Where's the Bottom?

Where's the Bottom?

REAL ESTATE by Jean Gruss | Editor/Lee-Collier

Vulture funds are circling Florida looking to buy residential land for pennies on the dollar, but no one is prepared to call a bottom. A few investors have started buying.

Are we nearing a bottom for residential land prices?

In late November, Lennar Corp. kicked off a frenzy of speculation about that when it sold 11,000 lots in 32 communities around the country for 40 cents on the dollar to a company it created with Morgan Stanley.

Since then, developers up and down the Gulf Coast have taken bites of the Miami-based homebuilder's vast portfolio of land. For example, Fort Myers-based Cameratta Properties acquired the 500-acre Cypress Shadow development in Estero for $28 million and Tampa-based Metro Development Group bought 8,300 home sites in Pasco, Hillsborough, Sarasota and Lee counties, among others, for an undisclosed price.

But landowners, buyers and land consultants caution that these deals may not signal a bottom. Indeed, the Lennar deals may have been spurred by year-end tax maneuvers.

"We're not interested in bottom feeding," says Rob Ahrens, vice president in charge of acquisitions and sales at Metro Development Group. "Price is important, but we also think this is a cycle we're going to be out of in a couple years."

Identifying a bottom in the market is a challenge for even the most sophisticated real estate investors.

"That's one of the most difficult things to forecast," says Syd Kitson, chairman and CEO of Kitson & Partners, the West Palm Beach firm developing with partner Morgan Stanley the 18,000-acre Babcock Ranch project that straddles Lee and Charlotte counties.

Kitson has been scouting for new residential deals for months, but he hasn't signed any deals yet. "If you buy something now, you'll have to sit on it for several years," Kitson says. "I don't think anyone believes there will be an overnight turnaround."

While there is a danger that prices will fall further and a recession might prolong any recovery, competition is growing from aggressive funds seeking to invest in Florida residential land. The Carlyle Group, the California Public Employees' Retirement System Board of Administration (CalPERS), Charlotte, N.C.-based Crosland LLC and Orlando-based CNL Financial Group are among the groups that have raised billions of dollars to invest in U.S. real estate.

"The vulture funds are circling around Florida right now," says Kitson. "We've been running into them."

But the credit markets have effectively shut down and they're an important source of leverage that aggressive funds use to boost returns. "One of the challenges you have right now is that there's no debt [financing]," Kitson says. "It's going to be very heavy on the equity." Funds that have to use more equity to strike deals are likely to be more cautious because more of their own cash is at stake.

So far, no major fund other than Morgan Stanley has made a move in Florida. "They're asking the same questions we are," Kitson says.

Location is everything

"Real estate isn't as cut and dried as everyone wants to make it," says Joseph Cameratta, CEO of Cameratta Properties. "I can tell you one thing: Everything is project and location specific."

For example, Cameratta says Cypress Shadow's land has all the necessary permits from a dozen different state and federal agencies acquired over a three-year period. What's more, its location is in an area that includes the expanded Southwest Florida International Airport, Florida Gulf Coast University and two new malls containing three million square feet of shops in Estero.

"People with money still buy," Cameratta says. When the market recovers, Cameratta will be ready to sell lots to builders.

Fact is, banks are still willing to lend money for the acquisition of residential developments in prime locations. Naples-based TIB Bank provided Cameratta with $18.2 million in financing for the Cypress Shadow deal, for example. "Everybody that has a relationship with lenders is still capable of borrowing money," Cameratta says, though he says he's had to "put more skin in the game."

Banks aren't the only players. "A lot of equity funds have approached me to acquire entitled land," says Cameratta, who has managed projects with Carlyle Group, a Washington, D.C.-based private equity firm. "They believe that in the next three to five years there will be a land grab that returns to Florida."

Ahrens agrees. "Price has something to do with it, but we looked at these properties to increase their value two years from now because of their locations," he says. "We strongly feel these markets are going to return."

Metro Development Group uses a combination of bank financing with Wachovia as its lead bank and it has formed a joint venture with an undisclosed private equity firm from New York.

"People who have good relationships with the banks can get loans," Ahrens says. "The equity firms are definitely interested in playing into the game."

Landowners are sitting tight

The consensus forecast that the residential real estate market will eventually recover in a few years means landowners aren't lowering their asking prices.

"We still haven't seen a major reduction of land prices across the board," says Dennis Gilkey, CEO of the Gilkey Organization and the former chief of Bonita Springs-based developer The Bonita Bay Group. "There are some deals happening, but unless they're really distressed, we haven't seen major discounts."

Among the first to shed land are homebuilders who are struggling to shore up their finances by selling land they accumulated during the boom. "The story is the homebuilders are offloading stuff at 1999 prices," says Bruce Erhardt, executive director of land brokerage with Cushman & Wakefield in Tampa.

But builders are concerned that their land banks will be depleted when the market recovers and developers will charge them a premium for the lots. "The builders who are sellers are concerned about their pipelines," Ahrens says. They're working with companies such as Metro Development Group, who will provide them with lots at reasonable prices when the market returns, he says.

The November deal between Morgan Stanley and Lennar is an example of how future agreements may be structured.

The two companies formed a land investment company called MSR Holding Co. LLC, which acquired the 11,000 lots for $525 million at a 60% discount. But Lennar has a 20% interest in the company and 50% voting rights. As part of the deal, Lennar has option agreements that give it the first right to buy the home sites later.

So Lennar got a much-needed cash infusion, it removed lots weighing on its balance sheet and has guaranteed a future supply of lots for the market's eventual return (Lennar spokesman Marshall Ames declined to discuss the deal further).

Hope the market returns

Just because land is cheap doesn't mean a deal will work. "What will that property become?" Kitson asks when looking at land. "In the end, it still comes down to the buyer buying a lot with a profit margin."

Although land prices are falling, they still have room to decline because they rose so high during the boom.

"Most people still think land prices need to come down another 20% to 30%," Gilkey says. "There has to be a relationship with the end-unit price. Some of the prices were way outside of what the end unit could support."

Even if buyers can get land at a substantial discount, the market may not rebound for some time. "People are going to have to hold them for two or three years before they can sell them to anybody," Erhardt says. "You've got to figure some sort of carry."

There are other wildcards, too, including whether banks will acquire large parcels of land at foreclosure from overextended borrowers. "We haven't seen the bank foreclosures yet, but they're coming," says Erhardt. That will most likely pressure land prices lower as banks shed lots at deep discounts.

Even when the residential market returns, it's not clear how much demand there will be. "Let's say everything is back to normal. What kind of absorption will we have? I don't know."

Population and job growth along the Gulf Coast are starting to slow, even though Florida continues to lead other states.

"We are worried about job growth, which drives this whole thing," Erhardt says.

He's concerned Florida's rising taxes and insurance costs are putting the state at a competitive disadvantage to other states. "All those relocations - Citibank, Chase, JP Morgan, USAA - why do you think they came here? They came here because we were cheap."

prospective

buyers

Morningstar, the Chicago-based fund tracker, says 37 real estate funds were launched in 2007 and the last days of 2006. Here's a partial list of investors who have raised money to buy large tracts of residential land and may be actively searching along the Gulf Coast.

• CNL Financial Group in Orlando announced in December it launched a global real estate fund. The firm did not say how much it planned to raise through the offering.

• Crosland LLC of Charlotte, N.C., in December formed an investment fund with Northwestern Mutual to buy $225 million worth of land in the southeast U.S.

• The Carlyle Group in September announced it had raised $3 billion for its fifth U.S. real estate fund. Carlyle has partnered with Fort Myers-based Cameratta Properties on past projects.

• The California Public Employees' Retirement System Board of Administration (CalPERS) recently shifted the real estate allocation of its $250 billion portfolio to 10%, an increase of 2 percentage points.

• Metro Development Group of Tampa has been scouting home sites along the Gulf Coast and generated sales of nearly $200 million last year. It has joined forces with an undisclosed New York-based private-equity fund.

• Kitson & Partners is looking for large tracts of residential land and commercial properties around Florida. It has partnered with Morgan Stanley on past deals such as Babcock Ranch in Charlotte County.

REVIEW SUMMARY

Industry. Land development

Trend. Prices are falling for residential land

Key. Prices for residential land will likely fall further before buyers start acquiring large parcels.