New Real Estate Predators
by Will Parrish and Darwin Bond-Graham, February 1, 2012
“During depressions, assets return to their rightful owners.” — Andrew Mellon, banker, US Treasury Secretary, and intellectual father of “trickle down” tax cut ideology.
“Buy on the fringe and wait. Buy land near a growing city! Buy real estate when other people want to sell. Hold what you buy!” — John Jacob Astor, real estate speculator-cum-fur trader and global opium trafficker.
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Throughout much of the North Bay and North Coast, real estate values closely correlate with the value of wine. In recent decades, the wine industry's relentless development of “raw land” — as industrial agriculturists refer to forests, prairies, savannahs, meadows, deserts, or any other landbase not yet totally subsumed by the industrial economy — into vineyards has markedly driven up regional property prices. The industry has further impacted real estate values via its integration with the real estate economy as a whole. More than any other artifact or image, it is the vineyard and wine glass that have come to epitomize the “Good Life” of Northern California for a global market of real estate investors, vacation-takers, and home buyers. The political and business establishment tout wine's economic impact in triumphalist terms, virtually never exploring the dark sides of gentrification and growing inequality.
With the 2007-8 collapse of the real estate market, and the attendant decline of pricey “premium” wine brands, new forms of predatory real estate capital have emerged to prey on the “distressed assets” that now pervade the suburbs, exurbs, and countryside. “Distressed” is a financial sector euphemism for assets that have lost significant value due to the fact that the middle class has been gutted by foreclosures, high unemployment, loss of savings and other factors. Most often, of course, those who are truly distressed by this state of affairs are families or individuals who can no longer afford to pay bills, save, or even survive, let alone purchase the growing inventory of foreclosed homes that have glutted the market.
To understand how this development ties into the fate of this area’s wine industry, it helps to recount the rise and recent fall of one of the wine industry's largest speculative entities of the last decade, Premier Pacific Vineyards (PPV).
William Hill's Forte
The first person to hit upon the full potential of wine's value as a speculative real estate asset was one of PPV's two co-chairman, William Hill, whose greatest forte across his four-decade career has been to feed the same venture capital and institutional investor capital that had provided the impetus for the Bay Area's housing/commercial real estate and high tech sectors into a vortex of constant land speculation in the mountain regions of Napa, Sonoma, and Mendocino counties.
Hill was a sandy blond haired recent alumnus of Stanford Graduate School of Business in the early 1970s when he ventured forth from his job as Bay Area real estate investment adviser to scout raw land for grapevines in Napa Valley. His initial foray as a vineyard developer was on a steep slope in the Mayacamas Mountains range above Calistoga, a property he named “Diamond Mountain,” where his crews cleared 120 forested acres to install Cabernet and Chardonnay grapes. In 1978, he sold the property (“flipped” it) to one of the world's largest corporations, Coca-Cola. The pattern repeated itself numerous times over the years, with Hill developing and flipping vineyard estates to institutional investors or large corporations.
The frenetic pace of regional vineyard development reached its statistical zenith in the late-1990s. Such was Hill's ambition in this period that he partnered with a Willits lumber tycoon named Rich Padula in a preposterous scheme to clear-cut 5,000 acres of redwood forest on a 20,000 parcel in the Gualala River watershed, just outside of Annapolis. Admittedly, this was a more restrained proposal than the 10,000-acre conversion of forest to grapes Padula originally put forward. Hill soon withdrew from the plan.
Waiting in the wings was one of California's leading real estate investment specialists, Richard Wollack, who previously chaired the country's largest so-called “limited partnership” investment firm, Liquidity Fund of Emeryville. Limited partnerships involve investors who have limited legal liability and are not involved in day-to-day management of the project. It's an open secret within the financial sector that they often exist for the primary purpose of steering investors' money into tax shelters, with those who operate them commonly known as “shelter packagers.” As one of the United States' leading shelter packagers, Wollack had formed extensive ties to investors throughout the country.
Hill and Wollack formed a company called Premier Pacific Vineyards, initially with the goal of raising $85 million in $1 million increments from pension and other funds around the world. Their plan was to follow the same pattern as Hill had pursued throughout his career, except now on an even grander scale: buy land, clear it, flatten it, and install a vineyard, then sell to the highest bidder. The model was predicated on the idea that demand for high-end wine would continue to grow, and that the purchasing power of prospective upper-middle class wine drinkers would continue to expand.
In 2002, Wollack, a noted Democratic Party fundraiser and insider, landed the first of two $100 million investments from CalPERS (California Public Employees Retirement System). It was the first time CalPERS had ever invested in an agricultural venture. With this infusion of public cash, they purchased Rich Padula's 20,000-acre parcel in the Gualala River watershed for $28.5 million, quickly pledging to clear the 1,700 acres of redwoods to install grapes. In keeping with the tendency of the most environmentally destructive corporations to attempt to recast their image via sophisticated public relations, PPV christened the project as “Preservation Ranch,” then promised to set aside part of the property as a conservation easement much of which they would “sustainably log.”
Premier Pacific also wasted little time in developing 18 new vineyards (from “raw land”), as well as purchasing some existing acreage. Three of these vineyards are in Anderson Valley. The company at one point claimed to own the largest vineyard portfolio in the country with acreage in Washington and Oregon, and holdings running up California’s coastal zones from Santa Barbara to the valley this fine publication calls home.
Pension Booze Revisited
In March 2010, we published a piece in the AVA called “Richard (Blum) Ellis' North Coast Pension Booze,” in which we described the political economy underlying some of the most ecologically destructive vineyard projects in Sonoma and Mendocino Counties CalPERS and CalSTRS (California State Teachers Retirement Sytem) have become piggy banks for politically-connected private equity firms. A whopping 54% of the roughly $191 billion in CALPERS' coffers were staked to the private equity market at that particular moment. In many cases, wealthy financiers who have given enormous sums of money to both the Democratic and Republican Parties — mostly the Democrats, who typically wield greatest power in Sacramento — are landing hundreds of millions in pension investments for their companies and pet projects.
In the article, we analyzed two extremely wealthy regional wine corporations. Premier Pacific Vineyards was one. The other was the parent company of Duckhorn Vineyards (owner of Anderson Valley's Goldeneye Winery franchise), Global Investment Partners (GI Partners for short)
As we noted, GI Parners was an investment partnership of some of the most sophisticated players in the global real estate game. Its $26 million in seed money came courtesy of the world's largest real estate brokerage firm, CB Richard Ellis (CBRE), which is owned by the private equity firm operated by Richard Blum — the billionaire husband of US Senator Dianne Feinstein (D-CA). As we examined in the series for the AVA two years ago, Blum is a consummate Democratic Party insider. His various companies have often secured eyebrow-raising investments from CalPERS.
Other initial investors in GI Partners included none other than Goldman Sachs, as well as John Paulson, a hedge fund manager who notoriously reaped billions by short-selling predatory housing loans in 2007. It didn't take long for GI Partners to beef up on public pension money. By 2011, it ranked as California's eighth largest private equity firm, with a whopping 69% of its roughly $6 billion coming from either CalPERS or CalSTRS.
CBRE's sponsorship of GI Partners brought important connections. GI Partners co-founder Richard Magnuson was a managing director at CBRE. The firm's other co-founders and current directors came from CBRE, Nomura, Vulcan Capital, and other top-tier corporations and private equity groups. To date, GI Partners has invested several billion in real estate. Its investment in Duckhorn counts for $250 million of its overall portfolio.
Of course, wealthy corporations — private equity firms included — have backed the wine industry's expansion in numerous other instances. Institutional investors such as Prudential and John Hancock are large investors in vineyards, with wealthy individual investors who don't buy vineyards of their own participate through private-equity investments, or through the public markets via real estate investment trusts.
To take just one example, the world's largest private equity firm, TPG Capital of San Francisco (which is slightly larger than the second- and third-ranked Goldman Sachs Capital Partners and Carlyle Group), provided the bulk of the start-up financing for one of Wine Country's largest outfits, Silverado Premium Properties of Napa and Sonoma, which owns 10,000 vineyard acres throughout California.
PPV's Feats of Engineering
Not only did William Hill succeed in expanding the frontiers of wine industry funding, but he was also establishing entirely new frontiers of vineyard engineering, which would replicated by the biggest wine corporations such as Kendall-Jackson and E&J Gallo in the following years. Nearly every one of In each case, the vineyards were located in rocky soil high up on mountain benchlands or steep slopes, in climates that Hill and other observers considered to yield the highest caliber of grapes possible.
In 1980, for example, he undertook what was certainly the most audacious vineyard development in Northern California up to that point, on a 1300-acre property in a remote area of Napa called Atlas Peak. As James Conaway, author of Napa: Story of an American Eden, put it, “There wasn't enough water on Atlas Peak for the rattlesnakes.” So Hill's crews excavated some massive reservoir, one of them holding a whopping 960-acre feet (a typical large vineyard pond is 49-acre feet), to store water for irrigation and frost protection. They dynamited the hardpan soils and ripped them up with D-10 Caterpillars, using a six foot plow.
The property cost roughly $30 million in 1980 dollars to develop ($81.9 million adjusted for inflation). Hill's primary investor was the multi-national firm Whitebread PLC, owner of the United Kingdom's largest hotel brand, Premier Inn, as well as of the world's second largest international coffee shop chain other than Starbucks, Costa Coffee. The impact of this property on nearby land values was in itself staggering.
All of these successes fed Hill's manic pursuit of new mountain vineyard frontiers. Each development translating into greater riches for him and for his growing network of venture capital funders in the Bay Area and beyond. By 1990, he had secured access to enough capital to be developing four-five of these mountain vineyard parcels simultaneously.
One of these was way up on Peachland Road in Anderson Valley. One of the few people not employed by Hill who observed the development was a Division of Water Rights officer, who noted to this publication that he hadn't seen destruction on such that scale since his involvement in the US military's strafing of Laos during the Indochina wars of the early-1970s. Hill sold the property in a package deal to the British conglomerate Allied Lyons, again taking his profits and reinvesting them in still more mountain vineyard estates. This was the template for Premier Pacific Vineyards' various ecological rampages, with Preservation Ranch as its crown jewel.
The project would involve clear-cutting forest, removing the trees’ stumps and root systems in their entirety, flattening out hilltops with massive bulldozers, and chemically sterilizing the land (basically creating an ecological deadzone), as well as drilling deep wells, installing large water reservoirs, and putting a large new straw into an already badly damaged watershed. It would involve a gravel mining operation, roughly 80 miles of fencing and 90 miles of road.
Recognizing that the success of the proposal was dependent on their ability to create a regional housing market in this remote area of the northern Sonoma Coast, Hill, Wollack, and company also at one point proposed to construct 116 luxury vineyard estate homes on the parcel.
As the Great Recession unfolded, however, the market for premium wines collapsed. “In 2008 with the economic hardships surrounding us, the foul mood of the US taxpayer, and resultant inventory bulge ensuing from slack retail sales, many thought the luxury good business was dead,” reads the Silicon Valley Bank's 2011-2012 State of the Wine Industry Report. “Gone were the vestiges of conspicuous consumption and public celebrations.”
Vineyard lands acquired or created in the late 1990s and 2000s at sky-high prices have been unable to produce crops capable of fetching prices that equal high returns on earlier boom-time investments. Premier Pacific Vineyards banked on perpetual expansion of the market and lost. The same ecologically destructive — and thus capital-intensive — methods that characterized William Hill's career heretofore have finally stopped paying him dividends.
“[PPV's] vineyards are first-class,” Mark Freund, Senior Relationship Manager at Silicon Valley Bank, told Financial Advisor magazine in a story published last week, “but the cost was above and beyond what anybody else had ever spent. They were dynamiting out stone to get these vineyards in.”
Throughout Sonoma and Mendocino Counties, big plans for expansion of winegrape plantations deeper into the woods and higher into the hills have become stalled. The economic downturn has undermined the political power of the wine industry.
Last week, Sonoma County's new agricultural commissioner (and former Mendo Ag Commissioner), Tony Linegar, proposed a moratorium on new forest-to-vineyard conversions in the county (of which there are several on the table), with backing from a fragile coalition of the Board of Supervisors. Even many leaders of the regional wine industry quietly favor this proposal, which would help protect them from a market glut. The proposal's fate is being decided at a meeting Tuesday as the AVA goes to press.
For its part, Premier Pacific Vineyards has all but gone belly-up. The company's value declined 40% in a single year, prompting CalPERS to withdraw its funding from the project. To open the year, PPV laid off the majority of its work force. It then announced it was hiring none other than GI Partners to manage its remaining assets, “Preservation Ranch” included. Reportedly, the company is now looking to sell “Preservation Ranch.”
From Vineyards to Suburbs
At almost exactly the same time GI Partners took over management of Premier Pacific Vineyards' numerous tracts, it announced it was buying up thousands of foreclosed homes in the Bay Area and beyond. Its agent in this process is the Oakland-based Waypoint Real Estate Group. Founded in 2008 by a pair of wunderkind entrepreneurs — one is a former NFL kicker for the New Orleans Saints football team, the other a mechanical and software engineer — Waypoint specializes in purchasing foreclosed homes and turning them into rental properties.
The misfortune of thousands of homeowners, in the absence of any kind of homeowner bailout by the government, is their prize. Of course, Waypoint spins this activity as a benevolent one: “The Waypoint solution centers on buying distressed single-family houses, renovating them, and then leasing them to residents via innovative leasing programs which are designed to provide a path to future home ownership for the residents.” Waypoint's site also contends that it “currently owns and manages nearly 1,000 homes in California, and is poised to begin an aggressive national expansion program in 2012.”Many of these homes are the foreclosure epicenters of Contra Costa, Alameda, and Solano Counties, with others are in southern California. GI Partners recently injected $250 million into Waypoint, the beginning of an effort go on a national home-buying spree while residential real estate prices remain low.
According to GI Partners managing director Richard Magnuson, another $750 million will be invested into Waypoint if the initial quarter-billion meets certain returns. Most of this money, of course, comes courtesy of CALPERS and CALSTRS, not to mention the Florida State Board of Administration and the Teachers Retirement System for the State of Illinois. Although GI Partners is legally a private equity group, the actual equity it is investing comes largely from the same taxpayers as a group that the federal government neglected to bailout when the crisis began.
Waypoint's executives have a variety of backgrounds related to the current business of grabbing land at deflated prices. One of Waypoint's founder, Colin Wiel, the engineer, is a principle investor and executive of Rainforest Capital, a private equity group that has bought 10,000 acres of Panamanian forestlands. Rainforest Capital plans to build an “eco-hospitality community development,” called “Junglewood” in the forest. Additionally, the company is logging tropical hardwood, supposedly in a “sustainable” manner. Deforested lands will then be converted into carbon credit assets and sold to investors seeking to offset their emissions.
It's no surprise then to see private equity firms active in the premium wine grape game now shifting serious capital into foreclosed homes. After all, as William Hill and Richard Wollack recognized long ago, as goes the wine industry now that this region has become Wine Country, so go real estate values. PPV's new property manager, GI Partners — owner of Duckhorn and the Goldeneye Winery — is leading the pack in this transition from monopolizing high-value agricultural holdings in the boom market of the 2000s to monopolizing low-value rental housing in the current mega-bust.
In Sonoma County, the number of property foreclosures went from virtually none in 2006 to 4,771 in 2009 and 3,333 in 2011. The regional wine country's foreclosure rate is statistically greater than the national average. It remains to be seen if the “Preservation Ranch” land's current reprieve will hold out, or if it will be gobbled up by an investment entity hunting for distressed assets. One thing is clear, however. As predatory entities like GI Partners continue to expand, so will their land grab throughout the region.