Bloomberg News

California Builders Boom With FivePoint New Schools: Real Estate

May 12, 2014

Waterset

Newland Real Estate Group donated the site for a private Montessori school in the community center of its Waterset community in Apollo Beach, Florida. The school, lower left, opened in 2012, before the first homes sold. Source: Newland Real Estate Group

FivePoint Communities Management Inc. is already constructing a school at its Great Park Neighborhoods project in Irvine, California, for 1,000 elementary and middle school students even as it’s still building the first 700 homes.

“We build the schools ahead of time,” said Emile Haddad, chief executive officer of Aliso Viejo, California-based FivePoint, which has permits for about 10,000 homes at Great Park. “That way we always have them ready.”

Local schools, along with parks and recreation facilities, have long been draws for buyers in new communities. Now, as school districts face tight construction budgets and homebuilders compete to attract families able to qualify for mortgages, developers are taking the lead on school construction instead of waiting for local governments to do the job.

Sales of new single-family homes have trailed the broader housing recovery as buyers balk at high prices or the remote neighborhoods where more-affordable residences are available. New-home purchases fell 14.5 percent in March from February to an annual pace of 384,000, according to the Commerce Department. Transactions, which have averaged about 661,000 a year since 1963, peaked at an annual pace of 1.33 million in March 2005.

In Apollo Beach, Florida, Newland Real Estate Group LLC donated space so a private Montessori preschool was ready to open in 2012, before the first house sold in its Waterset development.

‘Score Issues’

The private school was included in the plan to attract parents who might be turned off by “test-score issues” at nearby public schools, said Teri Slavik-Tsuyuki, chief marketing officer for San Diego-based Newland, the largest U.S. developer of master-planned communities, with 28 projects in 14 states. Higher grades will probably be added to the Montessori school in the future, she said.

“We don’t do this because there are exactions that the counties are dragging out of us,” Slavik-Tsuyuki said in a telephone interview. “We knew that a school was the right thing for the community and that’s just the cost of doing business.”

At nearby FishHawk Ranch, Newland spent $5 million in 2009, at the bottom of the housing market, for site development of a new high school, almost five years before model homes were ready, she said.

“It was like ‘Field of Dreams,’” Slavik-Tsuyuki said, referring to the 1989 Kevin Costner movie about an Iowa farmer who builds a baseball diamond in a cornfield to attract the ghosts of a disgraced team after he hears a disembodied voice saying: “If you build it, he will come.”

“There’s this massive new school in the middle of this vacant, open master-planned community,” Slavik-Tsuyuki said.

Technology Academy

Cambay Group Inc., the developer of River Islands in Lathrop, California, opened a charter school in August, about nine months before the first model home opens this month. The River Islands Technology Academy has about 400 students in kindergarten through sixth grade and almost 600 more on a waiting list, according to Susan Dell’Osso, project director of the community 77 miles (124 kilometers) east of San Francisco.

Cambay has 11,000 River Islands residences planned, which will be home to a projected 8,000 students. Many parents with kids on the academy waiting list expect to buy new houses because of the school, Dell’Osso said in a telephone interview.

“It probably adds 10 to 20 percent to home values,” she said. “A good school makes a tremendous difference in a master-planned community.”

There’s a direct correlation between top-performing schools and premium real estate prices, according to Stan Humphries, chief economist at Zillow Inc., the property-data website firm. The connection is a chicken-or-egg question, he said.

‘Good Schools’

“On the one hand, parents desire good schools, which leads them to bid up home prices in areas with good schools,” Humphries said in an e-mail. “On the other hand, parents in more affluent areas have resources that better arm both their children and their schools to compete in terms of performance.”

Premiums vary by location, he said. In Pennsylvania, homes near schools rated at the top of the 1-10 performance index created by GreatSchools Inc. are more than twice as expensive as homes near schools rated 5 on the index, he said. In Nebraska, buyers pay only a 50 percent premium for a school with a 9 rating, he said.

“A big reason why real estate is all about location, location, location is because school quality makes such a difference in terms of home values but yet varies so widely,” Humphries said.

Tuition Comparison

For many parents, the premium for a house near high-quality public schools seems reasonable compared with the cost of a private education, said FivePoint’s Haddad, whose children attended an Episcopal school where tuition is now more than $22,000 a year.

“If you ask people today why they’re buying a home in Irvine, the No. 1 answer is the school district,” Haddad, who co-owns FivePoint with Lennar Corp. (LEN:US), said in an interview at Bloomberg News’s Los Angeles office. Among the five public high schools in the city, 40 miles southwest of Los Angeles, three are rated 10 and two are rated 9 on the GreatSchools index.

The Irvine school district has agreed to deliver a new $250 million high school by 2016 on land Haddad set aside in his development. FivePoint and Irvine Co., a closely held developer that planned most of the city, are covering the costs of the 2,700-student school, which will be built by the district, according to Lorrie Ruiz, its director of facilities planning.

Premium Paid

Irvine’s Jeffrey Trail Middle School, which isn’t rated yet because it opened in September, is accommodating students from Haddad’s Great Park development until his school’s expected completion next year. Parents waiting in the parking lot earlier this month said they are paying a premium for their homes to enroll their kids in the new school.

May Brown, the mother of a Jeffrey Trail seventh-grader, is renting while on the waiting list to buy a new house in Irvine’s Stonegate Village, where she expects to pay $750,000 to $1 million for a four-bedroom, Mediterranean-style home. That’s about three times the cost of comparable homes in Tennessee, where her family lived before returning to their native California last August.

“We moved here because of the schools,” said Brown, whose husband is associate dean of the School of Pharmacology at Chapman University in Orange, California. “In every town, you have to pay a premium to buy a house near good schools.”

Mi Jeong Oh said she and her husband, who was transferred in 2012 from Toronto as an electronics researcher, chose to live in Irvine because they wanted their son, a ninth-grader, and daughter, a seventh-grader, to attend the local schools.

‘Very Expensive’

“Irvine is very expensive,” Oh said as she waited for her daughter at Jeffrey Trail. “After they graduate, I’m going to move to another place.”

California, which has about 6.2 million of the 54 million kindergarten-through-12th-grade students in the U.S., has been a leader for developer contributions to new schools since the 1980s, when impact fees were first imposed to fund public improvements after the voter-approved Proposition 13 restricted the ability of local governments to raise taxes.

Last year, the number of new-school projects fell to 120 statewide from a decade peak of 1,147 in 2008, before the impacts of the housing crash hit the economy, according to the California Office of Public School Construction.

District construction regulations and planning processes often frustrate developer efforts to provide schools as fast as they want, said Jeffrey Vincent, deputy director at the Center for Cities and Schools at the University of California, Berkeley.

“I love school districts, but they’re not always quick and nimble,” Vincent said in a telephone interview.

Playa Vista

It took more than a decade for Los Angeles Unified School District to design and build a new elementary school in Playa Vista, a planned community for more than 5,800 homes that includes a 4-acre (1.6 hectare) school site dedicated by the owner, said Marc Huffman, vice president of planning and entitlements at Brookfield Residential Properties Inc. (BRP), the project’s master developer since 2012. Playa Vista also will contribute about $30 million in impact fees for local school construction over the life of the development, Huffman said.

Since the school opened in August 2012, Playa Vista home prices have climbed as much as 20 percent as it attracts families and move-up buyers from the community’s smaller condominiums, Huffman said in a telephone interview.

“The school’s definitely a draw,” he said.

San Francisco

Playa Vista is a rare urban project with space for a new school. While Haddad’s Southern California developments in Irvine and Valencia include land for new schools, he hasn’t been able to shoehorn a campus into a San Francisco project called Hunters Point/Candlestick Park, where he’s building 10,000 homes on a waterfront site south of downtown. It’s an amenity cities need if they expect to attract more than young, single people and empty-nesters, Haddad said.

“We need to start thinking about urban schools -- about going vertical,” said Haddad, whose company is overseeing the development of five planned California communities with almost 50,000 homes. “We haven’t won that battle yet, but I haven’t given up.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net Daniel Taub, Rob Urban


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