Nevada Business Journal invited a group of top executives involved in developing master-planned communities to a roundtable meeting at the Four Seasons Hotel to discuss challenges and issues affecting their industry in Nevada. The meeting was a part of our monthly Industry Outlook series. The developers discussed the availability of land for master-planned communities, the challenges of dealing with governmental entities and the controversy surrounding construction defects. They also expressed their opinions on topics affecting all Nevadans interested in the future of the state, including economic diversification and the Yucca Mountain project.
Availability of Land
Dario Herrera: One of the challenges I see from my side of the development process is the availability of land, because as land becomes more and more scarce, the price continues to go up. I understand that if you add about $1,000 to the price of a home you price 1,400 people out of the housing market, so that’s a big issue for us.
Dan Van Epp: As the land supply gets more and more restricted, it is obviously more and more expensive for those of us who are in the process of trying to get our hands on land, and then develop it. Obviously the cost of a home has gone up dramatically and will continue to go up dramatically until there’s more land supply. With the service kind of economy we have, that should be a concern to us in the long run.
Tom Hantges: In Reno, there is somewhat a problem with the availability of land. There is not an awful lot of land in Reno proper. There is some in the Sparks area going out towards the north.
John Kilduff: The availability of land and the entitlement process are the two main factors affecting the future of development in Southern Nevada. It’s going to depend on the release of BLM properties. They’ve got 5,000 acres still remaining in North Las Vegas and 6,500 acres in Henderson. When you talk about the large master-planned communities, those are really the only parcels that are still remaining. City officials are hesitant to negotiate with any one person before the [BLM] auction, because they don’t know who’s going to win, and they also don’t want to give any one developer a preference over another. So you go to the auction not knowing what the entitlements are going to be on that property until after you put your money down. It’s going to require cooperation of municipalities and the BLM for these larger master-planned communities to be able to afford to put in all of the amenities necessary to establish a quality of life for home buyers. If the city or the county decides not to be fair in all estimations, then there’s going to be less interest in these BLM auctions.
Frank Pankratz: We’d like to think the additional BLM lands will come on for auction sooner than later. The real concern there is the cost of doing business as these things go to auction. As we found out at the last auction in North Las Vegas it gets extremely expensive throughout the entitlement process.
Permitting and Government Relations
Rich MacDonald: Our biggest challenge in the jurisdiction where we are is essentially trying to get mapping completed. The entitlement process is a challenge everywhere, but the problem we’re having is getting the infrastructure plans approved through the city. It takes probably twice as long as it did four years ago.
Herrera: The number one phone call I get from people in the community is, “My property is being held up – Public Works said this, Planning said this. We made the changes they asked us to make, and then they asked us to make an additional change that they didn’t consider the first time.” A change you make in Public Works might affect your flood control issues. One little change can add six months to a project. We are developing a seamless plan so we have all of those people communicating. I think the county’s time span is probably the shortest of any [government] in Southern Nevada. We have been pretty proactive about dealing with these issues. We came together with the homebuilders and did a role reversal – our planners played developers and developers played the planner role. Some really unique information came out of that. I think developers gained a better appreciation for what planners are looking for, and of course the planners got to see firsthand how much of an impact minor decisions they make can have on the livelihood of a project.
Hantges: As a lender to master-planned communities and also as a developer of two projects in Southern California, I go to places like California and see an entitlement process that literally takes years and years. It’s a big risk for people to do a project, because they have to be able to persevere through the entire process, which could be three years or five years. If they run out of cash during that period, obviously they don’t make it to the finish line. The reality is that the price of all that inefficiency and waste is being passed on to the home buyers. If we’re going to keep affordability, someday people have to wake up and ask themselves why something needs to take five years to be entitled. It just doesn’t make any sense.
Blake Smith: The initial entitlement process was the most difficult for us. It took us some four and a half years to entitle a property and bring it from the county to the city. Each political environment has its own rules, but in Northern Nevada it is very tedious going through it. Once we achieved the initial entitlements on [Somersett], it’s actually been a pleasant surprise. The current administration of the city of Reno is really organized and has the streamlining you were speaking about.
Connie Brennan (Nevada Business Journal): We work a lot with people in economic development and I know one of their key selling points is that Nevada is pro-business. Yet, when we talk to the developers, they say it takes them two years to get something approved through a local government. Are we really pro-business? How is that affecting economic development?
Workforce Affects Nevada’s Future
Van Epp: I think the constraints on economic development and diversification have a lot more to do with an overall lack of an educated workforce, and also perhaps with the state’s willingness to support or subsidize a new business. If you look around nationally at the municipalities in states that have really done superior jobs of economic development, they do a little bit more than we do in giving to the incoming company – be it tax breaks or actual incentives. We’re very good once a company comes in, in terms of getting them approved. We’ve found over and over again that if we get them to that point, the various governments will work very quickly to get them approved, or help them get through the construction of a building, or whatever it is.
Kilduff: In Henderson too, we have had no trouble at all, once we get somebody to commit to come here. The city will do everything possible to accommodate their needs and also allow us to do things they wouldn’t let us do on a speculative building. Because there is a time frame in which you have to get into the building, we go in to talk to the mayor and council and we have always gotten cooperation. But, as Dan said, to get them to that point is the real issue.
Herrera: What we are seeing is a Catch-22 in the university system. We may be trying to attract a certain type of business, but when that business looks at our human resources infrastructure, it determines we don’t have the qualified personnel to provide quality employees for that business. But then when students go to the university and ask what they can major in, they hear, “Well, you can major in that, but there won’t be a job when you get out of here.” So, there is a gap in that process. What we are trying to develop is to have the university work with the business community to determine exactly what kind of businesses we’re trying to attract so they can adjust their curriculum accordingly. That is probably the number one obstacle for continuing economic development in Southern Nevada.
Thalia Dondero: The community college does a good job also of responding to the needs of the community for certain clients that represent the workforce, but there is always room for improvement. Business classes at the university had an increase of 20 percent in full-time students, but they couldn’t take them because they only had money for four professors. We don’t have money to do some of the things that are needed, and education seems to be down on the list [of priorities] somewhere.
Pankratz: Relocation people and CEOs of companies have their antennas up, and when they hear some of things they are currently hearing – doctors fleeing, and that – you need about 20 positive things to overcome all those negatives. We as the community leaders have to be very cognizant of moving quickly on some of those negative things to overcome them quickly.
Herrera: There are a bunch of problems. Obviously the medical malpractice crisis is one, the whole proposed Yucca Mountain Depository is another, affordability and reliability of power is another, along with the availability of water. We are dealing with a lot of big challenges that really could have an impact on whether or not businesses choose to relocate here. The way government bodies deal with those public policy issues is going to dictate our success in attracting new businesses to Nevada.
MacDonald: The situation with doctors is a crucial thing when you are looking at coming into a community We do a good amount of our lot sales to medical people, and looking through the sheets the other day of how many listings we have, I noticed there was a sharp uptake of 15 new listings. I checked with those people and they are all doctors under the impression that they are probably going to be leaving town. I remember years ago, when you had something seriously wrong with you, you went to California to get treated. I’d hate to see us have to go back to a situation like that.
Smith: It’s interesting to hear how all of these issues are coming back to a state legislative thing. As much as we may see it as a city or county issue, these massive issues that you are talking about are state legislative issues. The diversification that Las Vegas is heading towards has been, in our opinion, a savior in the north. We’ve diversified down to where the gaming industry is really only 35 percent of the economy. I think what will keep diversification from going forward are the constant comments about the labor source. This university system is a wonderful system, but they are still not fulfilling all the needs that these companies are looking for. Labor is probably the number one issue that is stopping people from coming forward at that point.
Construction Defect Litigation
Connie Brennan: I know that the Southern Nevada Homebuilders Association is putting together a legislative agenda to deal with the construction defect issue. How does this situation affect your ability to deliver homes that are affordable?
Kilduff: There seems to be a much more consolidated effort for this legislative session and hopefully we’ll get some reform. Premiums we have to pay for our insurance now are skyrocketing because of all this litigation that’s come from a lack of control over construction defects, and that brings us again to the price of housing – nothing comes for free.
Van Epp: The construction defect litigation ends up drawing in the subject of homeowners associations and that ends up affecting the master-planned community developer. It’s the same legislation that covers both. Our associations have been relatively free of issues, and yet we’re going to find restrictions on homeowners’ associations as a result of what’s been going on in the litigation about construction defects. It could have a very negative effect on what we are trying to do in our master-planned communities.
Hantges: We are currently developing a townhome community in Reno. In regards to this litigation issue, there is currently no competition for our product, which simply tells you that homebuilders are not building [townhomes]. They don’t want the hassle, they don’t want the risk, they can’t afford the insurance or they can’t get it. When I built a condominium project here in Las Vegas in 1991, my liability policy was $30,000. Last fall, I got $3 million of coverage for $700,000 dollars, and $3 million of coverage really is not enough to make all the subcontractors and everybody else happy. So, obviously there is good and bad here. The good is that there is virtually no competition in Reno, but I know that townhomes and condominium development are down significantly everywhere. This is a bad thing for consumers, who are not seeing the kind of product a lot of them enjoy.
Pankratz: The fact that the consumer gets priced out of the marketplace has a tremendous impact on business. We talk about diversification of our community – that has a significant influence in terms of the affordability of housing. The real issue is the right to come back in and make a repair. No one is debating that the homebuilder or subcontractor should be responsible to repair defects. I think we are all likely in agreement there. But they have a situation now where they are not allowed back into the house to make that repair because some attorney has gotten involved and decides that is the best way to run the show. It is antithetical to decent business practice and it has got to change.
Herrera: People are spending their life savings to be homeowners. They obviously have every right to expect the product they paid for, and there are a lot of folks in the industry who aren’t being responsive to those people’s needs.
Pankratz: The legislation that is being proposed wouldn’t preclude those who aren’t getting the response from taking the appropriate legal steps.
Herrera: Obviously construction litigation and malpractice litigation is affecting the cost of insurance. But insurance is affecting the cost of insurance as well. I think you have to look at both tort reform and insurance reform combined. Right now in the state of Nevada when an insurance company applies for a rate increase, they don’t have the public hearing. Whereas if the Nevada Power Company is going to apply for a rate increase, there is a public hearing with some scrutiny. We ought to look at the other side of the coin as well and talk about insurance reform, because right now small states like Nevada are hurt by big insurance companies.
Pankratz: That would scare the hell out of me. The next thing you’d have to do is go over to the PUC and have somebody tell us what we price our houses at. If you take a look at [insurance company] returns, they have been devastated by the cost of litigation and thus we are seeing them reacting the way they are. They can’t afford to do business here and in a lot of states they can’t afford to underwrite certain kinds of risks.
Yucca Mountain Causes Concern
Brennan: One of the things you mentioned earlier was the Yucca Mountain project. How much concern is there in this room on its impact on the growth of new business?
Dondero: I oppose it, because I don’t want people saying we are just a garbage dump. [The government] is building more and more tunnels, and pretty soon the whole central part of our state is going to be dedicated to that. Why should we be taking everybody’s garbage? We shouldn’t be. They should be reprocessing it where it is produced.
Herrera: The Department of Energy has admitted that when they transport the waste there will be accidents, at least two accidents per year, with radiation. This is by their own admission in their environmental impact statement. The only question is how, when and where? God forbid Las Vegas becomes the answer to that question. If there is an accident, even without release of radiation, anywhere on the transportation route it’s going to be a national story and the story will be that it was headed for “Yucca Mountain outside of Las Vegas.” Our studies in Clark County show there is an immediate property devaluation as a result of transportation of nuclear waste through a community. We expect that, just to prepare this community to receive shipment of waste, it will cost Clark County $360 million the first year. Over the life of the program it will cost something like $3 billion for public safety training, human resources and adequate equipment.
Kilduff: If people have a choice to move someplace, why would they move down the street from the nation’s garbage dump? That is going to impact our ability to sell homes.
Van Epp: I don’t think there is going to be an accident relating to the storage of the stuff up there, and I think the science is pretty good on that. It is the transportation I am concerned about. We are one of the few private companies that testified against the transportation of the waste coming through Southern Nevada. Furthermore, if we keep up the kind of rhetoric that we have going now, all we are going to do is scare away the tourists to the point that we will have no economy. The consequences of publicizing the dangers may be more negative than the consequences of the stuff being there. So I would take a little bit different approach and focus specifically on the transportation subject.
Herrera: The big argument we are all making that this is not a Nevada problem – this is a national problem. There are 43 states that will be subject to the transportation of nuclear waste. There are 703 counties, and 60 million people live within one mile of the transportation corridor. The DOE hasn’t done a national transportation analysis or a homeland security assessment.
Dondero: I went out into the tunnels where they are digging right now and they say it won’t contaminate the water, but the dye tests that they did flowed right to Lake Mead. When you go down in the elevator, the walls are lined with water seeping out, so the underground water is there.
MacDonald: It’s good to hear that public officials are moving to make this a broad issue, rather than a Nevada issue. Dan is certainly correct – the more we dwell on this, the more it looks like a local issue. I still have people looking at moving into the community who ask about water availability because water shortages were in the news 10 years ago.
