A Tale of Two Floridas

A Tale of Two Floridas

Commercial real estate by Jean Gruss | Editor/Lee-Collier

Northeast Florida and Southwest Florida might as well be at opposite poles, one developer says.

Laura Holquist sees two different Floridas.

Northeast Florida, anchored by the bustling port of Jacksonville and the high-tech businesses of the Space Coast, is still growing at a healthy pace.

Southwest Florida, by contrast, is dominated by service-related jobs and residential real estate. "Right now, we're in a horrendous recession," she says.

It's been a long time since anyone's said the "R" word to describe Southwest Florida's economy, but it pays to listen to real estate developers like Holquist who have that statewide perspective. She's the president of Allete Properties, the real estate arm of the Minnesota-based publicly traded utility by the same name.

Based in Fort Myers, Allete owns about 15,000 acres, mostly in the northeast part of Florida. But over the last decade, Allete acquired and then sold thousands of platted lots in Lehigh Acres and Cape Coral in Lee County.

That's not to say there aren't any opportunities in Southwest Florida. There are pockets such as Lehigh Acres and Cape Coral that could benefit from new shops and restaurants, she says. But the company has sold off most of its residential land in Southwest Florida. "This area is so overbuilt," she says.

Holquist is much more sanguine about the Tampa area, where the mix of employment is much more diversified than the area stretching from Sarasota to Naples. The firm is scouting for land close to Tampa, though Holquist declines to reveal more. It is also looking outside the state, including the Carolinas.

To grow the company, Allete Properties recently hired Heidi Hughes as senior vice president and Jeffrey Roth as senior vice president and chief financial officer. Most recently, Hughes was chief of staff and general counsel for the Florida Department of State. Roth's previous experience included vice president of finance for KB Home's Fort Myers division.

Water and land

In the early 1990s, Allete (then called Minnesota Power) came to Florida to buy water utilities. But the water utilities often owned adjacent land and the company became a significant landowner.

For example, in 1991 Allete bought Lehigh Corp. from the government's Resolution Trust Corp., the developer of the Lehigh Acres community east of Fort Myers that was caught up in the savings and loan debacle. The assets included a water utility and 10,000 platted residential lots.

A few years later, it bought 13,000 acres in Palm Coast, a town halfway between Jacksonville and Daytona Beach, from ITT. It included a water utility and 2,500 residential lots. The company later added 6,800 acres in Flagler County from Rayonier.

By the late 1990s, Allete had become the largest privately held water utility in Florida. But municipalities wanted to gain control of their water resources and Allete sold them the water companies, exiting the business by 2001.

But by that time Allete had gained expertise in the development and sale of residential communities and had decided to grow the business. "We started to change our strategy to buy raw land," Holquist says.

Previously, Allete had acquired land that already had the required permits to be developed for residential and commercial purposes. But this kind of land was getting harder to find and Allete decided it could acquire land and entitle it through the complicated maze of governmental approvals. Some of the company's staff had experience developing large-scale residential communities, including William Livingston, who had been a senior management executive with the developer of Tampa Palms in north Hillsborough County.

In 1999, Allete bought about 2,500 acres of residential and commercial land in Cape Coral for $45 million from Avatar Holdings. It has since sold most of those assets, benefiting from the run-up in values since then.

In 2002, Allete bought 6,200 acres of agricultural property in Ormond Beach, 85 miles south of Jacksonville along Interstate 95, from the Florida Development Co. and Florida East Coast Railroad.

Allete is most active now in Northeast Florida, where it has its major development projects (see related story). It has an office in Palm Coast where it houses half of Allete Properties' 25 employees.

Land boom

Allete certainly seems to have been successful in timing its purchases. According to a recent analysis by James Bellessa Jr. of investment firm D.A. Davidson & Co., Allete Properties' cost basis in its land inventory is $58 million and he values that land at $464 million currently.

Bellessa values Allete's entire Florida real estate business at $13 per share, roughly a quarter of the company's value of $50 per share. That's even as real estate represented 8% of operating revenues in 2006.

"We're very conservative with our operations," says Holquist. The land's low cost basis "can help you weather a lot of things." Revenue from land sales was $56 million in 2006 compared with $42 million in 2005, a 33% increase.

Still, development from raw land to final product takes time and significant capital. For example, Allete started work on the 1,500-acre Town Center at Palm Coast in 2000 but the first buildings didn't start coming out of the ground until late 2006. The company financed the roads, utilities and landscaping with a $26.4 million tax-exempt bond issue and $8.5 million development loan.

The 6,200 acres Allete bought in Ormond Beach was the last significant purchase by the company. Since then, land prices have risen substantially. "Frankly, we needed the slowdown to get caught up," Holquist says.

New opportunities

The company now is scouting land again. "We're looking at emerging-growth areas," Holquist says. That includes Tampa, Northeast Florida and the Carolinas.

The company recently hired Heidi Hughes to lead the company's land acquisition and government-relations activities. Previously, Hughes served as deputy general counsel to Gov. Jeb Bush and general counsel for the Florida Department of Community Affairs, where she was involved in modifying Florida's Growth Management Act in 2005. She was most recently chief of staff and general counsel for the Florida Department of State.

In addition, Allete hired Jeffrey Roth as chief financial officer to evaluate acquisitions and develop project financing.

Roth previously was vice president of finance for KB Home's Fort Myers division, CFO of Centex Construction's Mid-Atlantic division and senior vice president with Norway-based Kvaerner ASA.

But land prices have still not come down enough to make the finances work. "The sellers are still stubborn," Holquist says. What's more, many counties have raised impact fees and the state has shifted the road-building burden onto developers. On a 4,000-acre project, a developer who might have paid $30 million for road improvements now has to pay $120 million.

Allete still competes with speculators who will pay too much for land. For example, it's important to know that water rights come with any land in the Tampa area and some investors ignore that potential cost and overpay. "Sometimes we think we know too much," Holquist jokes.

Still, she says, "a lot of people made bad decisions." Holquist expects that some of these investors will have to sell land at a discount. "The third developer makes the money," she says, citing a familiar real estate dictum.

Although Allete will consider "opportunistic purchases" in Southwest Florida, Holquist believes the residential market is saturated. "This area is so overbuilt," she says.

One reason for that was the unprecedented amount of speculation that took place until 2005. "We never knew how much investors impacted the market," Holquist says. Now that investors and many second-home buyers have abandoned Southwest Florida, demand is likely to remain soft. "This whole investor mess is over," she says.

What's more, Holquist says mammoth future developments such as Babcock Ranch in Charlotte County and Big Cypress in Collier County are going to continue to saturate the area with residential lots. Meanwhile, Holquist believes Southwest Florida's population growth will slow because of factors such as the residential downturn, property taxes and rising insurance costs.

Except in a few pockets such as Cape Coral and Lehigh Acres, Holquist says companies also have overbuilt commercial buildings. She points to the fast-growing area of Bonita Springs in South Lee County as an example, where nearly 3 million square feet of shops were built last year.

In the Carolinas, by contrast, land didn't appreciate as fast as in Florida while demand is still there, particularly from retirees. What's more, the Carolinas provide diversification so that the fortunes of Allete Properties aren't solely tied to Florida's economy.

"We'd like to grow in the Carolinas," Holquist says.

REVIEW SUMMARY

Industry. Real estate development

Company. Allete Properties

Key. High land costs and overbuilding sour some developers on Southwest Florida.

Allete Properties' Major Projects

Fort Myers-based Allete Properties has three major development projects underway in Northeast Florida in Palm Coast and Ormond Beach, halfway between Jacksonville and Daytona Beach. They include:

• Town Center at Palm Coast. The project is designed to be Palm Coast's new downtown area, a 1,550-acre development with a neo-traditional design. Eventually, Town Center will have 2,950 condos, 2.2 million square feet of commercial space and 1.4 million square feet of offices. Roads and other infrastructure were completed in 2006 and a Publix-anchored retail center opened in December. Pending land sales total $40.1 million.

• Palm Coast Park. The mixed-use, 4,700-acre development is located along U.S. 1 in northwest Palm Coast, one mile south of Interstate 95. The project will include 3,600 homes and 3.2 million square feet of commercial space. Infrastructure construction began in December. Closed and pending sales total $65.8 million.

• Ormond Crossings. This 6,000-acre project will have 3,700 homes and 5 million square feet of commercial space along I-95. Infrastructure design and completion will start this year and last through 2008. Land sales are scheduled to begin in 2009.