Toll Brothers losing interest in NorCal but not in Cupertino tract

Pennsylvania home builder Toll Brothers Inc., an active player across the Bay Area, will push ahead with a contentious and uncertain Cupertino condominium project even as it foregoes other proposed California developments in recognition of a slowing national housing market.

Toll Brothers alerted Wall Street analysts Aug. 22 that it would take a $21.1 million write-off in its third quarter to account for its decision not to move forward on buying an unspecified number of lots that it had previously optioned. Based on industry business practices, $20 million is enough to leverage the acquisition of roughly $400 million worth of land.

Most of the lots it is discarding are in California and Florida, the company said in prepared remarks. But under questioning from analysts, Chief Financial Officer Joel Rassman said those in California were primarily in the northern part of the state. A Toll Brothers spokesman disputed the accuracy of Mr. Rassman's comment after the call, however, saying that Mr. Rassman had "misspoken." Joe Sicree declined to be more specific on the lots' locations, however, though he did confirm that the Cupertino property was not among the projects the company intends to abandon at this time.

He alluded to the fact that additional write-offs may be in the works as well, as the company is in active negotiations with property owners on additional tracts "to try to save deals."

The price a builder is willing to pay for a given piece of land is premised on the anticipated market price for the homes it eventually intends to build there. When home prices erode, builders try to reduce their land acquisition costs so as not to corrode their profits. If sellers are intransigent, the company, as in Toll Brothers' case, will simply walk away, accepting as lost the money it has spent on options and gaining development approvals.

Toll Brothers operates in 21 states.

The publicly traded company, which has a reputation for building expensive luxury homes, is among the most active builders in the Bay Area. It has at least 15 projects, with an aggregate of more than 2,000 homes or condos, that it is selling now, according to industry researcher The Ryness Co. Those subdivisions range from the 75-unit Courtyards at Lundy condominiums in San Jose, selling for $600,000 and up, to the 287-home Norris Canyon Estates in San Ramon, where the highest-priced houses are offered for $2 million.

In the works in the South Bay, besides Toll's Cupertino project, is a large housing development in Mountain View, where it has also fought long and hard to gain approvals. In June, the Mountain View city council agreed after a combative community fight to allow the company to build up to 530 homes on a 20-acre site previously owned by Hewlett-Packard Co. Details of that development, including the outlines of about 3.6 acres in parks, remain to be worked out.

Toll Brothers sought to attain those entitlements since at least April 2004.

But Toll Brothers has faced the stiffest resistance from Cupertino residents. Opponents claim the 380 condominiums adjacent to Vallco Fashion Park would degrade schools, harm property values and undermine the town's industrial base.

The 32 acres on which the project is to be built are owned by H-P and are zoned for industrial development. The land has been idle for decades.

Cupertino's city council has approved the project, which comes with a 3.5-acre public park and 80 below-market-rate units set aside for seniors. The local school system, which would receive an estimated $500,000 annually as a result of the new development, has offered its support.

But after the council approved the development March 23, incensed residents gathered 5,000 signatures to put the development to a public vote in November.

Patty Chi, a Cupertino resident since 1988 who is leading the opposition to the plan, says that, as the mother of a first-grader, she questions the school district's findings that the increased student counts from the development won't be a problem. She thinks the number of new students will be far higher than the district projects, "because we all know why people move to Cupertino: the schools"

She says her child's elementary school already has several portable classrooms, which are eating up playground space, and she worries that lunch lines and bathroom lines will also grow unwieldly.

The cast of characters in the opposition campaign includes two -- Dennis Whittaker and Edward "Ned" Britt -- who also led an effort last year to impose new development controls citywide through three voter referendums. All three failed, though not by huge margins.

Skeptical citizens are nothing new for Toll Brothers, Mr. Sicree, the company spokesman, says.

"The company has grown up dealing with tough municipalities and working through the approval process," he says. "In New Jersey, one of our major markets, it can take six, seven, eight years to get all of the approvals needed. This is not a short-term business."

There is no question that new home sales in the Bay Area have slowed, though as Toll Brothers chairman and chief executive officer Robert I. Toll said to analysts, conditions are not uniform.

"In Northern California, it's been very spotty. Some communities have been very, very slow, and some communities have seen pretty substantial demand," he said.

The company continues to look for land to buy in Southern California, he added.

His observations jibe with statistics from Ryness. According to the company, Bay Area new home sales in the week ending Aug. 27 were down 31 percent from the same week a year ago. Conditions in Contra Costa County were basically unchanged, however, and weekly sales in Santa Clara and Alameda counties, while both down 24 percent, were much stronger than the remaining five counties in the survey.

The weekly average across 30 developments in Santa Clara County was 0.83 homes a week, Ryness says, but that total masks considerable variation. Some developments, such as Pulte Homes' Altura project in San Jose, is selling an average of four homes a week so far this year, and numerous developments countywide continue to report selling two and three homes a week for the year to date.

In comparison, Toll Brothers' sales across a multi-faceted development in Dublin range from about one home to more than two homes a week, Ryness reports, though its numbers are based on conditions at the end of June. A more current survey of a single-family housing development in Hayward, with homes priced in excess of $1 million, shows the company continued to sell more than two homes a week. And in San Jose at the Lundy condominiums, sales were running at two units a week, based on a survey in the first week of the month.

Silicon Valley/San Jose Business Journal
September 1, 2006
by Sharon Simonson