Copyright © 2013 Albuquerque Journal
A modest 30-year-old gated community of 486 homes has overcome monumental obstacles to achieve a goal taken for granted in neighborhoods across the Albuquerque metro area – ownership of the land it’s built on.
The Towne Park Homeowners Association put all the pieces together – a willing seller, homeowner support, financing – to buy the ground lease for the 74 acres it was built on at Chico and Eubank NE, just north of Central, for $11 million. The purchase closed on May 31.
“It was a very stressful, long process,” said Bill Shue, president of the association’s board of directors and a catalyst behind the ground-lease purchase. “This is the best situation for everybody.”
A subdivision of detached, single-family homes developed on leased land doesn’t sound very practical, but in the early 1980s some viewed it as the next big thing. Buyers purchase the lot improvements, basically the house, but rent the lot it sits on.
Towne Park residents have periodically inquired about buying out the ground lease for about 15 years, Shue said.
Obstacle No. 1
The first obstacle to buying a ground lease is whether the landowner or holder of the lease is willing to sell. A ground lease on a completed project can be a cash cow. The lease is securitized by the improvements, thus is typically low risk, and can provide a steady income with minimal expense.
“There are investors in the business of holding ground leases,” said Albuquerque real-estate and business lawyer Larry Wells, who represented Towne Park in the lease buyout. “Once a project is completed, they look at cash flow, the tenant’s credit rating and so forth. It’s a specialized type of investment.”
Towne Park’s ground lease was held by the Sandia Foundation, an Albuquerque nonprofit charitable trust that benefits the University of New Mexico, Dickinson College in Carlisle, Pa., and local charities.
In 2003, the foundation rejected a $7 million offer to buy the lease from a group of Towne Park residents, but not the neighborhood association itself. One reason for the rejection cited by the foundation was that the ground lease was a good investment for its beneficiaries.
The potential buyout of the lease was back on the table for discussion a few years later.
“What we did during 2012 was prod the foundation board to look hard at whether they should sell,” said Carol Rickert, vice president of Sentry Management in Albuquerque. “We saw a high moral ground they could stake by selling to the association.”
While Sentry Management is the property manager for Towne Park, Rickert is also a veteran commercial real-estate broker who represented the association in the lease buyout.
The prodding appears to have worked. In early December, the Sandia Foundation sent the association’s board of directors an offer to sell the ground lease for $11 million.
“It was the right thing to do,” said foundation President and CEO Bob Goodman. “For their long-term benefit, it was much better for the residents to own the land that their houses are on.”
The pressure was on for the association’s board, Shue said.
“Our concern was that if we didn’t buy it, somebody else would and the opportunity would be lost forever,” he said.
Financing needed to be nailed down. An exploratory committee had approached banks and other financial institutions about a loan, Shue said, “Most were not interested. They didn’t know how to make it work.”
Los Alamos National Bank stepped up and provided the necessary financing at 4.8 percent interest with a 10-year term.
Getting owners to agree
The other critical obstacle was to get two-thirds or 67 percent of the homeowners association’s members to approve the purchase.
The association’s board of directors, which was unified in support of the purchase, launched a low-key campaign to educate homeowners on the ground lease. Three informational meetings were held in the clubhouse and a series of written updates were distributed. The recurring theme was, “This is the single most important issue currently facing the Towne Park community.”
About 70 percent of the homeowners approved the purchase, Shue said. A resident of Towne Park for 28 years, he added, “Honestly, we’ve never been able to get 67 percent of the homeowners to agree on anything.”
“It’s difficult to build a consensus to do big things in a homeowners association,” Wells said. “They did it. That’s remarkable.”
Most of the behind-the-scenes work was done by the Campbell & Wells law firm and First American Title Co. Actually, it was not one ground lease that was being purchased, but 486 – one for each home – plus the master lease that covered the community’s common areas, Wells said.
“It was a daunting project, heavy on details. None of us had done a deal like this before,” he said. “Who has done a deal involving 486 ground leases?”
‘A landmark transaction’
From a real-estate standpoint, Rickert said a ground lease buyout by 486 homeowners was “a landmark transaction for Albuquerque.”
The $11 million purchase price is the basis for enabling homeowners to exercise the option of buying their lots for $25,000 during the 12 months after the May 31 closing. Homeowners can still choose to rent their lots, although Shue said the hope is that the lots are purchased over the next 10 years or so.
Home prices in Towne Park range from about $115,000 to $200,000 depending on the size of the home, Shue said. A check of Towne Park home listings on the zillow.com real-estate website last week showed the average asking sales price was about $138,000.
Based on Towne Park home prices, the $25,000 lots are priced to the market, said Mike Schiffer, a veteran land specialist at commercial real-estate services firm CBRE’s Albuquerque office. Lots in the community are not particularly big at about 4,100 square feet, give or take.
“As a rule of thumb, the lot value is 20-25 percent of the total property value in tract housing,” he said.
The ground lease approach to Towne Park’s development traces back to UNM’s ownership of the land and its entrepreneurial approach of teaming with private developers to turn vacant university-owned land into revenue-producing assets.
Ground lease example
Winrock Center at Louisiana and Interstate 40 is the best-known early example of a major commercial project developed on a UNM ground lease, which has since been bought out. UNM is still using the ground lease approach for development of land at its south campus.
UNM teamed with a California developer, the late Robert E. Towne, and locally owned Charter Building and Development Corp. to develop Towne Park, which opened in 1984 and was sold out by 1993. The 68-year ground lease was transferred to the Sandia Foundation later in the 1990s in a land swap with UNM.
As promoted in 1984, the ground lease approach enabled the developer to save on the upfront cost of land acquisition and instead invest in community amenities. In addition to the clubhouse, Towne Park has a tennis complex, two pools and a park with a roughly 4,000-square-foot pond and waterfall.
Also as promoted, homebuyers could put more money into their houses since they didn’t have to spend any on their lots. The cost comparison in 1984 was $31 a month to lease the lot against about $200 a month on a mortgage. At the time of the recent buyout, the monthly lease payment was still only $86.
The endgame is where ground leases for a project such as Towne Park can present problems. Decades in advance of the expiration date of the lease, financing issues can arise as houses on ground leases are sold due to uncertainty about the future.