How Low will it Go?

How Low will it Go?

CEO Q&A by Jean Gruss | Editor/Lee-Collier

Bonita Bay Group Chairman David Lucas says homebuilders and developers should be prepared to weather a downturn that could last two years.

As a leading Southwest Florida developer, David Lucas sensed the looming homebuilding downturn and started preparing for it two years ago. Lucas, the chairman of Bonita Springs-based Bonita Bay Group, sat down with the Review recently to discuss the downturn, its impact on his company and when we might see the market come back.

Despite the downturn, Lucas says homes are still beyond the reach of many professionals. He is particularly concerned about affordable housing for teachers, and he recently assembled a group of prominent Lee County executives to tackle the problem. Other participants include Chico's Charities, Oswald Trippe & Co., Southwest Florida Community Foundation, Gates-McVey Communities, Colonial Bank, Steve and Kathy Shimp and Alan Freeman.

Working with the Lee Housing Development Corp., Bonita Bay Group bought 50 condominiums from Lennar and plans to offer qualified teachers interest-free loans of as much as $50,000. The loans won't have to be repaid until the home is resold.

Here are excerpts of the conversation with Lucas:

How serious is the housing-affordability crisis here and why are you taking the lead to help teachers find affordable housing?

In 2005, the average resale price of a house in Lee County went up 50%, so we're pricing a lot of professional people out of the market, and teachers are chief among them. The average resale price of a house in Lee County was about $280,000 last year. That's starting to come down a little bit now, but it's still very, very high.

I've been interested in education for quite a long time. I was on the Canterbury School board of trustees for 20 years. I've been on the board of FGCU (Florida Gulf Coast University) and I'm also on the board of Reform Theological Seminary, a seminary in Jackson, Miss., Orlando and Charlotte, N.C.

In addition to that, the Bonita Bay Group has over the years given at least $350,000 in contributions to education, so it's something I'm very interested in. I started thinking about this last winter. We had a very good year in 2005, and I wanted to do something for the community, and people had been talking about teacher housing for some time. But it didn't seem that much was happening along those lines, so I decided that I was going to try to make something happen in a relatively short period, and it would be something that would be scalable. So my original thought was a fund that would work to reduce the mortgage so teachers could buy their own house.

Then one of our vice presidents came across the possibility of buying a group of condominiums at a discounted price. I immediately said that's great because it'll be several years before we get something built. It's something we can do right away. So we negotiated with Lennar and got a significant discount on the units and the idea is, with a combination of private and public money, we'll buy down the purchase price to where we may be able to get a teacher in a $280,000 condominium for as low as $170,000.

Do you think builders bear a certain responsibility to help provide affordable housing?

That's being mandated now. There are projects now where there's a requirement for an affordable housing component. But we're not doing this because of any requirement. We not only bought the units at a discount, we're putting additional money toward the buy-down. That's money that the company and I are putting in.

How much money are you contributing to this effort?

It's $500,000 from the company and $500,000 from my family foundation.

What are the biggest obstacles?

It's the coordination and communications and getting everybody on the same page. It's a multifaceted process. First you have to get the bank financing lined up. Then you have to get people qualified. Who should be eligible for this? How do you make sure they don't turn around and sell the next day at a profit? There are thousands of details and I'm sure we have a couple thousand hours in this.

How do you maintain your company's well-regarded culture of ethics during a downturn in the market?

Ethics are not adjustable. Our guiding principle is 'Do the right thing,' and that means don't just do the right thing when times are good. So that's what I strive for.

Is that more difficult in a downturn?

There's more pressure. I think people intrinsically know what's right and what's wrong. What I try to do is have a culture within the company is to have a culture where you're swimming with the tide.

WCI Communities, your competitor in Bonita Springs, told investors recently that new-home orders were down 80% in the third quarter versus a year ago. Are you seeing the same magnitude of drop in orders, or is that an aberration?

We've seen a significant drop. The market is very, very soft right now. The difference between WCI and us is that they're a public company. We're better able to withstand that. We don't have to deal with Wall Street's quarterly expectations. We can take a little longer view.

Have you seen a period like this before?

No, I haven't. It's really stopped in a hurry. It was full-steam ahead and then slammed on the brakes. I wasn't surprised that it happened, but I was surprised at how fast it happened and how severe the drop was.

What is your company doing to adjust to this changing environment?

We basically saw it coming about two years ago, and we were able to make some bulk sales last year that helped our balance sheet significantly. So we feel like we're in pretty good shape right now. But obviously we have to be careful because sales have definitely slowed down.

What advice do you have for those who are managing through a downturn like the one we're experiencing now?

The first thing you have to do is conserve cash. The problem with a situation like this is people who have been thinly capitalized are going to get tipped over. We need to have the reserves available to withstand this. If it lasts for a couple years, it's going to be very painful. There are going to be quite a few people who will have problems. I think it could very well last for some time. You've got to look at your expense structure and adjust that for your lower volume. People who are in denial are going to have problems. I don't think you can count on this market coming back in the next three to six months. It could be a year. It could be two years.

What is your best guess as to when the market will recover, and what will be the first signs that it's coming back?

There's been a lot of speculation in the market, and the speculators are going to have to get washed out. They're going to have to sell their inventory at whatever price they can sell it for and some of them are going to fail. I think that needs to get absorbed before things are going to get back to normal. We had more speculation than we thought we had, and I think that's causing the problem right now. That could take six, 12, 18 months. When you start seeing the resale market go up and the number of listings comes down, those are the first leading indicators.

Economists at Moody's recently forecast a nearly 20% decline in home prices for the Fort Myers area from the peak in the last quarter of 2005 to the trough in the middle of 2007. Is that a reasonable forecast?

I hope that it's pessimistic, but I think it's within the realm of possibilities.

What are the chances of that happening?

I'd say it's at least 30%. It's just an oversupply issue. There's too much on the market.

Do you think the decline in the market might actually make homes affordable again for teachers and police officers?

I don't think the market's going to go down to that extent. I think it's still a real problem and when things turn back up prices will go up again.

Has Bonita Bay Group lowered its prices or offered incentives?

We sell lots to builders and we have not.

In terms of volume, can you give us an idea of how this year will compare last year?

This year will be significantly lower than last year. We're still going to be profitable, but we're going to do significantly less business this year.

Your company has been scouting sites outside Florida, notably in North Carolina. What is your strategy there and has the recent downturn put anything on hold?

We're still looking in the Southeastern United States. Hopefully this downturn will moderate some prices, which could be good for us. Land prices have gotten out of control, so this gives us a little better negotiating position.

How much development do you plan to do outside Florida?

In the next five years, development outside the state will constitute no more than 20%. Maybe in the next 10 years it might be greater than that. The entitlement process is so lengthy. It's going to be a while. We're looking throughout Florida. There's still tremendous potential in the state; 900 people are moving here every day.

Your company has acquired land away from the coast in places such as LaBelle and Clewiston in Hendry County. Is the downturn going to slow that down or is that still on track?

It's on track. There's not a lot of coastal land left and what's left can't be development. If you provide the right mix of amenities and attractions for people, it will work. You can't just have a golf course and say, 'OK, go out and play golf every day.' You have to have varied amenities and some social programs. You have to have hiking and bike trails, fitness components and social interaction. There has to be a more complete package.

Everybody expects the huge Baby Boomer wave will wash over Florida buying homes. Do you subscribe to that forecast?

That's certainly a trend, and that's going to be a positive overall. But it's not an unqualified thing and it's not a guarantee. There are some indications that people retire in place or want to be closer to the kids. The demographics generally work in our favor, but that doesn't mean we can get lazy, sit back and take orders.