The next phase of Tustin Legacy, including the large eastern corner of the Tustin Marine Corps Air Station at Jamboree and Edinger (pictured above), is undergoing a potentially significant shakeup. Centex is negotiating to pull out of Tustin Legacy Community Partners, LLC, the Master Developer partnership with Shea Homes for this portion of the base’s development. (Other areas were led by Lyon, Lennar, and Laing)
The OC Register reported:
At a special meeting on May 7, the City Council voted to approve restructuring the Tustin Legacy Community Partners development agreement to permit Centex Homes, a publicly traded company, to withdraw from the partnership.
Last month, Centex Homes announced its intention to withdraw from the project. The company recently stated that the withdrawal was a result of a review of its portfolio, including the financial resources necessary to remain in the partnership.
The Orange County Business Journal added:
The departure of Dallas-based Centex would make the partnership an all-local affair. Two units of Walnut-based J.F. Shea Co. as well as the city of Tustin are the other partners.
Legacy Park calls for 2,100 homes and 6.7 million square feet of offices, restaurants, shops and hotels in the next six to eight years. The project broke ground late last year.
This is probably a good example of how homebuilders are forced to respond to substantial financial pressure and “hunkering down” for this reversal in the market. It would validate news reports of homebuilders, in general, reducing their land holdings, and in many cases paying a penalty to forfeit these positions. Centex’s latest 10-K filing with the SEC, for the period ending March 31st, acknowledges rather plainly the nature of these pressures (they are not referring specifically to Tustin Legacy):
“The risk of owning developed and undeveloped land can be substantial for homebuilders. The market value of undeveloped land, buildable lots and housing inventories can fluctuate significantly as a result of changing economic and market conditions, such as the adverse conditions we are currently experiencing. During the year ended March 31, 2007, we also determined it was probable we would not pursue development and construction in certain areas where we had made land option deposits, which resulted in significant write-offs of land option deposits and pre-acquisition costs. In addition, during the year ended March 31, 2007, we recorded land valuation adjustments, or impairments, to land under development primarily due to challenging market conditions and, to a lesser extent, cost overruns in land development budgets. These write-offs and impairments adversely affected our operating earnings and operating margins during the year ended March 31, 2007. If market conditions deteriorate further in future periods, we may decide not to pursue development and construction in additional areas, and the value of existing land holdings may continue to decline, which would lead to further write-offs of option deposits and pre-acquisition costs and further land impairments.””
It is not known how much Centex has invested so far in this relationship, which appears to have been solidified about one year ago, according to City of Tustin documents. This slide suggests that there are not direct land purchase costs at this (phase 1) stage in the project.
It does appear that the costs to make the infrastructure improvements (which are in the critical path to actually building on the land) were being borne by the partnership, so presumably they’d be on the hook for a portion of those. There have already been months of earthmoving and grading going on, as those who drive across Edinger regularly have seen. There are mixed reports on whether this is a positive or defensive business move on the part of Centex. No evidence of an official announcement on the part of Centex, Shea, or the City of Tustin has been found yet.
What does it mean for the marketplace?
This isn’t clear. It is unlikely that Shea would become the exclusive builder on the property, given the sheer size. The Master Developer role means they can sell off sub-parcels to other interested homebuilders and it is reasonable to assume they would, to help spread risk. So to Orange County home shoppers, it may just mean a different mix of homes than otherwise would have been. But when reshuffles like this take place, I’d venture to guess it is a sign of significant stress in our marketplace, and despite suggestions to the contrary, Orange County isn’t immune. The follow up questions for us to consider are:
- Has the marketplace yet seen the worst of this stress, or is more coming?
- Because of the lag from consumating the development deal to selling homes, are the land values agreed upon (and now the responsibility of Shea) still supported by the marketplace?
- Is this more of an opportuntiy or risk for Shea?
Referenced links:
OC Register Briefing (about halfway down)
OCBJ Article (thanks to Zovall for research assistance)
Centex 10-K pdf (pages 12 & 13)
