WATER, WATER EVERYWHERE

DEL WEBB'S 5,600-ACRE NEW RIVER DEVELOPMENT HAS SPAWNED CONTROVERSY. BUT NEWS COVERAGE HAS IGNORED THE WATER WHEELING AND DEALING THAT COULD CARPET ARIZONA'S VIRGIN DESERT WITH SUBURBAN SPRAWL.

Gary Giordano is convinced that a decadelong grand conspiracy involving the most powerful business and political interests in the state is finally coming to fruition. Unless it is unmasked, he insists, that sinister plot will destroy the rural community where Giordano lives--New River, Arizona.

At a cafe in downtown Phoenix last month, the former state legislator--a conservative Republican who would, in most cases, favor large business interests--describes a web of intrigue that, he says, surrounds the state's most powerful bank and one of the country's largest homebuilders. One gets the feeling he has told this story a few times before.

Giordano's yarn takes a while to unfold; understanding it requires a listener with the patience of a Cardinals fan and the financial acumen of a CPA. The bottom line, however, is clear.

Giordano believes that Bank One Arizona and Del Webb Corporation devised a long-running, diabolically clever plan to acquire--for next to nothing--5,600 acres of undeveloped state land three miles south of New River.

Now, Giordano says, Del Webb has begun to execute the last phase of that plan. If the homebuilder succeeds, a 50,000-person planned community will inhabit what once was thousands of acres of open desert. The losers in Giordano's complex scheme are the little guys--state taxpayers and New River residents. The winner, of course: Big Business.

This nefarious conspiracy has become visible to ordinary mortals, Giordano explains, because Del Webb had to seek approval from Maricopa County to build its 16,500-home New River project. Tracking backward in time from the county process, he says, has revealed years of evildoing.

"This was all planned ten years ago," he insists.
In the conversation, completed long before county supervisors are to vote on the Del Webb project, Giordano acknowledges that he's trying to stir up publicity; he wants to put pressure on the county to reject Webb's proposal, which would allow the company to build three homes per acre instead of requiring it to stick to the current standard in New River--one acre equals one home. Giordano already has whipped fellow residents into a "Save New River" frenzy over the development, even though it lies three miles south of, and on the other side of a mountain from, New River itself. The development won't even be seen from the existing town.

Still, Giordano is hoping to inspire a media blitz.
"The more publicity, the harder it would be for them to go through with this," he says urgently.

Giordano's conspiracy theory played well in New River. Pieces of it even made the pages of Phoenix's major dailies. But the notion didn't make much difference to Maricopa County supervisors. They approved Del Webb's development plan for New River with nary a whisper of concern.

In fact, the Grand Giordano Conspiracy Theory cannot hold up to even a moderate level of scrutiny.

This isn't to say that political intrigue and financial power plays have been absent from Del Webb's project, which the company calls the Villages at Desert Hills. There is a long, ugly and costly history etched into the desert the company wants to develop.

Rather than a carefully choreographed dance, however, the New River story appears to have been a desperate stagger, a chaotic thrashing about for a solution to the challenge facing all developers in the Sonoran Desert: getting water to your land.

In this case, the solution came from the unlikeliest of sources--a thinly populated Indian reservation south of Phoenix whose residents know firsthand what it's like not to have water.

That solution may open the way for leapfrog development such as the Sonoran Desert has never seen.

The Ak-Chin Indian Community's waterless days are long over, thanks to a handful of insightful leaders, several clever Washington, D.C., lawyers and a settlement of the tribe's long-standing claim that its water rights had been stolen by white settlers.

For the last decade, in fact, Ak-Chin leaders have grappled with an odder problem: The 600-member community, which lives on a 22,000-acre reservation 30 miles south of Phoenix, simply had too much water. Seventy-five thousand acre-feet of water--enough water to supply the residential needs of 350,000 people per year--were being taken from the Colorado River and delivered free to the community's doorstep via the Central Arizona Project canal. The water comes courtesy of the U.S. Interior Department.

Those annual deliveries are part of a federal water-rights settlement with the tribe. The deliveries are to continue indefinitely.

While the community uses a lot of the CAP water on a 16,000-acre tribal farm, there is a surplus. "The tribe was trying to figure out what to do with that extra water," tribal chairman Martin Antone says. "Are you going to let it run down the Colorado River to Mexico or capitalize somehow on the water you still have?"

A potential solution surfaced about two years ago. Sixty miles due north of the Ak-Chin reservation, Del Webb Corporation had acquired more than 5,600 acres of rolling desert next to Interstate 17.

The company believed the site was an ideal location for its next massive, Sun City-type development. It was a project expected to house 50,000 people.

But Del Webb needed water. A lot of water. Groundwater supplies in the New River area were far too scanty to support anything so massive as the Villages at Desert Hills.

If the project were to develop, Del Webb needed a reliable water supply from an off-site source. But if Del Webb lacked water, the company was hardly short of cash or credit. In fact, the firm was becoming something of a darling in the financial community. Its stock was rising on the New York exchange; business publications were touting Del Webb as a model for the American development industry.

The water-rich Ak-Chin and cash-laden Del Webb made an all-American deal. The Ak-Chin agreed to lease between 6,000 and 10,000 acre-feet of water annually to Del Webb for the next 100 years; the developer was free to use the water at any of its communities in Maricopa County, including the Villages at Desert Hills in New River.

The agreement, endorsed by the federal government, has broad implications for future development in central Arizona. For the first time, an Arizona Indian tribe has leased water directly to a private developer rather than to a municipality or other government. "With the Del Webb deal, you now will have other businesses and corporations looking at Indian tribes for water leases," Antone says.

And Arizona tribes have rights to huge amounts of CAP water.
Central Arizona Project officials estimate that as many as 300,000 acre-feet of water now belonging to state Indian tribes will be available for lease in the near future. That's enough water to meet the needs of 1.5 million people per year.

Richard W. Garnett III, a water attorney who reviewed the Ak-Chin lease agreement for Maricopa County, says Indian water leases will play an important role in meeting municipal demands.

Garnett points to the City of Scottsdale's ongoing attempts to reach a similar lease arrangement with the San Carlos Apaches. Scottsdale already has a lease agreement with the Salt River Pima-Maricopa Indian Community. Tucson is negotiating with the Tohono O'odham tribe in southern Arizona.

"Anybody that needs a certified assured water supply is going to think about the Indians as a possibility," Garnett says.

The value of Indian water is abundantly clear in Del Webb's Villages project. The water lease served as a linchpin in the development deal; the deal is projected to generate more than $2 billion in revenue for Del Webb over the next 20 years. The agreement also is a financial windfall for the Ak-Chin.

The lease requires Del Webb to pay $12 million initially for rights to the water, plus delivery charges starting at more than $500,000 per year and steadily increasing for the next 100 years. By the 15th year of the lease, the Ak-Chin will have received a total of $10 million in delivery charges on top of the initial $12 million lease payment--with 85 years to go.

The Ak-Chin have turned surplus water into gold. Now that gold will earn compound interest for the rest of time.

"We want to put the money in a 20-year trust fund and not even touch it," says Antone.

The Ak-Chin/Del Webb agreement, however, does more than benefit those two parties. It also opens the way for other private developers to play the water-lease game.

If a developer can afford to install supporting infrastructure up-front--for the Villages, an outlay of $110 million--and if a demand for housing exists, no area within reasonable distance of the CAP canal in Maricopa, Pinal and Pima counties will be off-limits for construction.

"I certainly don't think there is any particular constraint," Garnett says. Maricopa County's relatively quick approval of the Villages project earlier this month underscores the regional planning problems that Indian water leased to private developers will only exacerbate. No one at the county level cared much about the implications of Del Webb's water lease. Essentially, county officials cared to know that there was water available.

Cities have traditionally used water delivery as a planning tool; a decision on providing water to an outlying area often determined when and how that area would develop.

But growth experts say the availability of Indian water could allow developers to bypass the troublesome municipal planning process. Even more than in the past, development could leapfrog into areas far from urban cores. Areas perhaps even more remote than New River.

And for the unincorporated areas of Arizona's largest urban county, there is no regional planning or zoning entity in place that has the will, the power and the expertise to control such patchwork growth.

"We are really at just the beginning stages of becoming aware of regional growth issues," says Leslie Dornfeld of the Maricopa Association of Governments. "We are just infants."

Del Webb's New River project can be seen in at least two different lights. It could be judged a huge, complicated development that proceeded because of huge and complicated, but perfectly legitimate, market incentives.

Or, if you think like Gary Giordano, the project could be considered the end result of a huge, complicated conspiracy, a manipulation of the government process to benefit private business.

If Del Webb's New River project were the result of a decadelong conspiracy, there would be little reason to believe it could chart a course for Valley growth that numerous other developers are likely to follow.

So it is worthwhile to determine whether Giordano's theory of the Villages at Desert Hills is correct. By Giordano's description, the deal went down like this:

First, Del Webb finds a front company, Lakeview City, Inc., conveniently staffed by a former Del Webb executive.

Next, Lakeview convinces the Arizona State Legislature to allow the state Land Department to trade extremely valuable public land near New River for marginal land along the Colorado River that Lakeview happens to own.

Third, the swap is made. Lakeview obtains the New River land for a song.
Act Four, however, contains a twist. The land trade is challenged in court. This is where Lakeview's lender, Valley National Bank (subsequently Bank One), enters Giordano's scenario. Lakeview collapses, and the bank forecloses on the New River land.

To whom does the bank sell the New River land--at a huge loss?
You got it. Del Webb.
But the loss is only temporary; Bank One will recoup its money as the property develops and sells, through a side agreement with Del Webb.

The bottom line, according to Giordano:
Del Webb gets thousands of acres of prime state land at a ridiculously low price.

Bank One gets millions of dollars it is owed and a continuing profit stream from the New River project.

And the state gets a lot of useless land in sun-fried western Arizona.
Giordano's theory is not, on its face, entirely implausible. Del Webb and Bank One are big political players, not just in Arizona, but across the country. But the theory does have a major problem. It does not square with several well-documented facts, or the recollections of many who have been intimately involved with the New River acreage Del Webb ultimately acquired.

Here's how the New River deal really went down:
Conspiracy theory: Bank One will profit inordinately from the New River deal.

Reality: Public records and numerous interviews document that the bank's predecessor institution, Valley National Bank, took a loss of more than $50 million when Lakeview City, Inc., defaulted on loans backed by its property in New River. Bank One is not a development partner with Del Webb on the Villages at Desert Hills project; the bank's balance sheet, therefore, will not be directly affected by the success or failure of the development.

"What's going on now is between Del Webb and that community," a bank spokesman says. "The bank does not have a profit participation in this, as has been alleged."

Explanation: An utterly unpredictable series of financially catastrophic events ensued immediately after the state Land Department traded 5,600 acres of land near New River to Lakeview in 1986.

Bank One spokesman Steve Roman says the bank (then Valley National) made a crucial mistake in initially evaluating the New River property. The bank believed the land was worth far more than the $29 million appraised value used by the state Land Department when it traded the parcel to Lakeview.

Valley National lending officers, relying on generous mid-1980s appraisals, valued the property anywhere from $70 million to $130 million, says Roman.

"It was obviously a bad appraisal," says Roman.
The land swap had resulted in a lengthy, bitter and expensive court battle. Lakeview finally gained legal control of the property in 1988. But as soon as the courtroom dust cleared, the Arizona real estate market collapsed.

Two forces were eroding the value of the New River land: the general collapse of the Valley's real estate market, which was in full tailspin by 1988; and the lack of water needed to develop a planned community on the site. By that time, Lakeview, then headed by Jerry P. King, had piled up $60 million in debt using the New River land as collateral. The property, in effect, had become as much the obligation of Valley National as it was of Lakeview.

No bank likes to be in such a situation.
There was little the bank could do about the macroeconomic decline in real estate values other than write down the value of its real estate loans. The only hope of stemming the drop in value of the New River land--which the bank's appraisers had lowered to $30 million by December 1989--was to somehow find water for the land.

Lakeview City pulled out the stops to find water. It almost succeeded.
The company quietly negotiated a development agreement with the City of Peoria in September 1990. The agreement would extend the city's assured water supply to the New River acreage; Lakeview would pay development fees of more than $14 million to the city.

When Peoria entered the development agreement with Lakeview, Valley National also refinanced $69 million in Lakeview loans, on the theory that the New River property was now worth more. It had a guaranteed water supply.

But it was only "paper" water. No efforts were made to actually pump water to the New River land. The Peoria development agreement was never implemented. The value of the property continued to decline.

Valley National appraised the New River land at $30 million in December 1989; a $25 million valuation followed in April 1991; then came a $15 million value in December 1991; and by early 1992, at the depth of Phoenix's real estate crash, bank appraisers said the 5,600 acres south of New River was worth just $7 million.

By mid-1992, federal banking regulators were leaning on Valley National to get the loan off the bank's books. The Peoria water agreement didn't impress the Office of Comptroller of Currency, Roman says.

"With no guarantees to water, it was worth very little," Roman says the comptroller told the bank.

After four years in bankruptcy, Lakeview threw in the towel. On June 16, 1992, the firm defaulted on its loans and turned the New River land over to Valley National.

Conspiracy theory: After Lakeview's default, Del Webb acquired the New River property at less than market value as a result of a back-room deal of some sort.

Reality: Del Webb paid about as much per acre for the property as it has for other prime development sites across the country. It appears the company paid roughly market price for the land. No documentation has been made public suggesting the deal was anything but arm's-length.

Explanation: Roman says Valley National knew Del Webb had long been interested in acquiring the New River land. Del Webb and Lakeview signed an agreement in 1989 that provided an option for Lakeview to sell the land to Del Webb. That option, however, was never executed.

Several other potential buyers approached Valley National about the New River land, Roman says, but Del Webb made the best offer and had the financial strength to purchase the property.

"We had confidence that Webb would be able to perform at the closing table," Roman says.

The bank sold the land to Del Webb for $11 million, 15 days after Lakeview defaulted.

"I have a feeling there is an implication that we sold this at a discount to Del Webb because of some sort of deal that was going on," Roman says. "That simply was not the case. We sold the property to Del Webb at appraised value. That's what we did, and we took a loss." Despite taking a loss of at least $50 million on loans to Lakeview, Roman says the bank was delighted to sell the New River land for $11 million. "The value of the property was still dropping," he says.

The bank had another strong motivation to sell the land. At the time, the bank was being eyed by its eventual purchaser, Bank One. To make itself a more enticing target for a potential buyer, Valley National was aggressively selling more than $500 million in assets it had acquired by foreclosing on bad loans. Among those nonperforming assets was the New River land.

Valley National's efforts to improve its balance sheet paid off handsomely. Bank One's purchase of Valley National in 1993 increased shareholder wealth by more than $1 billion.

For Del Webb, the $11 million purchase price was nothing unusual. The price was right in line with other major land purchases the company has made in the last few years, especially when the $12 million water-lease payment to the Ak-Chin is factored in.

"That's more than what we paid for our Texas land, and close to what we paid for the Hilton Head [South Carolina] property," says John H. Gleason, Del Webb's senior vice president of project planning and development.

The county supervisors' auditorium is packed for the public hearing on the Villages.

The dividing lines are clear, although the logic is muddled.
Those against Del Webb's project speak in emotional language, frequently citing the reason they moved to New River was "to get away from the city."

They plead with supervisors to keep Del Webb out of their pristine environment. At the same time, they ignore the groundwater depletion, septic-tank pollution and piecemeal uglification of desert that already plagues their community.

Del Webb's proponents are cool and collected. A seasoned zoning attorney delivers a calm, analytical pitch that almost has you believing that 16,500 homes, three golf courses and a commercial center will benefit 5,600 acres of virgin desert.

The fray goes on for hours.
Outside, Del Webb chairman Phil Dion takes a break.
"Some people think we will live or die by this project," he says. "That's not true."

Dion says Del Webb has plenty of other development work on its platter around the country. But it is clear he expects approval.

High public demand for Del Webb's master-planned communities supports his case. Prospective homebuyers are camping out for days at a time, for example, to select lots at the company's new Terravita development in north Scottsdale.

Dion has no patience for critics living on mountainside homes overlooking Terravita, critics who say the project is a blight on the landscape.

"Why should we be forced to look at their ugly hillside homes?" he counters.

The us-versus-them attitude prevails throughout the night, and extends to the next meeting a few days later, when the supervisors finally approve Del Webb's master plan for the Villages project. Most of the critical issues--potential traffic problems, the question of leapfrog development, project density--remain unaddressed through the hours of meetings.

In offering an explanation of his "bigger-picture issues," Board of Supervisors chairman Tom Rawles unconsciously magnifies the shallowness of the debate on the Del Webb proposal: "We have no guarantees in a free society that no one will move in next door."

That is, no guarantees that someone with a spare $11 million and an Indian water lease might not settle in for a spell.

It is not certain that other developers will try to duplicate the Ak-Chin/Del Webb lease arrangement. That it was even completed caught many builders by surprise; its implications are just beginning to be discussed.

"No one ever thought the Indians would be selling their water rights, and the potential it creates for isolated development is interesting," says Carol Johnson, a member of Phoenix's task force on urban growth and desert preservation.

If developers follow the path of central Arizona municipalities, however, there will be very strong private demand for Indian water leases.

Cities already are counting on Indian water rights to augment their water supplies over the next 40 years.

"We think a lot of the Indian water will end up being leased back to municipal users in the [Central Arizona Project] service area," says Larry Dozier, assistant general manager of the Central Arizona Water Conservation District, the operator of the CAP canal.

"As a matter of fact, one could almost say we are counting on it," Dozier adds.

How much Indian water may go to private developers, and what impact that has for growth, is a question CAWCD has not addressed.

"The bottom line is it really comes back to a city or county issue, because they are the ones who zone the land," Dozier says.

Maricopa County's approval of the Villages clearly shows it is not opposed to leapfrog development and cares little where water comes from, as long as the new development meets state requirements demonstrating an assured 100-year water supply.

Supervisors chairman Tom Rawles says he would be "hard-pressed" not to approve a similar project in a relatively isolated area, as long as a water supply was assured and growth was expected in the area.

That could be just about anywhere in Maricopa County. Government planners say the county's population will more than double--reaching 5.8 million by 2035--with no pinch in the Valley's water supply. And those calculations were made without taking Indian water into account.

Valley cities are beginning to take a harder look at growth patterns than the county. Scottsdale, for instance, will ask voters to approve a .2 percent sales-tax increase next month in order to purchase land in the McDowell Mountains slated for development. Phoenix has established several task forces to identify sensitive desert lands that should be preserved.

But addressing regional development issues would require drastic policy changes for city and county planning agencies that now concentrate on providing housing for the 50,000 people who move into the Phoenix area each year.

On a larger scale, the state Land Department is conducting an inventory of about 100,000 acres it controls in the metropolitan area--most of which is in north Phoenix and Scottsdale. Commissioner M. Jean Hassell says the state is working with cities on their development plans.

"We only look at areas that we think are ripe for development," Hassell says.

But no one is looking at growth patterns and development controls on a regional scale, or with an eye for quality rather than quantity. The closest thing to a comprehensive planning agency is the Maricopa Association of Governments, a voluntary organization of cities and towns that has no regulatory authority on growth issues.

MAG, best known for its inept handling of Valley freeway construction, is creating a regional planning committee later this year, but it is unlikely that it will evolve into a regulatory body anytime soon. For one thing, any such evolution would require legislative approval, and MAG is no darling with the legislature.

The creation of a regional planning committee reflects a recognition of growing public concern over growth, says MAG's Dornfeld.

"The magnitude of growth is becoming more and more apparent, and the problems related to it, like congestion, air quality and loss of open space, are more evident," she says.

But Indian water rights and their impact on growth, especially in rural areas, are not issues high on MAG's priority lists.

If other developers follow in Del Webb's footsteps, Indian water will almost certainly spur a pattern of leapfrog development that could strain the Valley's finances as it speeds the Los Angelesization of the desert.

Del Webb has repeatedly assured Maricopa County that it will provide all the local infrastructure needed to support the Villages at Desert Hills. Yet there was little discussion of the development's impact on life in the rest of the Valley.

This is a sensitive issue for Webb. The company's massive Foothills project south of South Mountain has overwhelmed Interstate 10, creating massive traffic jams that have gone unabated for years. The Villages is expected to overload Interstate 17 north of Phoenix in the same way. The freeway will have to be expanded to at least six lanes within 20 years.

"The issue the rest of the community must deal with now is how Del Webb connects to the other parts of the city," says MAG's Dornfeld.

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