News Article | 9/28/2011

Perot Rolls the Dice on Las Vegas Rebound

Ambitious Texas developer H. Ross Perot Jr., son of the computer billionaire and erstwhile third-party presidential candidate, is betting on an eventual rebound of the Las Vegas housing market by angling for control of a huge swath of land north of the city.

Mr. Perot’s Hillwood Communities bought 400 acres of the so-called Park Highlands development in 2008 at a steep discount, and late last year, Hillwood bought the remaining 1,000 developable acres for an undisclosed “nominal amount.”

But the larger parcel is saddled with $179 million in debt, far more than the land’s estimated value, which has tumbled to just $19 million. Unable to reach a workout with lenders, Hillwood put the parcel into bankruptcy in July and now is hoping to buy back the land in an auction later this year.

“No other bidder sits in our unique position,” says Fred Balda, president of Hillwood Communities.

Hillwood’s strategy for the land that is home to little more than desert scrub and jackrabbits speaks volumes about how the housing bust has transformed the land business in Las Vegas. Back in the go-go days, developers used enormous leverage to buy big swaths of land at federal auctions, then spent hundreds of millions more to build roads, sewers and power lines in the hopes of selling thousands of houses to the city’s booming population.

Mr. Perot and others are trying to take control of large parcels at distressed prices with plans to hold onto them until new housing demand eventually returns. The price for an acre of raw land in the Las Vegas valley peaked in late 2007 at more than $900,000, according to Applied Analysis, a Las Vegas-based research firm. Now, the average is roughly $138,000, excluding a single pricey second-quarter deal that skewed the numbers.

“Back then, it was business as usual” to buy huge tracts for thousands of homes, says Dennis Smith, president of Home Builders Research Inc., a Las Vegas area market-analysis firm. “There was demand for 35,000 homes a year. Now there’s demand for 3,500 homes a year.”

There are plenty of busted deals around Las Vegas for the new breed of land buyer to pursue. Inspirada, a 1,900-acre tract in nearby Henderson, was forced into bankruptcy court by its lenders after several builders, including KB Home and Toll Brothers Inc., defaulted on a $585 million loan. Some of the builders agreed to pay lenders $340 million in a settlement reached in June.

Northwest of Las Vegas, developers behind the 1,700-acre Kyle Canyon Gateway project defaulted in 2008 on a $435 million loan, resulting in lead lender Wachovia Corp. foreclosing on the land. The lenders are negotiating with city officials for a new, smaller development agreement in the hopes of selling the property, according to a spokeswoman for Wells Fargo & Co., which bought Wachovia in 2008.

Investors buying land in the Southwest and California include hedge-fund firms Paulson & Co. and D.E. Shaw & Co., as well as private-equity fund manager Angelo, Gordon & Co . But these deals are often tricky because picking up the pieces of busted deals typically involves dealing with unhappy lenders trying to cope with big losses.

Hillwood’s gamble on Park Highlands fits Mr. Perot’s Texas-sized appetite for complex, high-profile projects that take years, even decades, to complete. His family made its fortune from founding and eventually selling technology companies Electronic Data Systems and Perot Systems.

Mr. Perot’s biggest real-estate project, Hillwood’s 17,000-acre Alliance industrial hub north of Fort Worth, Texas, is 40% developed with an airport, warehouses, homes and offices. Mr. Perot, 52 years old, sometimes pilots his helicopter over Alliance to allow guests to take in its scope from above.

Less of a success is Mr. Perot’s Victory Park project of offices, stores, hotels and condominiums surrounding the American Airlines Center arena adjacent to downtown Dallas. Victory Park has struggled to attract condo buyers and retain restaurants and stores since opening in 2006. In 2009, Hillwood, facing a pricey overhaul of the project, handed over Victory Park to equity partner U.S. Treuhand, a German investment fund.

The Park Highlands land was purchased for $639 million in 2005 by five home builders, led by D.R. Horton Inc. and Standard Pacific Homes. The deal was financed partly with a loan of $360 million originated by Credit Suisse and syndicated to roughly 60 lenders.

Park Highlands quickly ran into difficulty, as the Las Vegas market cratered. Hillwood purchased 400 acres at Park Highlands from D.R. Horton in 2008 for a mere $2 million. The developers holding the other 1,000-acre tract put it into bankruptcy in 2009.

Park Highlands emerged from Chapter 11 later that year with only $179 million in debt, but within four months it defaulted again. Hillwood stepped in late last year by acquiring the 1,000 acres for an undisclosed “nominal amount” and entering talks to restructure the parcel’s debt. Unable to reach a consensus with Park Highlands’ many lenders, Hillwood returned the project to bankruptcy protection last July.

A resolution likely is near. A bankruptcy judge in Las Vegas is expected to rule Thursday on a proposal to auction the parcel by year end. A lawyer representing five of the lenders said the entire lender group endorses the auction as its best option.

Hillwood earlier this month said it would offer $15 million for the land. But there may be competition: The chief restructuring officer in the bankruptcy case says seven potential bidders have shown interest so far.

Hillwood says if it loses the auction, it will simply mothball its 400 acres, leaving the winning bidder to handle the onerous cost of installing roads, utilities and other infrastructure on the 1,000-acre tract. “If we are unsuccessful, we will just sit back and let someone else take the lead,” Mr. Balda said. “We are patient.”