Real estate and Covid 19: A delicate balance

            As the real estate market struggles to fight initial pandemic effects, the future in late June has been clouded by an explosion of Covid 19 cases nearing daily figures approaching previous highs.

            That uncertainty will likely hang over both residential and commercial markets, even as historic low interest rates provide incentives for owning and investing in real estate while the larger economy remains fragile.

            In Oregon the pandemic has accentuated a long-recognized political and cultural divide between much of the I-5 corridor in the west that reaches from the Columbia River south through Portland and to  Eugene, and the many sparsely populated counties east of the Cascades.

            As state-mandated restaurant, bar, church and lodging closures and restrictions went into effect where case totals were rising, many eastern counties with few infections also had to shutdown businesses.

            In mid-June a backlash of elected officials in eastern counties manifested in a non-publicized meeting in Prairie City to air grievances and map a strategy to address restrictions emanating from Salem.

            But soon after the meeting case totals began to rise in the populous Portland metro and other western Oregon areas as well as central and eastern counties of the state. Nationally the daily totals of newly reported infections approached and surpassed those of previous peaks many weeks earlier.

            All the while as infectious disease experts warned of a continuing wave of cases, Trump administration officials on June 26 touted alleged “success” in getting back to normal. On the same day governors in Republican states of Florida and Texas announced new measures intended to head off increasing virus numbers.

            As Central Oregon including Deschutes County has “reopened,” so to speak, for the past weeks from mid-May, through Memorial Day and most of June, virus infections have slowly climbed, albeit at a level far below those of Portland and hotspot states and counties across the country. 
           By some reports, lodging occupancy in the Bend area has jumped from lows barely in double digits when stay-at-home was urged by health officials to more than 90% bookings going into the July 4 weekend--this in the face of city officials discouraging the influx of urban dwellers excaping to an area they consider safer. 
           But crowds in downtown Bend and floaters nearly bouncing off each other on the Deschutes River through town seemed to be signaling a trend in the opposite direction of staying close to home.

New case highs raise concern 

            The emerging new virus statistics could be a warning sign with more and more tourists and vacation homeowners coming into the area, and what in many public locations seems to be a silent (thus far) political conflict based on mask wearing and adequate social distancing.

            Armed with rising infection statistics, Gov. Kate Brown extended the state’s emergency declaration for 60 days, as of July 1, as the Oregon Health Authority initiated indoor mask requirements for the public and businesses.
            On June 30, Deschutes County reported its highest daily number of new Covid 19 cases in the pandemic, followed by the state which also reached a new daily record July 1. 
            The potential danger was highlighted July 3 in a Facebook post marked URGENT in red by St. Charles Health Sytem and noting that noted Covid 19 hospitalizations had almost doubled in 24 hours. The post warned that "if our behavior doesn't change we will overwhelm our health system's capacitiy in coming weeks."           

           Bend state Rep. Cheri Helt (R) has supported mask requirements, prompting comments from those who typically refer to wearers as “snowflakes,” and “sheepies,” often backing up their arguments with claims the virus is nothing more than the flu, or pleading their constitutional rights or difficult to verify health conditions that prevent them from masking.

            On Friday, June 26, the OHA released new statistics and three possible scenarios that all hinged on potential continued increases in the state’s infection rate. The most optimistic possibility, the OHA forecast suggests, would be slightly under 200 new cases daily with the most dire being more than 5,000 a day by the middle of July.

            A more moderate assumption would be just over 900 cases a day, bringing the total potential state infections to slightly more than 38,000 in mid-July, even so nearly five times the 7,818 confirmed cases reported by June 26.

The crowds return to the Deschutes R.

            At a July 1 news conference, Oregon's leading infectious disease expert said the recent jump in cases means the state could be facing, "a worst case scenario," and called the trend, "ominous."
            Officials announced that Deschutes has joined Umatilla and Malheur counties as having the greatest increase in cases. Statewide, Gov. Brown raised the possibility that rollbacks in business operations and plans for schools in the Fall could be possible if the public response in wearing masks and other measures is inadequate. 

 Brokers adapt business routines

             Although considered an essential business, real estate sales will be subject to restrictions on social distancing and masks. Brokers have already been charged with limiting visits at open houses and frequently disinfecting properties. Many have worked mostly virtually by handling necessary document production and signings online, and communicating face to face on Zoom and similar platforms.

            Through the first five months of 2020, including the period from mid-March as Oregon began its Covid 19 shutdown, sales of Bend single family homes on less than an acre totaled 753 at a median closing price of $460,000. That represented a decline of 4.56% from the 789 closings in the same period of 2019, but a 2.22% increase over the five-month median price of $450,000 the previous year.

The battle over masking on FB

            A consistent trend for 2020 and previous years has been the lack of inventory, as calculated by a 12-month moving average of sales. The homes on the market at the end of May 2020 represented a two-month supply, which ranged from a low of only 1.4 months in March to two months over the current year. Inventory also held at only two months for all but May of 2019, when it rose to three months.

Looking for wide open spaces

            Some brokers have concluded that the inventory has remained lower in part as sellers sit on the sidelines to wait out progression of the Covid 19 effects, coupled with continued demand from some buyers who are ready to either relocate permanently out of urban areas, or to have a getaway in a less populated area.

            Realtors in the Flathead area of northwest Montana--with such marquee natural attractions as Glacier National Park, the Bob Marshal Wilderness and abundant lakes and rivers--reports a significant spike in out of state buyers seeking some elbow room, and who are not sensitive to local prices.

            In comments reported by the Whitefish, MT based Flathead Beacon, Wendy brown of the Northwest Montana Association of Realtors said two trends are emerging.

            “People are really sick and tired of living on top of each other in the big city, and number two, everybody’s figured out how to work from home...So that’s probably our biggest driving factor—some of the barriers that kept people from being here before are no longer barriers.”

            Statistics from the NWMAR show 2,115 sales closed in May of this year, up from 1,921 the same month of 2019 and a rise in median single family home prices to $335,000, from $319,000 the previous year in Flathead County, nestled along Glacier National Park’s western boundary. Anecdotally buyers are coming from California, Washington, Oregon and Texas, local brokers report.

            Bozeman, MT based Fay Ranches, a leading ranch and land broker, has observed in its regular newsletter than ranches and land offer ideal opportunities for social distancing in the era of a pandemic.

            “It seems everyone is asking ‘where do I want my family to be when the next crisis hits”? Many people are considering land, which has caused a surge in the market,” according to Grey Fay of Fay Ranches, in an interview with The Land Report editor Eric O’Keefe.

            “From coast to coast it appears more people are recognizing land as the great insulator,” Fay observed in the interview.

            “As one client mentioned, ‘social distancing has been an attractive component of land for centuries. Right now, being in a place where the distance from your neighbor is measured in miles and not feet, sounds pretty good. I also wouldn’t be cooped up in this house all day.” according to Fay. 

Rental markets face potential defaults

            Apart from overall trends in residential and ranch real estate, the effects of Covid 19 appear to be hitting hard the rental markets in major metropolitan areas.

            Nationally, a Pulse survey by the U. S. Census Bureau, concludes that 27% of renters believe they will be unable to make their July rent payments. Miami leads the list of potential rental defaults with 49% potentially unable to make July payments, followed by Houston, Atlanta, New York and Detroit with more than a third in that position.

            In the Northwest Seattle renters in danger of rental arrears are estimated at 18%, or approximately 208,000 renters among 1.1 million in the metro area including King, Snohomish and Pierce Counties. San Francisco’s troubled rent segment of 19% is similar to Seattle.

            Earlier reports from major cities have predicted that many businesses wracked by Covid 19 related economic challenges are negotiating for lease relief by landlords or withholding

            In May Seattle-based Starbucks—with nearly 9,000 stores globally-informed its landlords in a letter from Chief Operating Officer Roz Brewer that, “Effective June 1 and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures.”

Aspen Lakes facing a long winter with major financial challenges

            The Aspen Lakes Golf Course, and its Cyrus family ownership through several LLCs, again appear to be fighting for survival, weighed down by numerous creditors including a South Dakota private equity firm with a note secured by the golf facilities and other real estate and personal propoerty..

            Adding to the challenges, a recent letter from a homeowner’s board of directors reveals that two pumps providing domestic and landscaping water had failed, leaving the community to rely on a rented pump. The developer family’s Aspen Lakes Untility Company  LLC, “reports it does not have the money to replace either pump,” the letter noted.
            "Of greatest concern is the fact that Wildhorse Meadows (a family LLC) owns the land where the Water Company's wells are located, and the Water Company is a guarantor of some of all of this debt." the board wrote. 

            With fire hydrants inoperable for lack of the larger pressure landscaping pump, the HOA board letter said Cloverdale Fire District has agreed to provide, “additional resources” in the event of a fire, “and has made arrangements with sorrounding districts for use of their equpment if needed.”

            The board letter also said its legal advisors have notified the Oregon Public Utility Commisson staff of the community’s financial situation and water problems, with the objective of making them,”aware of the situation....in the event the HOA needs assistance in the future.”

            As outlined by the HOA board, the future of the community could hinge on several possiibilities – a foreclosure by the secured creditor; a deed in lieu of foreclosure and a potential auction of all assets.

            HOA attorneys are monitoring the situation, “so we can try to get out ahead” of anything that might jeopardize water delivery or increase costs. Although the HOA cannot direct the Cyruses and their LLCs or creditors to maintain the golf course, “it is in the interest of the debtor and creditors to maximize the value of this asset,” the letter concluded. 

Map at left showing Aspen Lakes Water Rights: gray area is domestic water and yellow irrigation. Red dots are wells.
 

            In late January, a federal bankruptcy judge approved a motion to dismiss a petition to reorganize under Chapter 11 of the federal bankruptcy code by the several Limited Liability Companies, or LLCs, conrolled by Cyrus family members. 

           The federal bankruptcy trustee had filed the dismissal motion in late 2019, “insofar as there is no reasonable likelihood of reorganization at this point,” noting that the, “Debtor is entering into its least profitable season of the year.”

            This Chapter 11 filing was the second for the Cyruses and their LLCs, the first coming in 2011 as the region was struggling to recover from the national recession driven in large part by questionable real estate loans and related investment derivatives.

            In that earlier bankruptcy petition, as now, the major unsecured creditor for Aspen Lakes LLCs is GT Capital LLC,  its agent listed in South Dakota Secretary of State records as Eugene McGowan Sr.

            In turn, McGowan is a leading principal in The McGowan Capital Group of Sioux Falls, whose mission, its website says, “...is to provide select investors with exceptional private equity and income opportunites and to bring creative financing solutions to business owners.”

            Deschutes County Clerk records show GT Capital LLC in September of 2019 held a deed of trust  for $4.085 million involving the Cyrus family LLCs, and essentially secured by the assets of individual family LLC members.

            GT Capital was also the beneficiary of an earlier trust deed, also for $4.085 million executed in May of 2006, and which was a factor in the Aspen Lakes and related LLCs Chapter 11 petition in 2011.

            In April of 2018 GT Capital filed a notice of foreclosure on the debt, which appeared to trigger  the latest Chapter 11 petition for protection under the bankruptcy code. As of February 14 there was not a notice of foreclosure filed with Deschutes County on the debt filed with the Cyrus' LLCs in September of 2019.  
            Also in April of 2018 the IRS refled a federal tax lien, originally filed in 2009, in the amount of $59,977.9, that amount approximately $30,000 less than the original lien..          

            Among the various creditors listed in the recently dismissed bankruptcy action are dozens of small businesses and suppliers.

An Auction but No Bidders

            After the June 2018 bankruptcy filing the Cyruses and their LLCs announced through attorneys that the golf course and other related properties would go to auction conducted by New York based Keen-Summit Properties and golf course broker Fairway Advisors. The auction was not successful according to bankruptcy documents.

            The auction properties included the 388 acre golf course parcel; a 339 acre block noted to be zoned for 10 home sites but with resort development potential and a

mining/mineral zoned site of 118 acres. Broker opinions at the time valued the properties at more than $8 million. As a point of comparison, in 2017 a Florida investor purchased all operating assets of Eagle Crest Resort in Redmond including two golf courses, main lodge and conference meeting facilities and more than 80 entitled lots for $12 million.

            Except for several unsold lots in the Aspen Lakes Community, most of the potential development property would require substantial infrastructure investment as well as permitting costs.

            The failed auction was structured without a minimum reserve, and was receptive in the announcement to a “stalking horse” bid in which an early bidder sets a price to start the process and perhaps attract others. The seller is not obligated to accept the stalking horse bid  or higher offers, but generally must pay a “breakup fee” to the stalking horse entity. There were no acceptable bids according to bankruptcy court documents.

            Perhaps a significant impediment to any buyer of the golf course has been the interlocking LLCs controlled by the Cyrus family. The golf course LLC relies on a lease from another Cyrus LLC, Wildhorse Meadows, which also owns the land and appurtenant water rights used for course irrigation. There are also LLCs for a construction related company and the utility company.

            That potentially creates a situation for a single well-capitalized investment entity to take over all assets of the LLCs. That possible scenario could occur if there is another default and subsequent action by the major secured creditor.

            Financial challenges to newer golf communities, including those also considered resorts with other amenities such as lodging, unlike Aspen Lakes, are were not unusual. The much larger Pronghorn, Tetherow and Brasada Ranch resorts all faced stiff economic headwinds in the real estate collapse of the early 2000s.

            But those resorts had significant advantages in that all were zoned for resort expansion and also had considerable real estate in the form of buildable lots to aid in their recovery. All three received an infusion of capital from new investors coming out of the recession and are benefitting from championship caliber golf courses and significant marketing efforts.

A Bright Future in the Beginning

            In its early days the future looked very promising for Aspen Lakes when the first drives blasted off the inaugural nine tees in 1999. Another nine holes were added in 2000.

            Just five minutes east of Sisters, OR, with views of the 10,000 foot plus peaks of the Cascades, the course garnered accolades from players and infuential golfing media.

           

An early master plan: no lodgings has been built

One golf publication named it one of America’s top new public play courses, and with the notoriety and pre-recession optimism of the mid-2000s came interest in having a home along the fairways.

            Lot sales were brisk. Custom homes rose along the fairways, some selling near to or above $1 million, at that time the higher end of regional prices. The course and real estate were competing favorably with such well-established golf communities and resorts as Black Butte Ranch eight miles west of Sisters and Eagle Crest 20 miles east near Redmond.

            The Aspen Lakes restaurant, known as Brand 33, to reflect the development family’s ranching heritage, gained a loyal clientele until the recent troubles. It is closed for the winter season now. The scenic location with banquet facility has also been a popular wedding venue.

            But today, even if the Cyruses/their LLCS and their secured creditor come to an agreement, there’s a cloud over potential home and lot sales. And its likely that careful brokers will exercise extra caution in crafting due diligence clauses to protect their potential buyer clients.

            As of February 10, the MLS of Central Oregon showed nine lot listings in a range of $189,000 to $380,000 and a single home offered at $1.85 million. In 2019 there were three lots sold in the range of $210,000 to $225,000 and 10 homes at $757,000 to $1.6 million. There were five lot sales at $185,000 to $325,000 in 2018, and eight homes from $660,000 to $1.77 million.

            With the various challenges facing Aspen Lakes and its developers, one veteran real estate professional recently offered a near disaster opinion – “game over.” Perhaps, but Aspen Lakes owners have been able to rise from near collapse in the past.

            The coming of the Spring golf season, with pending decisions by the major creditor and the necessity to provide irrigation water for common area and course landscaping, might give a clearer picture of the way forward for Aspen Lakes.

             

Earlier post:

Aspen Lakes goes to auction

https://bendisbetter.blogspot.com/2019/03/aspen-lakes-golf-course-in-bankruptcy.html