Sun Valley could well be the most flamboyant development scheme ever hatched in a Phoenix high-rise, a 48,000-acre fantasy of limitless possibilities and easy millions just fifty fast minutes west on I-10. Ever since the land was hustled out of public ownership and into private hands in a complicated series of trades three years ago, backers have claimed Sun Valley was destined to become one of the biggest cities in Arizona.
The new owners, led by Burns International of Phoenix, hyped the project lavishly, quickly running up land prices to ten times the amount they paid the federal government for it. They flicked off unsettling questions about water, access and other details--there still isn't a master plan--with more promises. The project's appeal grew even more seductive in 1986, when Burns officials talked their way into $82 million worth of tax-free county bonds to build a six-lane parkway through the tract.
Last month they bugled the parkway's completion, under budget and ahead of schedule, as a triumph of private-sector efficiency. Now the budding empire west of the White Tank Mountains could really take off, said Burns executive Robert Williams, who also heads the Sun Valley Property Owners' Association.
Even as the Burns PR machine scripted glowing releases about the area's prospects, however, three miles down Central Avenue a very different scenario was being drafted for publication. Officials at First American Title Insurance Company of Arizona were putting the finishing touches on a series of foreclosure notices covering thousands of acres in Sun Valley.
Sun Valley has become not Phoenix's new frontier, but the latest example of its collapsing dream. Put simply, the speculators who scrambled to buy land at prices of up to $10,000 per acre in the giddy days after the county-bond coup are bailing out. As they go, Burns and its partners face a mounting pile of unpaid bond assessments and inflated taxes, not to mention their own unpaid notes on the land.
As befits the architects of a brave new world, the Sun Valley backers haven't lost their nerve. Worried? Dennis White, executive vice president of Heron Financial Corporation, a London-based multinational which is backing the road bonds, waves away the thought. "We're not worried by the current defaults," he says. "We knew it would be a long-term deal."
In the long term, however, their real adversary is not the economy, it is the desert. Sun Valley, were it built, would be a city with no source of water except what lies trapped in the sands beneath its feet. It is precisely the kind of development Arizona intended to prevent by adopting the 1980 Groundwater Management Act. Soon, as the state Department of Water Resources (DWR) imposes drastic limits on groundwater withdrawals in the deserts near Phoenix, such developments will become not merely undesirable, but impossible.
Anyone who doubts that Burns, the developer with the biggest stake in Sun Valley, takes this threat seriously has but to follow the trail of its lobbyist, lawyer Jim Johnson, as he searches for loopholes in the state groundwater code.
True, Sun Valley is not the only grandiose vision to wither in the economic dust bowl that Arizona has become. But in many ways it signals the end of the line for the Phoenix development dream. Here in the desert fifty miles west of town, the yeasty mix of ambition, fast talk and paper profits that fueled the dream empties onto the sand and is absorbed without a trace.
UP UNTIL 1985, the land that became Sun Valley had sustained nothing more burdensome than a handful of cattle grazing under federal leases. So the federal Bureau of Land Management (BLM) didn't hesitate to turn loose nearly 15,000 acres, valued at a mere $400 each, when the chance came to acquire two ranches in northern Arizona needed for Navajo families dislodged by the Navajo-Hopi land dispute.
To speculators willing to ignore warning lights flashing at DWR, however, those dry acres beckoned like the Promised Land. Within months of acquiring it from the BLM, the new owner, a Mormon rancher named T.G. Spurlock, sold the land for $678 an acre to Canadian investor Huddie Bell. A few months later, Bell scooped up the adjoining 40,896 acres in a swap for land he controlled in southeastern Arizona.
(The BLM had announced its desire to establish a nature preserve on land bordering the San Pedro River south of Sierra Vista. But Bell stepped in first and bought the San Pedro land from Tenneco West, a California-based farm conglomerate with huge holdings in rural Arizona. Bell then traded the San Pedro parcels for the BLM's Sun Valley land, assessed at $648 an acre--a boost in value triggered mainly by his previous purchase of the adjacent Spurlock parcel.)
In March 1986, Bell began selling off blocks of his Sun Valley land to other speculators for prices as high as $2,900 an acre. Burns International, acting through a web of interlocking partnerships with other investors, acquired roughly 30,000 acres.
Even in the superheated real estate market of 1986, the Burns deal was an extravagant buy for raw desert land, fifty miles from town, with no water or access to a major highway. Burns immediately issued promises to develop a master-planned community of 100,000 homes, attracting a fourth wave of buying at even more inflated prices.
The company's grand visions, however, contained few details and still fewer hard dollars. Rather than financing an access road itself, for instance, Burns made a pitch for $90 million in tax-free dollars from the Maricopa County Board of Supervisors.
Burns promised that the Sun Valley Property Owners' Association would oversee construction, pay off the bonds and deed the completed parkway to the county in return for the county's approval to sell tax-free bonds. The proposal was unprecedented in county history, but captured the board's imagination so completely that only one supervisor even questioned it.
Supervisor Carole Carpenter, in whose district Sun Valley is located, recalls her concerns. "I felt the proposed arrangement should be studied as a policy because if this succeeded, we could be asked to approve private roads all over the county," she says. "This road, in particular, did not fit into any existing transportation plan or needs assessment."
Carpenter was alarmed by other uncertainties as well. "They hadn't even submitted a master plan, and there were many unanswered questions about whether this land had an assured water supply," she says. "I just didn't think we should be involved in approving something that might result in land being . . . well, hyped."
In response to the uncertainties about water, Burns produced a hydrologist's study that showed large quantities of underground water and hired Phoenix water lawyer Jim Johnson to assuage doubts about its accessibility. Johnson, who represents several developers attempting to build city-sized developments in areas with no water rights, dismissed concerns that DWR might disallow use of the groundwater. "In my opinion," Johnson said at a supervisors meeting in August 1986, "there can be no question that the Sun Valley project will be able to qualify for an assured water supply designation for a substantial development."
Unable to win over Carpenter, Burns representatives focused on the other supervisors, resulting in approval of the bond issue on a 3-1 vote. (Supervisor Ed Pastor was absent for the vote.) The Sun Valley bond issue, authorized at $90 million, resulted in bond sales of $82 million to build the road. The first bond repayment of $1.4 million came due last August.
Carpenter, however, did manage to protect county taxpayers from exposure in the event that Sun Valley property owners default on their payments. She insisted on some alternative assurance of payment so that the Sun Valley land would not be the only collateral.
Burns complied by arranging an agreement with Security Pacific National Bank of California, the sixth-largest bank in the country, to provide a letter of credit, which in turn was backed by Heron Financial Corporation. Heron, which owns Pima Savings & Loan of Tucson, also handles all administrative duties for the bond fund.
As predicted, the supervisors' approval of the road bonds ignited more speculative buying. Although the project still existed entirely in theory and the water questions remained unresolved, the new investors saw the promise of still greater profits ahead and their buying ballooned land prices to nearly $10,000 per acre, county assessor's records show.
THE BOOM IN LAND PRICES lasted only months before the Phoenix real estate market began to wobble. In early 1987, land sales in Sun Valley abruptly went flat as a dead man's heart monitor. Almost no sales have occurred since late 1987 anywhere on the acreage, county records show.
And investors like Leroy Smith began to wonder if they would see the profit margins they had counted on making. Smith, a 76-year-old farmer from Delta, Utah, bought $1.67 million worth of Sun Valley land from Burns a little over a year ago. He says he expected to cover the purchase through quick resale of some of the parcels. But the expected sales never came, he says.
"The market fell clear apart," Smith says. "I had hoped to resell to developers and retain a part, but it's drawn out too long."
Smith let his holdings go into foreclosure in April, as did three other investment trusts which had purchased nearly $10 million in land from Burns. Altogether, nearly 3,500 acres are in foreclosure because the owners stopped making payments on notes held by Burns. "I decided to let it go now, rather than to sink more into it and then let it go later," Smith says. "I've talked to some of the other [defaulting] owners and quite a few of the larger landowners are doing the same thing."
Smith says he still believes Sun Valley is a good project, but adds, "I've got some other [investments] going that I need to concentrate on. Fundamentally, I'm getting out of all my Sun Valley properties."
The defaults represent millions of dollars in lost profits on land sales by Burns. This month Burns will attempt to recoup those losses by selling the parcels at auction, says company spokesman Brian McBain. But he downplays the significance of the foreclosures.
"They aren't in default," McBain says. "Default is when the land is actually taken back. These are just delinquent; none has been sold yet and the owners have until the day of the auction to cure the delinquency."
An even larger amount of Sun Valley property is in foreclosure by Heron because owners are delinquent in making bond-assessment payments, title company records show. Foreclosures by Heron now involve more than 7,500 acres, including the acreage also in foreclosure by Burns. About 16 percent of the Sun Valley land, representing $464,000 in bond assessment fees, is delinquent in making the fee payments. An additional 1,100 acres is subject to forfeiture because Heron advanced money to the owners to make previous bond-assessment payments, records show.
The number of landowners who are delinquent in making their semi-annual bond payments has doubled in the last six months, from six to twelve, according to title company records. The Sun Valley Owners' Association lists approximately seventy members.
Heron officials deny that the foreclosures mean the Sun Valley project is in trouble or that bondholders have any reason to worry. "Anytime there is a shortfall in the bond- assessment pool, we make up the difference, so the bondholders need have no fear of default," explains White, the Heron vice president.
Heron will continue to make up the default as often as necessary, he says. But any land that reverts to Heron's control is exempt from bond assessments, under terms of the agreement between Heron and the Sun Valley Public Improvement Corporation, the nonprofit group formed by Burns to administer the road bonds.
This means Heron makes sure the bonds are paid, but then recoups its losses by redistributing the unpaid assessments across the remaining acreage, increasing the burden on other landowners. Tax experts call this concept "the last faithful acre," because the debt builds like an inverted pyramid on paying landowners as their numbers diminish.
White, however, dismisses grim curiosity about the impact on remaining property owners. "I'm sure these parcels will find ready buyers," he says of the sixty or so parcels scheduled for auction in late July. "The last bond assessment payment was, let's see, $61 an acre. I think the land's worth more than that, don't you?"
Amid the collective marveling over the spectacular fortunes being made in Sun Valley, one circumstance has gone ignored: All of those fortunes exist largely on paper. Every acre of the land is covered in liens, sometimes five or six deep. The liens go all the way back to Huddie Bell's unpaid debt to Tenneco for the land he bought in southeastern Arizona and then traded for Sun Valley.
Should the project go bust, landowners still hanging onto parcels acquired for thousands of dollars per acre will have witnessed the collapse of an empire built on paper.
THE RULING AXIOM of real estate in Arizona is that water determines the value of land. Nothing, be it beauty, location or size, can compensate for the absence of a secure source of water. That reality governed original appraisals on the high, dry Sun Valley land, but it has long since been lost in the voracious speculative scramble that followed the BLM's 1985 decision to trade the acreage for private lands elsewhere in the state.
Sun Valley's promoters claim now, as they claimed to county supervisors, that water is no problem. Their sales videos tout the area's abundant groundwater supplies. But they fail to mention the facts tucked away in the fine print of sales contracts--that this development does not have the approval it requires from DWR to use the groundwater.
Bob Williams, head of the property owners' group, contends the development's water problems have been solved through an agreement with the City of Buckeye. "We made an agreement eighteen months ago with Buckeye so we're in their service area now," he says. Williams claims Sun Valley's recent annexation by Buckeye solves any water problems.
Again, the fine print tells a different story. The Buckeye agreement requires Sun Valley to provide the water for any connections beyond the first 25 hookups. Sun Valley's recent annexation won't change the water-service agreement, says Buckeye city manager Fred Carpenter. "We're responsible for the first 25 connections, and then it's up to them to provide the water supply for anything beyond that," Carpenter says.
"Twenty-five hookups means a line about as big as a good-sized garden hose," explains hydrologist Philip Briggs, a former DWR deputy director. "|'Course, it would be a real long garden hose."
Though located in the valley of the Hassayampa River, Sun Valley has no permanent source of surface water, nor does it have rights to other water. Even the presence of the Hassayampa's dry riverbed, promising abundant supplies of underground water, is countered by restrictions looming under the 1980 groundwater code. Those restrictions, first heralded in 1984 by DWR's conservation plans for the Phoenix area, will make the groundwater under Sun Valley largely off-limits to developers.
DWR officials say the rules, though limiting groundwater-dependent new developments, will have negligible effect on the Valley's overall growth prospects. But Johnson, the lobbyist who vouched his own credibility as a water expert to convince doubtful county officials that Sun Valley had no water problem, has spent the past few months attempting to convince the governor and legislators that the state's entire economy is threatened by DWR's efforts to enforce the groundwater code.
According to Johnson, the impending restrictions on groundwater pumping "would destroy hundreds of millions of dollars of existing investment and make future development economically impossible."
The new restrictions, proposed by DWR in November, would only allow enough groundwater pumping to support about one house per acre in developments such as Sun Valley. "The groundwater code requires us to balance groundwater withdrawals with natural recharge rates by 2025," explains William Plummer, DWR director. "Safe yield means almost no withdrawal of groundwater."
Johnson calls the proposed changes "highly discriminatory" toward new developments located outside major cities. "To flatly impose density limitations . . . regardless of groundwater bankrupt projects that were based upon projections of greater densities," Johnson says. "More money has already been invested in those projects than the permitted densities can return."
Lobbyists for the cities, however, contend that the would-be builders of empires in the desert are getting what they deserve. "Sun Valley is exactly the kind of development the code was designed to prevent," says Roger Manning, executive director of the Arizona Municipal Water Users' Association. "Surprisingly, Jim Johnson and other representatives of desert developers have only recently realized that an appropriate reading of the code is that you can't have a mining license."
The cities are fighting the developers' efforts to weaken the restrictions because, says Manning, cities too often get stuck bailing out developments with insufficient water. "The usual scenario is for the developer to start his own water company, wait until 50 percent of the development is sold and then shift ownership to that group," he says. "Then, when the system wears out or the water runs low, the homeowners come running to us wanting to be annexed and put on city water.
"The more such developments DWR approves, the more it leaves the cities holding the bag, so we want these restrictions," Manning explains.
Publication of the proposed restrictions triggered frantic efforts by Johnson and other Sun Valley lobbyists to have them withdrawn by the governor or by Plummer, the new DWR director. When that didn't work, Johnson approached friendly legislators and other water lobbyists about rewriting the groundwater code to create loopholes for Sun Valley, say sources close to DWR.
The Sun Valley backers even tried to convince local bankers that the groundwater code is the cause of the Valley's economic problems. "The developers were creating paranoia among the bankers over the potential for curtailing development," says Art Othon, Governor Rose Mofford's top aide on natural resource issues. Banking-industry officials admit they were alarmed by the claims, but say their fears were calmed after discussing the new rules with DWR officials and receiving assurance that an economic-impact study would be done.
Othon acknowledges that DWR was pressured into abandoning plans for immediate implementation of the proposed restrictions. He insists, however, that many water users besides Sun Valley objected to immediate adoption of the rules. (The agency is now holding public hearings and final rules are expected by the end of the year.)
Johnson denies claims by well-placed sources that he convinced key legislators to hold up Plummer's confirmation until the agency agreed to drop the proposed rules. State Senator John Mawhinney, one of the legislators rumored to be involved, also denies the claim. "I'm shocked to hear of such a thing," Mawhinney says. "I merely brought Jim [Johnson] together with Othon and Plummer in order for them to provide input to Plummer."
"Jim did come to me with concerns about the proposed restrictions, because the net effect would be that some land outside the cities would be reduced in value by probably three quarters," Mawhinney says. But he denies that Johnson sought his support to create a loophole in the groundwater code for Sun Valley.
"I know these rumors have been going around, and I wish I could track down their source so I could put a stop to them," Johnson says. "They are absolutely untrue. I get really sensitive about this because I would never do such a thing. I support Bill Plummer and the code."
Manning, who predicts more "brutal" debate over DWR's proposed restrictions, claims the only reason Johnson and other developers' lobbyists didn't launch an open attack on the groundwater code this year is because they didn't have enough time to organize one.
"My fear is that DWR and perhaps even the governor's office will not be able to stand the heat from developers and will acquiesce to the continued mining of groundwater by these private developments," Manning says. "If they do withstand the pressure, there will be a real effort by developers in the next session to make substantive changes in the groundwater code. They will attempt to sell them as minor adjustments when, in fact, they are tearing the guts out of the code."
BACK WHEN SUN VALLEY officials were lobbying the county board of supervisors for tax-free bonds, Manning and then-DWR director Kathleen Ferris issued warnings about the uncertain water supply.
"Since there is legitimate concern about the availability of a sufficient water supply, the department recommends that the county remain cautious in approving the roadway proposal until [DWR approval] has been issued for the Sun Valley project," Ferris said in a June 1986 letter to the board.
But even the cautionary words of the state water commissioner were drowned in the flood of reassurances issuing forth from Johnson and other Sun Valley lobbyists. Less than two months later, the county board approved the bond issue over Carole Carpenter's dissent.
Nearly three years later, none of the houses, businesses or industries talked about for Sun Valley have been built. Not even a master plan has been completed. Burns officials say they haven't had time to finish it because they've been too busy overseeing parkway construction.
Cynics, Manning among them, question whether Sun Valley was ever anything more than a gigantic hustle to sell land. "I said at the time and I'll say now, the Burns people wanted to use the bonds to jack land prices, to sell all they could, and then lay the debt service on someone else," Manning says. "In twenty years there'll be a bunch of investors out there wondering how they got there and how to get out."
"I just didn't think we should be involved in approving something that might result in land being . . . well, hyped."
"Twenty-five hookups means a line about as big as a good-sized garden hose. 'Course, it would be a real long garden hose."
"Sun Valley is exactly the kind of development the code was designed to prevent."
Sun Valley backers even tried to convince local bankers that the groundwater code is the cause of the Valley's economic problems.
