A news release touting the largest sale in the history of Arizona’s land department made it sound like the boom would never end.
The lone bid for the 269 acres in north Phoenix was $149.5 million, topping the previous record sale of state trust land of $135 million two years before.
“This is a remarkable sales price and a milestone for the State of Arizona, which sends a clear message that the market is strong and very interested in the lands (the) Trust has to offer,” state land commissioner Mark Winkleman said in the news release.
But that was 2007, before the collapse of the real-estate industry that led the nation into a deep recession.
Now both of those big sales, along with 20 others, have either defaulted or are teetering on the brink of collapse, propped up by various payment extensions the land department granted to developers who agreed to pay top dollar at public auctions in the last six years.
An East Valley Tribune analysis of land department records shows that almost $970 million worth of sales from the land department made since 2003 have been canceled or had at least one extension. Some already have failed while others have had default notices issued. Many remain viable only because the land department has agreed to delay the deadlines on principal and interest payments on sales it financed.
The Tribune’s analysis shows that the land department has issued notices of default or canceled the deals on properties that sold for a total of about $554 million.
The properties that have either failed or are in jeopardy represent more than half of the land sales made by the state in the last six years when figured on the basis of price.
“If everybody paid us what they said they would when they said they would, that’s the best-case scenario for us and everybody else,” Winkleman said recently. “But the market is what it is. And like everybody else that has financed land in the last several years, the world has changed.”
Winkleman said the state’s biggest incentive to grant extensions is to maintain the prospect of getting the full price the land was sold for during the boom times. If a developer bought land a few years ago for $100 million, it may be worth only $60 million in today’s market.
“It’s not like we can turn around and sell that land at the same price,” Winkleman said. “We will probably not see these same prices for quite some time. So it’s not as if we will be made whole.”
The land department manages more than 9 million acres that was granted to a trust when Arizona became a state. The main beneficiary of money raised through land sales and leases is public schools.
Beginning in 2003, the land department went on an aggressive sales binge, with almost $1.84 billion in state trust land has been auctioned off to the highest bidder in those six years. In the prior 90 years since statehood, about $1 billion of state land had been sold, Winkleman said.
Sales are typically financed by the state. The buyers normally put 10 percent down, pay the fees associated with selling the property, and finance the balance through the state.
If a buyer defaults, the state keeps all payments that have been made and takes back the ownership of the land. By then, the buyers have typically paid millions in fees and interest.
An example of that is the August 2005 sale of 502 acres of state land in north Phoenix to a partnership between Toll Brothers Arizona Construction and Pulte Homes Corp. for $135 million.
The partnership paid 10 percent down, or $13.5 million, and paid $2.7 million in fees to close the sale. Over the next three years, the buyer paid another $26.2 million to the state in interest to finance the sale.
In August 2008, the land department granted a single extension. Two months later, it issued a notice of default on the sale. The state took the property back and kept all the payments that had been made by the partnership.
Pulte Homes spokeswoman Jacque Petroulakis said walking away from the property was tough, but it made sense to let the property go back to the state.
“Given the realities of the economy, you have to make those tough business decisions,” Petroulakis said. “While a considerable investment was made, we had to look at the numbers, the current market, and make a decision at that time. We definitely discussed possible ways of adjusting the timing of payments but just were not able to come to terms.”
Toll Brothers spokeswoman Linda Rossi declined to comment on the state land sale.