Land attack

Executive Summary
Florida doesn't exactly have a stellar history when it comes to aggregating vacant land for future development.

Selling unusable swampland to out-of-state investors is more than just legend. The Pinellas County community of Oldsmar, for example, temporarily changed its name to Tampa Shores in the late 1920s after a developer sold underwater lots in a scandal that reached the national stage.

Land banking has since changed quite a bit. While selling individual lots to single buyers remains common, the larger focus in the past few decades has centered on larger landmasses with hopes and dreams to build large-scale residential communities or massive commercial projects.

The housing crash of the 2000s gutted mass land banking for quite some time. But now it's made a resurgence in a way closely resembling deals of a decade ago. And that has one prominent Florida land use attorney worried.

“It's amazing how some just never learn from mistakes in the past,” says Chet Little, a partner and land bank attorney with Foley & Lardner. “You just see how quickly greed and opportunity can give you short-term memory.”

California screamin'
Land developers during the last housing boom realized it was too expensive — and too risky — to buy up large pieces of vacant or agricultural land, particularly using debt. Yet, investment groups such as retirement funds and other securities had cash to invest, so they wanted to buy the land, offer an option to the developer and just wait for returns once ground was broken.

That strategy was successful for some.

The California Public Employees' Retirement System, or CalPERS, partnered with Newland Communities to purchase and develop land, for instance. That includes projects such as MiraBay in Apollo Beach and FishHawk Ranch near Riverview. CalPERS officials didn't return calls seeking comment on those and other investments.

There have also been bad deals. One of those was in Palm Beach County earlier this year, when the California State Teachers' Retirement System, CalSTRS, was forced to write off $125 million in a bad industrial land investment deal.

That involved 537 acres CalSTRS partnered with a real estate investment trust to buy in 2007 for $162 million. It sold in December for just less than $30 million, part of a repositioning of a portfolio once worth more than $22 billion. CalSTRS sold the deal to get away from what the group called risky holdings.

Far too often, these investment groups buy land sight unseen, on behalf of investors who have little clue how much risk their money faces, Little says.

“These pensioners are the ones supplying the money, and they have no idea that money has morphed through different hands and is now in speculative real estate,” Little says. “It could be awhile before anyone even finds out. To these fund managers, if they don't have a return on their investment in six or seven years, then they'll worry about figuring out something then.”

Little represents the Los Angeles County Employees Retirement Association, which purchased a tract of land in St. Lucie County in 2004 for $20 million. Managers of those retirement funds are still waiting for a return on investment.

“It's sitting there now with big mounds of dirt and hills all overgrown with grass,” Little says.

The fund did receive an offer for the land -- $1 million from a cattle rancher. Now the investor group is trying to recoup some of its money in court.

“They thought it was a can't-lose situation because they had all these protections in place,” Little says. “But when the house of cards falls, it comes all the way to the ground.”

Although retirement groups are common investors in vacant land, those groups aren't the only ones. Last year, for example, Charlotte County developer Ron Greenland led an investment group to buy nearly 170 acres in Englewood for a little more than $2.5 million. Greenland, at the time, wanted to partner with a homebuilder to construct 400 single-family houses and paired villas.

Greenland is still working on entitlements for the land, which he said at the time would take until at least this summer to put in place.

Protections for land bankers typically come from builder guarantees to develop the land and create investment returns. But if a builder fails to get construction underway before a down cycle in the market, for example, it ties up land that others may have been able to develop instead, and forces the investor to just sit.

“The only option you have at that point is to sue,” Little says. “The developer failed to perform, but that's about all you have.”

Smart money
Despite the money lost in transactions like that, those kinds of land bank deals, and the problems that come with them, are back, Little says. Competition has become fierce for prime pieces of real estate, and, with it, investors are loosening guarantee demands and other restrictions designed to help protect investments.

For example, one lesson learned from the last market crash is for investors to demand letters of credit for millions of dollars to support obligations in a land option. However, with more land investors returning to the market fighting over prime land and partnerships with developers, guarantees like that are being negotiated out.

Yet, troublesome investments don't have to be a part of the market this cycle, says John Neal, president of east Manatee County-based Neal Land Ventures. Instead, investors can be smarter about each buy.

“I think land, unlike almost anything else, is best operated by somebody with local understanding,” Neal says. “I think an investment fund can come by some land and put money down on it. But there are a lot of variables they are not considering, probably because they aren't even aware of them.”

Neal manages land controlled by his father Pat Neal's company, Neal Communities, through various mechanisms, including options and outright purchases. Neal pays attention to all of those variables. A large parcel of land might look enticing, for example, but access could be a problem. Or potential plans might not jive with surrounding properties.

“You really have to know the market, understand the land cover and understand the ecology we have,” Neal says. “It's all important.”

Repeating history
Land certainly is changing hands more on the Gulf Coast than it did a few years ago, but it's positive growth, Eshenbaugh Land Co. President Bill Eshenbaugh says. That makes land bankers necessary partners for developers, especially because in-house land acquisition divisions typically don't contribute to a company's bottom line.

“It's all cash, and that's probably what land sales ought to be,” he says.

National homebuilders, especially those traded publicly like Pulte Homes and Standard Pacific Homes, are reluctant to add land to company ledgers. “Not even a couple hundred lots,” says Eshenbaugh, the Tampa-based broker known as the Dirt Dog. “Wall Street punishes them when they do it.”