a big meltdown, we increased our fund,” Long said. “We now have the money to place and we expect a large wave of assets to start trading later this year, including in the Antelope Valley.”

Long and Stevenson aren’t alone. Several private equity investment firms and independent investment groups are scouring the Southern California landscape looking for similar acquisitions at bargain-basement prices. Some plan to finish the projects on their own, while others simply want to hold the properties for a few years and then sell to homebuilders at a handsome profit once the market turns up.

To date, most of these have been in the Inland Empire and the Central Valley, but also a target has been the Lancaster and Palmdale areas, where home prices and land values have plunged more than 50 percent in the last couple of years. Indeed, in some locales, land values have fallen more than 80 percent.

That’s low enough to draw in many investors eager for a good bargain, though so far, the number of completed transactions has been relatively small.

“Just about anybody who has completed a deal has been early to the game,” said Brian Shirken, principal with Columbus Pacific Properties in Santa Monica, which has looked to buy partially improved subdivisions. “We expect the market to come to more equilibrium in the next six months and then the pace of these deals will really take off.”

One of the earliest deals occurred exactly a year ago, when Los Angeles-based Resmark Equity Partners reached a deal with William Lyon Homes of Newport Beach to buy a portfolio of 604 home sites and five model homes in 10 communities throughout Southern California for $90 million.

At the time, Resmark President Robert Goodman said his company “is actively engaged in reviewing other such land and home site acquisition opportunities.” Goodman did not return calls seeking an update.

A combination of factors has acted to keep a lid on the number of purchases of troubled subdivisions. Banks that have taken over the subdivisions from financially troubled developers and builders have been unwilling to part with them at the prices investors are bidding, fearful of having such tremendous losses show up on their balance sheets.

“They are holding out for more money,” Shirken said.

Also, with home and land prices continuing to fall, the time horizon for trying to turn a profit has lengthened, in many cases, beyond what investors are willing to endure. In other words, many investment firms were looking to make a profit in two or three years, but now see it may take five or more before prices move up significantly from current levels.

“They were setting this up on a two-to-four-year time horizon but are realizing they will have a hard time finding an exit in two to four years,” said Tom Reimers, president of Irvine-based Park Place Partners, which specializes in matching up buyers and sellers of subdivisions.

This is particularly true in places like Palmdale and Lancaster, where the expectation is that the housing market won’t recover for up to a decade.

What’s more, many private equity firms have had their own financial issues to deal with since the Wall Street meltdown last fall and have moved to the sidelines. That, Reimers said, has opened up opportunities for small groups of local investors, both for home sales and land sales.

But any deals that do get done must be completed with cash, since there’s virtually no debt financing available for land purchases in Southern California.

Still, Reimers and others on the lookout for residential subdivisions said the market for moving distressed residential subdivisions is starting to improve as banks become more willing to move them off their books.

“We’ve made offers on $2 billion in loans on subdivision projects. Over the last 18 months we’ve been spectacularly unsuccessful in getting the banks to come to terms until the last couple of months or so,” said Alex Zikakis, president of Capstone Advisors, a San Diego-based private equity firm that has bought three failed subdivisions in Riverside County and is looking in Los Angeles County.

Banks that have received federal funds from the Troubled Asset Relief Program are in a slightly better financial position so that they can start selling these subdivisions without destroying their capital ratios. Some banks are also facing pressure from federal regulators to clear these projects off their books, Zikakis said.

The other key ingredient is a better sense of when the market will hit bottom. Many economists now expect that point to be reached in the next six to nine months.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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