Building Homes On Old Bases - Lennar's Success on Mare Island

Building Homes
On Old Bases
Isn't So Easy

By CHRISTINE HAUGHNEY
March 22, 2006; Page B1

SAN FRANCISCO -- Lennar Corp. seemed to have snatched two dream properties when it paid $2 for the right to rebuild two former military bases in one of the nation's most expensive housing markets.

But Lennar executives have learned there's nothing easy about turning vacant military land into profitable housing developments. At Hunter's Point, a former Navy shipyard in southern San Francisco, Lennar faces demands to build more affordable houses for an economically depressed population as it tries to market homes in an area many San Franciscans consider environmentally unsafe.

Even at the closed Mare Island Navy shipyard in suburban Vallejo, the builder's success in selling homes with sweeping bay views has been overshadowed by criticism that it should have first developed job-creating commercial sites.

"It's not for the weak of heart," says Tim Ford, executive director for the Association of Defense Communities, a group based in Washington, D.C., that advises communities on base redevelopment. "It's something that you have to be able to look past all of the problems and realize the potential of a piece of land."

Lennar's experience is being closely watched because it has made the biggest plunge among home builders as the U.S. government shutters more bases.

The incentive for home builders: The government assumes responsibility for much of the costly environmental cleanup and sifting through competing community demands for the abandoned bases, limiting the builders' exposure to delays. Builders pay to construct roads and other infrastructure improvements. They profit by selling the redeveloped plots of land or newly-built homes.

At stake is the economic viability of areas around the 22 more major bases that have been ordered closed by President Bush. Among them: Walter Reed Army Medical Center in Washington and Concord Naval Weapons Station near Oakland, Calif., both due to shut down by 2011.

While other national home builders -- including Toll Brothers Inc., based in Horsham, Pa., and Actus Lend Lease, Nashville, Tenn. -- have looked at the bases slated for closure, Miami-based Lennar is the national developer furthest along in the redevelopment process. As the nation's third-largest home builder based on number of homes built, Lennar has plucked five military-base redevelopment projects in California, which company officials say offered bases with the best large parcels near major cities.

Lennar took ownership of Mare Island land in 2003 and Hunter's Point in 2005 for $1 apiece. An affiliated company, LNR Property Corp., is helping with nonresidential redevelopment of the bases' combined 1,100 acres. The price reflects the risk of the two projects, which require more infrastructure investment than bases more immediately available for home building. In contrast, Lennar paid $649 million in 2005 for the former El Toro Marine Air Corps station, covering 3,700-acres in real-estate hotbed Orange County, Calif.

To be sure, Lennar expects both Mare Island and Hunter's Point to pay off. After investing $80 million in Mare Island, it has sold 178 homes for an average of $700,000 apiece, or nearly $125 million. It splits the profits with the city of Vallejo. The company expects to invest a similar amount at Hunter's Point. It projects a profit there by mid- to late 2007 after starting home sales.

And while military-base redevelopment represents a tiny part of Lennar's business -- in 2005, it had sales of $13.8 billion and profit of $2.4 billion -- some analysts say the move gives the company an edge over competitors. "This is not going to make or break the company," says Stephen Kim, a managing director at Citigroup Investment Research. Still, he adds, Lennar is gaining valuable experience learning to negotiate, particularly in San Francisco, a fertile area for social activism but a lucrative market for home builders. "The more resistance there is," says Mr. Kim, "the greater potential for a competitive advantage to emerge."

Lennar executives acknowledge they've encountered unexpected problems and delays in negotiating with the military, local governments and community groups. "Everybody -- including the Navy, the cities and us -- all have gone through a learning curve," says Emile Haddad, president of Lennar's Western region, which oversees these projects.

Standing on the highest mound of Hunter's Point amid neat piles of concrete left from razed military buildings, Kofi Bonner, president of Lennar's urban land division for northern California, points out the abandoned industrial warehouses where Hunter's Point opened as a shipyard in 1867. It closed in 1974, triggering three decades of rancorous on-and-off discussions over its reuse and sporadic industrial use. The area lags behind San Francisco as a whole in average household income ($41,994 compared with $55,221) and housing values (a median of $119,600 versus $396,400).

Lennar executives have pledged that a third of the 1,238 homes planned for Hunter's Point will be affordable, measured by the median household income for Hunter's Point. The home builder also has sponsored seminars on cleaning up poor credit records and joined with an affiliated mortgage company to help residents buy homes with a minimal deposit.

But some community leaders say that's not enough. Lennar's housing "may be affordable to some people, but it won't be affordable to people here in Hunter's Point," says Willie Ratcliff, publisher of the Bayview local newspaper.

Lennar's promise to create 1,000 permanent jobs over the next decade, with initiatives such as attracting the film-production industry to the base's abandoned warehouses, also has met with community skepticism.

Meanwhile, Lennar faces a marketing challenge. Though the Navy spent $400 million to clean up the area polluted partly by a national radiation-defense lab, Hunter's Point still has lower life expectancy and higher hospitalization rates for chronic diseases like diabetes compared with the rest of the city, according to Dr. Rajiv Bhatia, director of environmental health for San Francisco's health department.

"Some people are convinced that the shipyard is a radioactive, pulsating volcano of ill winds and vapors," says Scott Madison, a local businessman who chairs a citizens advisory committee.

Even along the well landscaped streets lined with Victorian homes on Mare Island, Lennar has encountered community resistance for getting its plans to build 1,400 homes off the ground faster than its efforts to build job-generating commercial and industrial space to replace the 10,000 jobs lost when the base closed in 1996.

"We would like to see the industrial go up first," says Craig Whittom, Vallejo's community-development director. A Lennar spokesman says the company has attracted more than 85 businesses that employ 2,000 and is on schedule to bring in a promised 6,784 jobs by 2013.

Vallejo officials also are pressing the home builder to preserve 502 buildings and features of the Mare Island base that the city considers historically significant. Lennar already has spent three years categorizing every building for its landmark status, architectural integrity and contributions to the Mare Island historic district.

Despite the frustrations at the two bases, Lennar's Mr. Haddad says he's optimistic both projects will help the communities and be financially rewarding for the home builder. "One thing that I love about my job," he says, "is that I can ultimately see the results of my efforts through tough times."

Write to Christine Haughney at christine.haughney@wsj.com