Dirty Property

A few months ago I got the chance to facilitate two of the transactions described in the attached article that appeared in the Wall Street Journal.  The environmental due diligence on raw land in outlying areas is a bit more straightforward process than, say an urban shopping center with a service station and dry cleaner, but is still a very important part of the tranaction.  The importance of the environmental due diligence appears to be increasing as lending requirements imposed by capital partners such as Starwood in this instance, become more and more strict.  The timeframe within which these deals took place is extremely fast, so it is fortuante for someone in my position that there is a relatively small volume of historical information on these properties. 

D.R. Horton Unloads California Parcels,
Signaling a Shift Amid Housing Slump

By MICHAEL CORKERY
October 3, 2008; Page B1

As it struggles through the housing crisis, home builder D.R. Horton Inc. is unloading land across California at big discounts.

Horton, the nation’s largest home builder by unit volume, is jettisoning thousands of house lots in far-flung areas, partly to reap the tax benefits from selling property at a loss.

Michael Corkery/The Wall Street Journal

D.R. Horton recently sold this undeveloped parcel in Chino Hills, Calif., a hard-hit housing market east of Los Angeles.

As builders try to survive one of the worst housing downturns in U.S. history, land buyers and brokers expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other troubled housing markets. The sales also could indicate a shift for big builders: from developing huge swaths of land in the exurbs, to building smaller developments closer to metropolitan areas.

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California’s Inland Empire, for $7.8 million, according to county records. William Shopoff, a land investor who bid unsuccessfully for the property, estimates Horton paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers.

Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005, according to the county assessor.

Horton, based in Fort Worth, Texas, declined to comment for this article.

Buyers of some of Horton’s land in Southern California include a venture between Foremost Communities Inc. and Starwood Capital Group LLC, which together bought 250 house lots from the builder, according to a person familiar with the matter. The investors plan to hold the lots until the market recovers, this person said. A spokesperson for the venture didn’t return a call.

As new-home sales sank to a 17-year low, builders can no longer count on doubling their investments by buying undeveloped parcels, preparing the property and selling the homes on it. Horton, which built nearly 53,000 homes at the peak of the housing boom in 2006, has posted quarterly losses since the April-June quarter of last year.

The fire sales are a silver lining in those clouds. Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund. More sales are expected soon because the companies can apply losses only to profits earned as far back as two years and 2006 was the last profitable full year for most builders.

Horton told investors in June that it expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots to a joint venture it formed with Morgan Stanley.

“There’s going to be a rash of builders shedding assets,” said Tom Reimers, executive vice president of O’Donnell/Atkins, a real-estate advisory firm in Irvine, Calif. “It’s all tax-motivated.”

By dumping land, builders are chasing cash that allows them to keep current with lenders and pay overhead expenses.

Horton had $851.2 million in cash on hand at the end of its fiscal third quarter, June 30, up from $270 million at the end of last year, according to research firm Zelman & Associates. Horton owes about $210 million in annual interest payments, according to Zelman.

So far, most publicly traded home builders have managed to muddle through the housing mess. One reason is the builders’ financing arrangements. Many such large companies have long-term corporate debt that doesn’t come due for another year or two, giving them breathing room amid the credit crunch. The builders typically don’t need lender approval to keep building as long as they honor certain debt agreements at a corporate level.

Most closely held builders, on the other hand, use project-specific financing, in which they need a bank’s approval to start each new development. Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation’s small and midsize builders will fold during the housing downturn, which has already forced such private companies as Levitt & Sons of Fort Lauderdale, Fla., and Kimball Hill Homes of Rolling Meadows, Ill., to file for bankruptcy.

Still, big builders like Horton aren’t out of the woods. Horton has $585 million in debt that needs to be paid off in 2009, $362 million due in 2010 and $450 million in 2011, according to Zelman.

Horton’s recent land sales also could reflect an industry shift. Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. That contrasts with 2005, when builders bought massive parcels in California’s exurbs and earned big profits as land values skyrocketed during the housing boom.

Horton, for example, is interested in buying 50- to 150-lot parcels that are already developed and closer to certain cities in the San Francisco Bay area, says a person familiar with the company’s thinking.

“The builders are going to build in the better locations for the next few years, and live to see another day,” said Steve Reilly, a land broker with Prudential Realty in Danville, Calif. “The downside is they are never going to see the kind of margins when lots were doubling and tripling in value in the time it took to build a house.”

>коли под наемas been quite some time since I have posted here, but that has been for good reason. I am happy to report that we have been busy around here despite the apparent slump in the economy. We have been so busy in fact that we are rushing to attempt to find people to fill the roles and perform the work we have sold. In the coming months, I expect some pretty significant changes in the environmental due diligence field and I feel that I am in a good position to continue to meet and exceed my clients needs and expectations.

I just performed a Phase I ESA on some property in the Antellope Valley and found this book very useful as a reference for the geology of the area:

Geology of California/Book and Geologic Map of California by Robert M. Norris and Robert W. Webb

There has been a lot of changes in the finance industry over the past few weeks and a lot of people’s ideas about commercial real estate have changed significantly as well. Among all the turmoil, though, I did notice that the Dow and NASDAQ did recover a bit today and my phone is still ringing. There are people doing deals and acquiring new loans, just no where near as much as they used to. One notable change is that there appear to be less people buying commercial property on their own as a personal investment.

A significant number of the projects that we used to see come in the door were from individuals and family trusts that had bought a small shopping center or corner gas station as an investment and were unsure what to do when they received a letter from the Regional Water Quality Control Board or the Department of Toxic Substances Control. I don’t expect to see many of those loans in the near future because the loan programs that those types of investors used to use simply don’t exist anymore.

What I do see and expect to continue to see are the more savvy investors and more factitious lenders contacting us to cross the “Ts” and dot the “Is” on a deal where they already know what their exposure to liability and risk is.

Either way, I’m glad I can help.

I previously blogged on this subject here. In the current state of affairs in the property due diligence industry is one where lenders are going to want to make sure that all their ducks are in a row and every transaction is completely vetted. This means that it is highly likely that every property acquisition is going to require some level of environmental due diligence. Even properties that on the surface do not appear to require much investigation should be (and likely will be required to be) investigated and this is precisely where the, “Phase I Light” or Transaction Screen comes in.

A Transaction Screen can be conducted on a relatively quick turn around with a price tag that is approximately half of the cost of a full All Appropriate Inquiry (AAI) Phase I on the same property. Another benefit of the Transaction Screen is that the data collected as part of the Transaction Screen can be used in a full AAI Phase I if the Transaction Screen finds that a full AAI Phase I is warranted.

A brief way of thinking about the process of environmental due diligence in this case would be:

The seemingly rash sell-off of company owned retail gasoline stations that I previously reported here continues. While the previous article I featured focused on ExxonMobil with a nod to the other major oil companies, the article I am featuring below focuses on ConocoPhillips; the parent corporation of the popular “Union 76″ branded retail stations here in the greater Los Angeles area.

I find it interesting that this article and many other articles on the subject to not mention what portion, if any of the environmental liability the parent company, in this case ConocoPhillips, will retain after the sale is performed.  Particularly here in the greater Los Angeles area, the environmental liability at many of these stations can be a significant factor in the transaction.

ConocoPhillips will sell its company-owned filling stations

By BRETT CLANTON Houston Chronicle Copyright 2008

Aug. 27, 2008, 12:47PM

ConocoPhillips will sell its 600 remaining U.S. gas stations under a $800 million deal announced today that is the latest example of a major oil company exiting the troubled retail fuel station business.

PetroSun Fuel, a privately held Seattle firm, has agreed to buy the properties through a newly formed affiliate called Pacific Convenience & Fuel LLC.

The deal will make PetroSun, now with roughly 120 properties on the West Coast, one of the nation’s largest independent petroleum and convenience store operators.

Included in the transaction are company-owned and company-operated stores under the ConocoPhillips, Phillips 66 and 76 brands. Those brands will not disappear, but will have a more distant relationship with their former parent.

Once the deal is closed, ConocoPhillips will act solely as a wholesale fuel supplier to the sites, as well as to independently owned stores that are not part of the deal, said Terry Hunt, a spokeswoman for the Houston-based oil company.

She called the arrangement a “more sustainable business model.”

The deal comes as retail gas stations are struggling to turn a profit amid higher fuel costs and rising credit card fees. It also arrives as other oil majors including Exxon Mobil and BP are unloading U.S. stores.

Sam Hirbod, CEO of PetroSun, said in an interview that his company sees opportunity in all the churning.

“We are very much interested in participating in the consolidation that’s happening in the retail gas station sector,” he said, adding that his company is working on two other deals that could add up to 200 more stores by next year.

At the ConocoPhillips stores, PetroSun aims to offset rising costs by upgrading properties with better in-store products and services. That includes the addition of fresh deli sandwiches and salads, healthier snacks and even financial services, Hirbod said.

Most 600 stores incuded in the deal are in urban areas on the West Coast, with others in Denver, Col; Alberquerque, N.M. and Salt Lake City, he said. A Dallas store is the only Texas site.

In Houston, ConocoPhillips sells fuel through Phillips 66 and Conoco brand stations, but none of those is affected by the deal.

ConocoPhillips, the nation’s third-largest oil company and second-largest refiner, announced in December 2006 it would sell its remaining gas stations.

The announcement today ends that effort.

“This transaction is designed to strengthen our branded wholesale business model and grow market share,” Clayton Reasor, president of ConocoPhillips’ U.S. marketing division, said in a statement today. “We have worked with PetroSun before and believe that they will continue to enhance our brands and provide excellent service to our retail customers.”

brett.clanton@chron.com

Recently, I was introduced to an account manager from Envirofinance Group. They have a pretty good program for lending on environmentally impacted property. If you are seeking a loan on a property, you should consider giving them a call. here is one of their recent published news items:

ENVIROFINANCE GROUP PROVIDES $27.5 MILLION FOR BROWNFIELD REDEVELOPMENT
JERSEY CITY, N.J. — EnviroFinance Group has provided $27.5 million in financing for the acquisition and remediation of Liberty Harbor North, a 2.7-acre waterfront brownfield site located in Jersey City. The borrower, Statue of Liberty Harbor North Redevelopment Urban Renewal LLC, plans to clean up the site and subsequently develop it into a 564,000-square-foot hotel and residential property. It will feature a 313-room Conrad Hilton hotel, as well as 470 for-sale and rental condominiums. Completion of the clean up is expected to take less than 1 year; the hotel/residential project is slated for completion in 2012.

The Wharton School of Business published an article last month in their Finance and Investment section on the state of the Commercial Mortgage Industry that I found to be a good read:

Published: July 23, 2008 in Knowledge@Wharton

With so much media and federal regulatory attention focused on the global credit crunch, especially the securitization of massive pools of home loans, there has been little notice of what’s been happening with the market for commercial-mortgage backed securities, a younger cousin in the structured finance family.

“It’s pretty much gone,” says Wharton real estate professor Todd Sinai, speaking about the current state of CMBS issuance. “The liquidity crunch is across the board.”

The market for CMBS — packages of pooled loans backed by mortgages on office buildings, industrial properties, malls and other retail centers, and apartment buildings — has been ravaged by market conditions since last fall. In the first six months of 2007, 39 deals totaling $137 billion were brought to market and successfully sold, from the highest rated (triple-A) bonds down to the riskier, higher-yielding and lower-rated classes of bonds called B-pieces. Through mid-July 2008, only nine deals totaling $12.1 billion have been completed, a drop in issuance of more than 90%. No CMBS deal has been completed since a $1.27 billion offering from Banc of America Securities on June 19. There are currently no CMBS deals on the market.

Sinai believes there is little interest in the CMBS packages because they include both very secure and very risky bonds at a time when the market for the riskier elements is practically non-existent. Like their residential mortgage cousins, the CMBS are packaged in tranches, or layers, to offer protection for some buyers and higher yields for others. Without a market for the high-risk, high-yield layers, the overall package can’t sell. What’s more, Sinai says, for those deals sold so far this year, prices have been based on very few transactions, further distorting the market that had been steadily growing and stabilizing during the past decade. Due to the inactivity, “You don’t even really know where the market is,” Sinai adds. “All of the CMBS issued this year [were underwritten] in 2007, and only got unloaded this year.”

CMBS prices have plummeted, while yields, as measured in basis points over swap rates, have skyrocketed. As the CMBS market expanded, investors drove up prices for 10-year triple-A rated bonds. In their headiest days, in the three years leading up to summer 2007, those bonds were yielding consistent and reliable returns for CMBS investors, according to data from Commercial Real Estate Direct, an online news and information service based in Newtown, Pa. But these same securities are quoted today at prices that market watchers say are severely out of proportion to their value. These prices, or “spreads,” are the difference between the swap rate on a bond and the yield on a government bond of the same maturity, representing the risk associated with the investment. The lower the number, the better the price (and the tighter the spread).

Contagion, Plus

Joseph Gyourko, chairman of Wharton’s real estate department and director of the Samuel Zell and Robert Lurie Real Estate Center, says the CMBS market “took a huge hit around the same time as the credit crunch last August,” and the data bears that out. Blue-chip CMBS went from 26 basis points over swaps in July 2007 to about 70 basis points in September. Spreads eclipsed the 100 basis points threshold in late November and ballooned to their widest point in March 2008.

“Some of it was contagion from subprime,” Gyourko says. “The blowup in the housing market affected the commercial market, mostly for not very good reasons.

The Wall Street Journal reported earlier this month that ExxonMobil plans to sell 2,200 retail gas stations in the United States and other oil companies have sold most of theirs as well. They included the following graphic:

I know this may raise concern among many consumers who would think that this may lead to another rise in retail gasoline prices, but I am eternally optimistic in that I see an opportunity here for savvy investors.

I recommend the rest of the WSJ article, it’s a pretty good read:

Wall Street Journal

This was posted last week and the sampling was presumably performed a couple of weeks ago, but I am posting it to illustrate that public focus on these issues is increasing.

U.S. EPA to sample indoor air at Oakland homes, businesses near former plating shop

Release date: 07/23/2008

Contact Information: Wendy Chavez, 415/947-4248, chavez.wendy@epa.gov

High levels of VOCs found underground in Oakland

(San Francisco, Calif. — 07/23/08) – On Friday, the U.S. Environmental Protection Agency will begin testing the air inside several nearby homes, an adjacent business, and a day care center near the former Lane Metal Finishers site, where high levels of volatile organic compounds were found underground in Oakland, Calif.

Department of Toxic Substances Control scientists discovered elevated levels of VOCs in five samples taken at eight feet below the surface of the former metal plating site located at 30th Street & San Pablo Avenue. DTSC contacted the EPA to sample the indoor air to see if contaminants in the soil have migrated and are accumulating in nearby homes and businesses.

View Larger Map

“Because of the unknowns below the surface of the rest of the site, the EPA will sample the indoor air as a precautionary measure,” said Bret Moxley, the EPA’s on-scene coordinator. “The EPA and DTSC are working together to make sure that VOCs are not accumulating indoors, and if needed, will take the necessary steps until the situation is remedied.”

The underground samples showed very high levels of VOCs, particularly trichloroethylene (TCE), cis-dichloroethene, trans dichloroethene and vinyl chloride in the soil vapor. Soil vapor is in the spaces between the grains of sand or soil underground. Soil vapor can move through soil, but does not move as easily through clay and silt as it does in sandy soil. This site does have several clay layers in the soil which may have reduced the migration of the soil vapors.

Once under a home or other building, it is possible for vapors to come up through cracks in foundations and accumulate inside. If indoor VOC levels are high enough, it can create a health hazard for residents, especially children and pregnant women.

Soil, soil vapor and groundwater contamination at the Lane Metals facility is most likely the result of solvents used as degreasers during plating operations on the site dating back to the 1950s. The solvents are not uncommon at plating shop sites. DTSC has been overseeing the investigation of the site since June 2007.