Mammoth Real Estate Broker’s Report, January 14, 2011––The End of the Innocence

What would Mammoth be without tons of snow and all the associated chaos? What would Mammoth be without a big holiday crowd full of recreation diehards? (They had a great time from what I could tell.) And what would Mammoth be without one big controversy filled with uncertainty? Mammoth may not have an old western downtown like so many ski towns, but the Wild West is alive and well. The halt in development and sour economic times put Mammoth into the doldrums the last few years. But that is changing fast. And in the midst of it all, people are buying real estate in significant numbers.

Following last year’s Town Council election, the new Council cleaned house of the local bureaucrats, and those that haven’t been canned already are likely to be canned in the future, especially as more and more the Hot Creek litigation details emerge. The Appeals court upheld the Hot Creek decision and that has everybody talking (and I will get to that). Mammoth’s two new marijuana dispensaries are open for business and the citizenry doesn’t appear to be more or less stoned over it, although some people seem quite happy about it. The media has been reporting (extolling) about the quality and quality control of the product, hmmm…. Mammoth hit the national spotlight for record snowfall in one month––210 inches in December. And boy did it make a lot of people cranky. But now that we have a handle on the snow volume the winter sports enthusiasts are reveling in it. Steve Searles, aka “The Bear Whisperer” will be launched as a series on the Animal Planet channel this month, putting more spotlight on Mammoth Lakes. And after all the shuffling of news reporters, Mammoth now has three good news outlets to cover it all, now they just need to get out and do it.

On the real estate front, 2010 is in the books and looks pretty good on paper. So far, the push at the end of 2010 is spilling into 2011 with an unusually high level of activity in early January. My blog readers can now see the year-over-year statistics at a link on the blogsite. Others can find it at the RE/MAX of Mammoth site. The numbers are telling, but people can interpret them the way they want. And they will. The 2010 statistic that stands out for me is the number of residential sales over $1 million. Maybe the Ski Area is on to something with their “Black Pass” offerings. The foreclosure and short sale end of the market continues on. Since late last year, I am seeing a more aggressive position by the lenders with properties in default. There seems to be a solid direction to expedite foreclosures. But these things change. Right now it looks like buyers will have increased opportunities to pick up good REOs in 2011. This is not a flood. The banks are still trying to firm the bottom of the market. The short sale market remains dicey, some are successfully closing in reasonable time frames, some are taking 6-7 months before approvals, and some are simply being foreclosed on. It is still a crapshoot. The key for buyers offering on short sales is not the expectation of a great deal, it is the anticipation of picking up the right property.

And we are seeing solid price support in some segments of the market. Despite needing cash buyers, the condo hotel segment is clearly firming up (I said firming, not escalating). The low-end of the residential market is also firming. And there are outstanding home buys in the $1.5 million and above range (those Black Pass homes). The scenario I’m seeing more and more: many buyer’s have “I’m not in a hurry” syndrome, that is until they lose the property they want to a higher bidder. Once they lose the opportunity at the property, then they seem to be in a hurry.

And now to Hot Creek/airport litigation. We simply have no idea if and how this will affect Mammoth real estate. The Appeals Court rejected the Town’s appeal on New Year’s Eve. The Court upheld the $30 million award as well as the plaintiff’s attorney’s fees. I did not attend the trial in Bridgeport but I have read (albeit not super-critically, there’s real estate and skiing to be done) some of the Appeals Court documents including the plaintiff’s brief and the 60-page decision by the judges. I am quite familiar with Hot Creek’s plans and operations at the airport, basically from day one. The Town Council has already agreed to spend another $100K to take a run at the California Supreme Court. They are also weighing different options including municipal bankruptcy. A representative of Hot Creek has already made a statement that they are prepared to “negotiate.” Rusty Gregory has announced that the town “needs to pull together.” Meanwhile there’s been plenty of finger pointing around town. And many fear that this will compromise life in Mammoth in some dramatic way. The ultimate outcome and effect is still very uncertain. Some local residents are prepared to give-up the Bell Parcel, the coveted Town owned land at the corner of Meridian and Minaret, as payment. Others, frustrated with Town government, are ready to dissolve Town government and revert to County government and eliminate many perceived duplication of services.

The court documents make it clear that Town personnel didn’t handle the circumstances well. It’s a series of unfortunate mistakes. And there still seems to be some legal contention over the functioning of Development Agreements under the California law and hence a petition to the Supreme Court. The development agreement itself was not the problem. I’ve given this plenty of thought and I’ve listened to those who are speaking. Right now I have a glaring concern and nobody is talking about it. It is a real estate matter and I do have some experience with the topic. You see, the $30 million in damages is based upon a fractional condo hotel project proposed to be built behind the west hangars at the Mammoth Airport. That $30 million is the proposed profit from the estimated $350-400 million in sales. These numbers were derived from an appraisal and valuation of the proposed project completed for (and paid for) by the plaintiffs in the lawsuit (Hot Creek). I have some experience with these types of appraisers and their appraisals––in dealing with government land acquisitions and exchanges (like the Forest Service, DFG, etc.) and as a member of the county’s Assessment Appeals Board. In fact, the appraisers who often perform these appraisals have the prestigious “MAI” designations (it is proudly displayed after their name on everything), meaning they are Members of the Appraisal Institute. The inside joke is the MAI often stands for “made as instructed.” In the real world it is not a joke, especially for Mammoth right now.

Every proponent/plaintiff needs a valuation of their property to establish damages. Appraisal is not an exact science, the numbers can be easily skewed to fit the purpose. The fewer the comparable properties the more the numbers become hypothetical, and quite frankly, they can become very fictional. The number can be high or low depending on what the person paying for the appraisal wants. And development projects, like a fractional condo hotel project, can become great fiction. Just ask Credit Suisse.

The appraisal for the Hot Creek project that was presented in court was precisely what anyone should expect: a true “mega expert” in the appraisal field, pages of credentials, reams of proposed numbers and projections and drawings and justifications for the “number” his client wanted and he derived. Again, this is all normal and to be expected. But somebody has to refute it, and anybody with a clue about resort real estate could have easily refuted it in the Hot Creek case. And further, the defendant needs their just-as-absurd valuation to counter the other. This is a frequent occurrence at Assessment Appeals: “expert” attorneys and appraisers for each side beating each other up. But from everything I have read, the Town’s counsel didn’t adequately refute it. There is little evidence of cross-examination of the plaintiff’s expert. It should have been a war with so much at stake. One simple line of questioning was needed for Hot Creek’s appraiser: “Gee Mr. Expert, Mammoth has two of these fractional projects and both are beautiful high-end properties with great locations and they’ve spent hundreds of thousands of dollars in classy marketing and yet they only have had a handful of buyers and they remain only half completed and in fact both are in receivership and/or bankruptcy, so what makes you think that hundreds and hundreds of buyers will be interested in a similar product next to a runway surrounded by sagebrush and grazing cattle?” Hell, I’ve seen the County’s appraisers brought to tears by cross-examination. Bullshit crumbles fast under good cross-examination.

Where was the Town’s expert appraiser/consultant who could easily point to this delusional segment in the Mammoth market? Fractional has been tried before here in Mammoth and it has failed. Savvy real estate people see fractional as either desperation time or a path to quick, obscene profits. The Town’s case for a zero-to-low valuation was non-existent (and it was certainly justified––the trial was the summer of 2008 and the failure of fractional was clear and present). And the jury bought it because they had no other choice. And now that valuation is what we are stuck with. And it is ALL THE DIFERENCE IN THE WORLD!! Maybe the Town’s counsel was focused on other legal matters, but all the matters in the loss is the $30 million in damages. If I made these professional errors and omissions, I would certainly be liable. My clients expect me to argue valuation on a simple real estate transaction more than the defendant’s attorneys argued valuation in this lawsuit. I can tell because the valuation was easily arguable by experts. The Town deserved to lose this suit, but the $30 million in damages is pure fiction. It’s hot coffee spilled in their lap at McDonalds. The people who were supposed to be representing us may have sold us down the river. Not to mention the Appeals judges weren’t remotely impressed by the Town’s arguments. They almost seemed to be laughing at us in their decision. No wonder their initial reception was “icy.” I would really like to think the Town’s employees and Council were shrewd enough to know they were reneging on the development agreement but knew Hot Creek couldn’t prove the project had any value. Sadly, nobody seemed to be paying attention during the trial when it came time to prove to the jury that the development had no value. The Town is guilty alright, guilty of saving the lenders and developers of the Hot Creek fractional project the same fate as 80/50 and Tallus. It’s called financial disaster.

One of the interesting parts of this whole mess is how people are reacting. It is a microcosm of life itself. Many are stuck on blame and want heads to roll. Some are finding the impetus to move out of town (all of the snow hasn’t helped). See ya. Others just want to settle the score and get on with life. And still others are eyeing opportunities. When life gives you lemons, make margaritas.

Meanwhile, we continue to have no clue who owns the Ski Area. It’s like we’ve been cut adrift. I’m hearing more and more comments from real estate customers like “We really hoped Starwood was going to make some investment and quality change here.” But nothing has happened except good old-fashioned hedge fund drive-prices-up and peel services and costs down. I’m sure we’re off Barry Sternlicht’s radar. Maybe he is upset we didn’t like his sweaters. Or maybe he discovered we were hopeless. Regardless, the lifts are turning and the skiing is great!

Happy Martin Luther King Jr. Weekend! “We Shall Overcome.”