Standoff between Builders & Land Developers

[gn]

I was reading this article in the UT:

http://www.signonsandiego.com/uniontrib/20070513/news_1b13develop.html

And I’m wondering:

1. Prices are going down. Builders are demanding concessions from the Land Developers. How long can the Land Developers “hang on” ?

2. If things get real bad, can Land Developers let the lots stay un-built for years ? Imagine buying a house & having to wait years before nearby lots get built.

[sdrealtor]

The land owners have held there land for many years including a long and arduous entitlement process. Most can hold on as long as they have to. Builders that own lots are pretty committed to building on them or selling them wholesale.

[Bugs]

It kind of depends on when the land developers purchased and whether or not they spent a lot of money in the entitlement process. Once their interest in a site exceeds a certain point they’re in a tough spot. They have to worry that a current retail price for a finished lot at $450k doesn’t erode to $250k or less, ’cause if it does there won’t be enough margin between the finished lot value and the unimproved value to economically justify the remainder of the subdivision process.

It costs money to hold a property. I don’t see that holding land that already has entitlements for 5 years until the market rebounds is a plan. A couple of these developers seem to think things are going to firm up this summer, but I think that’s a fools dream. MLS sales of 2,200/month vs. 18,000+ listings is not indicative of an economic environment that’s going to lead to a lot of new demand in the short term.

FYI, I just appraised a proposed suubdivision site in 92009 (Carlsbad) wherein the land developer thinks the retail value of the finished sites will be about $350,000 by the time they get done with it next year; that’s down substantially from the peak. Based on his purchase price of the site and the money it takes to get the entitlements, grade the site and install streets and utilities, he cannot break even if the retail value of the finished sites decline from $350k to $250k.

I wish him well, but inasmuch as I think housing values in that neighborhood for new homes could slide another $100k in the next 24 months (’cause that’s how long it will take to build the homes and sell the majority of them off), I fear he may not realize his goals.

[sdrealtor]

Yes it defitely depends on how long they have held the land.

[JJGittes]

Bugs, since you know the area, what is the nature of the development and grading going in just across RSF Road from San Elijo? In other words, instead of turning east on to San Elijo road, you went west instead. It looks like a large development in the making.

[sdrealtor]

JJ,
I’m surprised you dont know what that is! It’s the second phase of La Costa Oaks. Go to http://www.lacostaoaks.com and you will see it on the map. From what I have heard it is NOT in the San Dieguito school district like phase 1 was. Some of the view lots there will be spectacular. You can probably find it on the city of carlsbad site also.

sdr

[PerryChase]

I wonder how the trend of doing infill development affect the suburban lots. Infill lots are mostly ready to build without the grading and entitlement issues. From what I understand, there’s only a small time lag between purchase of an infill lot to beginning of building.

For condo/townhouse buyers, I think that infill housing is more desirable.

[JJGittes]

sdr, thanks. I only pay attention to RE as a hobby, pure rookie. Hmm, will they be in the SM school district? That is an important dividing line.

Their timing on this seems not too great. Oh well, I bet they will drag their heels building until the next ‘recovery’. Actually, they may have to so that the repo’s from phase 1, current and coming, will have time to burn off.

Al least my wife will have fun looking at a new set of mcmansion models, and I’ll score some cookies.

[sdrealtor]

if what I heard was true they will be in the SM school district. The first part of LC Oaks was the last major subdivision coming to there area so it will be interesting tosee what happens going forward with no large scale communities to be built. There are a couple small tracts i am aware of. One in the middle of LC Oaks right off RSF Rd east of the planned la Costa Town Center (instersection of La Costa and RSF). There are some nice townhomes planned for the LC Town Center. There is also some grading going on for a small tract behind the davidson homes in LC Oaks and overlooking Olivenhain.

They do have great cookies don’t they.

[gn]

“It kind of depends on when the land developers purchased and whether or not they spent a lot of money in the entitlement process.”

I wonder what this means for Del Sur, since Del Sur is still in the “early” part of the entire development plan.

Can you venture a guess ?

For example:
– 70% chance that …
– 30% chance that …

Does anyone know of any similar example from the last burst ?

[Bugs]

The entire community of Del Sur is a must-sell situation, whether the developer realizes it yet or not. This is a planned community. To even get to that point requires most of the entitlement process to be completed.

The entitlement process includes all the little sundry studies, surveys, planning, environmental impact reviews, and subdivision processes. Once entitled, a parcel only needs payment of the bonds and fees and physical improvements to finish them – a finished lot consisting of a site with grading, streets and utilities stubbed to the site; everything you need to build the structure and sell it off as a home.

They probably haven’t completed but a fraction of the roads and utilities and rough grading yet, but they’re in way too deep to just walk away. They need builders or investors to step up and take those parcels off their hands, ’cause with the current trends the carrying costs will eat them alive before the market comes back.

[gn]

“The entitlement process includes all the little sundry studies, surveys, planning, environmental impact reviews, and subdivision processes”

Does the above include putting in the sewage & water ?

“This is a planned community. To even get to that point requires most of the entitlement process to be completed.”

Can you please explain why ?

“They need builders or investors to step up and take those parcels off their hands, ’cause with the current trends the carrying costs will eat them alive before the market comes back”

Does this mean that the land developers typically borrow money to finance the entitlement process ? Is it similar to the construction loans that builders use ?

[Bugs]

The entitlement process doesn’t involve any construction, but it does involve identifying the sources of those utilities and the costs to bring them to the sites.

In the case of Del Sur, all those studies would have to have been completed well in advance of turning the first shovel of dirt. They had to amend the General Plan, the zoning, they had to resolve all the hillside and open space easements, the traffic studies, set aside land or contribute to existing schools, fire stations and other infrastructure they ould impact. The list isn’t endless, but it’s pretty long.

As for how they finance, the answer is: Yes, developers have to borrow a lot of money in order to complete these various processes. The terms of those loans are not cheap either. We’re not talking about 6% interest rates and no closing costs here. Development and construction loans are very expensive. It usually works in the form of several loans in succession over a period of years, each rolling over into another loan as a particular phase of the project is completed. The payoff of all loans usually doesn’t occur until the developer is in their final phases. All financing gets paid off before any profits are realized.

When a developer walks away from a purchase option, they not only forfeit their deposits, they also forfeit all the time and money they’ve already put ito those projects. In some cases, those “other” costs may well equal the amount of the deposit money they’re losing.

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