Real Estate Update: There's Smart Money, And There's Really Smart Money

Even the biggest and best-advised investors make mistakes, and then there are some that seem to beat everyone all the time. In a busted land deal in Arizona, the enormous California Public Employee Retirement System (CalPERS) lost a bundle for its pension beneficiaries (and possibly state taxpayers, who may have to make up the difference someday). And it looks as though even Goldman Sachs lost money on this deal, which fell to earth for just eight cents on the dollar. The new owners are a group of patient Texans.

I came across this story on Bloomberg, and through their reporting found the source story at BREW, the Business Real Estate Weekly of Arizona.

In 2006, when U.S. home prices were at their very peak, a group of investors put together $150 million of cash with a $250 million mortgage and bought 10,200 acres in the middle of the Arizona desert, somewhere southwest of Phoenix. The plan was to build 42,000 homes, and put 2,300 acres to commercial and industrial use.

I've been there, or at least nearby, to a town called Buckeye, Arizona. It's beautiful country, if you like the desert. BREW reports that the property, known as Amaranth, sits between the Sonoran National Monument on the west, and the Maricopa County line on the east. (Students of the financial crisis know that a colossal failed hedge fund was also named Amaranth -- I don't know what if anything they have in common.) Google Earth shows something that looks like a construction site around there.

If I've got it right, most of the $150 million equity for the original purchase came from CalPERS, while a $250 million loan came from a group that included Goldman Sachs and a big hedge fund named Fortress Investment Group.

To repeat, the property just changed hands for $32.5 million, or $3,200 per acre, just eight cents on the original dollar. The buyer -- the real smart money in this deal -- is a group of investors that includes an Austin-based real estate firm and a funeral and memorialization company based in Houston.

At this point the land has no utility services, and but there are cattle grazing on it. Future revenues may come from selling its water rights, or letting Goodyear expand a nearby landfill, Kent Kleinman of Arcus Property Solutions, of Gilbert, Arizona, told Bloomberg.

"This won't be developed in my lifetime," Kleinman, who says he's in his mid-50s. "Our plan is basically buy and hold and resell after the market appreciates."

At the top of the housing market, 2006, smart investors were putting money into new houses -- in the middle of the desert. CalPERS lost money, and Goldman Sachs and Fortress lost money, and it looks like the winners will be the good old boys -- someday.