Investors pumped billions into suburbs that never got built
By Michael Sasso Bloomberg
Investors from Singapore to Toronto are wondering why North America’s vaunted urban sprawl ebbed before the billions they pumped into a giant “land banking” firm could pay off.
Walton Group of Companies, a Calgary-based real estate firm that had delivered 12 per cent annual returns in the past, sold them on the idea of investing roughly $10,000 or more apiece in rural properties outside of fast-growing cities such as Phoenix, Toronto and Atlanta.
But $3.8 billion in land assets, 92,000 investors and 106,000 acres later, the expected sprawl and the hoped-for fat returns have mostly not yet happened. Some backers say their shares were worth only 20 per cent of what they put in based on the most recent 2017 appraisal. And about 90 Canadian investors have hired a private investigations firm, U.S. Justice Coalition, to track the proceeds of Walton’s land syndication.
The company says it has a new strategy for selling its investors’ land and that it has found potential buyers for almost half of its holdings. One recent project fetched almost double what investors originally put into it, a Walton attorney said. Walton has “a number of important initiatives and opportunities on the horizon and we are excited about what the coming years have in store for Walton and our investors,” wrote Ryan Kretschmer, general counsel for a Walton affiliate called Walton Global Holdings Ltd. Kretschmer also said the severity of the real estate recession was “unforeseen,” and the recovery in the U.S. has been much slower than expected.
Still, the investors’ experience illustrates the risks of land speculation years in advance of development, as well as the perils faced by small retail investors, who lack the expertise of larger investment managers. A majority of more than 300 Walton land projects stretching from Alberta to Washington are delayed, often years past when investors expected a payoff.
“Syndication of raw land to retail investors is, in my 35+ years of experience, a very rare approach to investment in real estate both before and after the Great Recession,” Rob Ivanhoe, a real estate attorney with Greenberg Traurig, wrote in an email. “It does not seem to be the kind of high-risk investment that an unsophisticated individual retail investor can properly evaluate.”
Retiree Bruce Coristine bought into Walton’s vision for tiny Arcade, Ga., 11 years ago. But, where the company expected a teeming community of 4,000 houses on Atlanta’s distant outskirts, Arcade today remains mostly pastureland for grazing cattle. And, Coristine’s $41,000 investment was worth just $9,300 recently, according to a statement from Walton’s transfer agent.
“It seemed to be a very good investment and they were a well-respected company, until a point when they weren’t,” said Coristine, who lives in Kingsville, Ont. “It was not the worst investment ever, but pretty close.”
Founded in 1979, Walton and its investors profited after buying land cheaply following a deep Alberta recession in the 1980s, said Matthew Boukall, who tracks Canadian real estate for advisory firm Altus Group. Investors achieved an average “internal rate of return” — which accounts for the passage of time — of 12 per cent a year in a range of Calgary and Edmonton projects from 1987 to 2007, a 2016 investment offering document disclosed.
The company, whose ultimate parent is called Interborder Holdings Ltd., moved heavily into the U.S. in the mid-2000s, using the same model and often bought land 50 to 100 kilometres outside of Phoenix, Dallas, Atlanta and Washington, D.C. Urban sprawl helped fuel its plans. Walton disclosed the risks of speculating in raw land in investment offerings, and it sold its securities through an “exempt” market intended for savvier investors. Still, shareholders came to rely on its optimistic estimates of a quick sale, several investors said.
A markup of five times Walton’s own price wasn’t unusual across hundreds of properties. In one 2008 investment vehicle, Walton bought 304 acres northeast of Atlanta at a price of $13,600 an acre in U.S. dollars, and syndicated it to investors at about $68,000 an acre. Investors didn’t seem to mind as long as Walton sold it to homebuilders for some multiple of $68,000, and Walton had successfully sold land in Alberta in such fashion a few years earlier. Also, Walton’s efforts to obtain zoning changes and to get rights to develop the land would boost its value.
Still, “a reasonably intelligent investor who had seen the markup would have some questions,” said Steven Kelman, a Canadian investment consultant, who once advised a mutual fund dealer to avoid a Walton investment vehicle.
Walton also was paying sales commissions as high as 13.25 per cent in some cases, even though 6 per cent is more typical for speculative investments, securities experts say. Walton says it wasn’t out of line for the time, and it said each property is unique and that the markup alone doesn’t determine whether it will be successful.
“We pioneered the ability to say to investors, ‘You can make money anywhere in the planet,’” recalls Harlow Russell, an American expat who sold Walton securities from a glassy waterfront office in Singapore. “Why don’t you do it in a safe environment like Canada?”
Walton projected prestige as it touted the stability of the U.S. and Canada, said Russell, who was a contract salesman in Singapore from 2004 to 2010. Sales presentations were held inside Singapore’s luxurious colonnaded Fullerton Hotel, and high-achieving salespeople won lavish trips to places like New Zealand and Prague, Russell said. Other sales offices in Hong Kong, Kuala Lumpur, Hamburg and Scottsdale, Ariz., were so successful that Walton recently counted 92,000 investors worldwide.
Walton said it expected most projects to sell three to seven years after it had syndicated them, while others were “fast-tracked” and given two-to-four-year timelines, Russell said. He was so much a believer he invested personally in an Edmonton project in 2004 that paid him a return two years later. A more recent investment in Texas, which he put about $10,000 into, was targeted for sale by 2014 but is still vacant. Walton recently said it has a buyer for part of that land. A second Canadian project Russell invested about $7,500 into also hasn’t sold, he said.
At this point, “If I just got my principal back, I’d be thrilled,” said Russell, who lives in Austin, Texas.
In Walton’s home turf, one Canadian couple said they were inexperienced investors and that a company salesman steered them into unsuitable high-risk investments, according to a lawsuit filed in Ontario. An outside financial adviser added risk by persuading the couple to take out a line of credit worth almost $200,000 to invest with Walton, according to the suit.
The couple reached an undisclosed settlement with certain Walton entities last year. Walton disagrees with the couple’s allegations, the company said, adding that the case was settled with no adverse findings or admissions.
Investors began to worry in 2017, when certain Walton entities filed for creditor protection in Canada. Most of the land underlying Walton’s investment wasn’t included in the filing, and most entities that entered creditor protection have exited, Kretschmer said.
Also concerning was a re-evaluation of some investors’ land that same year. Until that point, investors expected their returns to be based on 300 acres or so in places like Arizona, Texas or Ontario.
However, under a new plan Walton rolled 133 separate land projects across North America into a single investment vehicle, simply called Roll-Up Corp. Investors taking part in the new company now would win or lose based on how all the land fared collectively.
Ernst & Young evaluated each land project included in Roll-Up Corp. and gave investors a proportionate share of equity in the new company.
On average, investors got 57 cents of equity in Roll-Up Corp. for each dollar they had originally invested. Some people got as little as 17 cents per dollar, while others got as much as $1.75.
Those exchange rates represent a point-in-time evaluation and don’t represent their potential future value, Kretschmer said. Also, some investors’ accounts, like Coristine’s, may understate their value due to a U.S. tax issue, the company said.
21 per cent return
Walton’s had some recent successes, including a project in Georgia that sold a year after syndication and gave investors a 21 per cent return. A portion of another Georgia project sold for $142,700 an acre, or almost twice what investors paid for it, although Kretschmer didn’t say how much of the land fetched that price.
All told, Walton has potential deals for 49,000 of its 106,000 acres, he said, although it can’t guarantee they will close. The company also is adjusting to a changed real estate climate by selling off smaller pieces of land to builders, instead of always selling off entire 300-acre tracts at once, he said.
Officials in Waxahachie, Texas, south of Dallas, are excited about a 3,000-acre project moving forward, while Walton hopes a new $1.7-billion electric vehicle battery factory in Jackson County, Ga., will spur interest in its nearby Arcade land. A Walton lawyer said the company is working through development plans with a builder for its Arcade property. Many in the small city are hoping something will happen.
Georgia businessman Chris Chapman recalls that a few years ago a person representing Walton pitched him on buying some Arcade property along with others in an investor group. Chapman doesn’t recall how much money the person wanted, but it was well north of the $15,000 an acre he figured it was worth. Walton denies having listed the land with a broker.
“I kind of knew what the deal was, so I told him I wasn’t interested,” Chapman said. “What they were asking was not what people were paying for it.”