North Coast Journal November 1, 2007 : THE TOWN DANDY : Through the Looking Glass

November 1, 2007

Through the Looking Glass

by HANK SIMS

Vigorously waving the white flag high over my head last Thursday afternoon, I stepped slowly toward the Scotia headquarters of the Pacific Lumber Co., scanning nearby rooftops for snipers. Every nine paces I unholstered my can of Silly String and sprayed the sidewalk ahead of me, scanning for invisible trip wires. All clear.

Only when I was safely ensconced inside the redwood-encrusted bunker at the corner of Main and Bridge streets, chatting with the friendly receptionist, did I fully permit myself to relax. This was not a setup. Pacific Lumber CEO George O'Brien, deep in the midst of an epic battle with county government on one hand and the combined forces of Wall Street on the other, really did want to sit me down for a chat.

It had been a bad week. Two days earlier, O'Brien had split his attention between two public forums where the future of the company he had been tasked to lead was up for debate: the board of supervisors meeting in Eureka, and the bankruptcy court in Corpus Christi, Texas. At issue in both forums was the viability of the company's plan to pull itself out of bankruptcy. Neither went particularly well for him.

The company's plan to right itself, to get out from underneath the crippling debt it has maintained since the 1985 takeover by the Houston-based Maxxam Corp., depends on the sale of land — about 28,000 acres of its approximately 200,000 acres of Humboldt County timber holdings. The 28,000 acres in question are contiguous. They run from Fortuna in the southwest up to Kneeland in the northeast, and skirt the Headwaters Forest Reserve. Under the plan, about 6,600 acres of prime redwood forest would be sold to a conservation agency for about $300 million. The rest would be parceled out into 160-acre "kingdoms," in a massive luxury development aimed at the super-rich. These kingdoms would sell for around $4 million each.

Right after this plan was released a couple of weeks ago, critics of the company pounced. The prices the company hopes to receive for its land are completely out of scale with reality, they said. And if the company doesn't end up getting the money it says it expects, it will be right back in bankruptcy in a couple of years. But more than that, the county board of supervisors decided to throw a wrench in the works right away. The board passed an emergency moratorium on building in lands zoned for timber production ("TPZ"), effectively letting the bankruptcy court know that the county would never consent to Palco's proposed subdivision (see "Town Dandy," Oct. 11).

O'Brien — a gentlemanly sort, nothing like the malevolent ball of nerves named Robert Manne who he succeeded last year — was taken aback by the county's move. He didn't see it coming.

"I've been very surprised by what's happened," he said at our meeting last week. "I realized that there are some aspects of our plan that might require an accommodation or modification of the way that the county has viewed TPZ land, historically. But I never in my wildest dreams thought they would react the way they did."

And he didn't understand exactly why the board of supervisors, at its last meeting, continued down the same path, taking steps to set up a new system whereby owners of TPZ lands would have to apply for a permit before being allowed to build a home. He realized that the county's new interest in building in timber zones was aimed squarely at his company. He realized the supervisors were using their influence to try to do away with Maxxam, once and for all — to make the company's plan fail in bankruptcy court, to get the Pacific Lumber timber lands into hands other than Charles Hurwitz's.

What he didn't understand was why. He sincerely believed that his company's plan was the best thing going for everybody. It leaves most of the land in timber production, providing timber jobs down the road. If successful, it would spark a construction boom and bring new, well-to-do residents to the area.

"We've not told a good story," he said. "I think once we have an opportunity to lay all this out for everybody, people will see — it doesn't take away timber from the Scotia mill, it preserves jobs, it's an economic boon for the county and it increases land dedicated to preservation."

Being from out of the area, O'Brien perhaps doesn't quite appreciate the degree to which his Houston bosses have made themselves near-universally loathed over their 22 years of "stewardship" — the overcutting, the timber wars, the lawsuits, the layoffs. And he perhaps doesn't appreciate the degree to which the county board of supervisors is committed to preserving timber and agricultural lands, and to fighting sprawl.

But he does believe in his company's plan. And until Corpus Christi Judge Richard S. Schmidt finally pulls the plug on the Maxxam Corp., he's going to be out there making the case for it.

Apocalypse Watch:
A couple of weeks ago, we gaped at the ferocious response to a paper by Humboldt State economist Dr. Erick Eschker ("Grab Your Pitchfork," Oct. 11). Eschker, keeper of the Humboldt Economic Index, had set Humboldt County aflame by predicting large drops in the Humboldt County housing market; he warned that home prices could soon fall by as much as 40 percent in inflation-adjusted dollars.

The Eureka Reporter editorial board sprang into action at the attack on our holy real estate market, the source of everything great and good in our lives, as perpetrated by this heathen ivory-tower economist — if he is an economist. Local realtors were more measured in their response than the hotheaded Reporter, but they too begged to differ with Eschker's conclusion. The market must continue to rise, they said, because the market has always risen.

Comes now the Wall Street firm of Goldman Sachs, entering the fray with a publication dated Oct. 21 and titled, simply, "Californian home prices are over-valued by 35-40 percent." In the paper, the Goldman Sachs analyst arrives at the same conclusion as Eschker, but by a completely different route. In his study of the Humboldt County market, Eschker looked at the historical relationship between average rent and average home price, and discovered that in recent years they had grown out of kilter by about 40 percent. In its study of the California market, Goldman Sachs takes a different tack. Its analyst looks at the relationship between home prices and two other indicators: disposable income and interest rates. But its conclusions for the state of California track remarkably well with Eschker's prediction for Humboldt County — there's a great big bubble out there in real estate land, and it's just about to go pop.

The Goldman Sachs paper, which can be read on the Humboldt Economic Index website, conveniently gathers together a whole lot of horrifying trivia. Statewide, there's twice as many homes on the market right now than there were one year ago. Sales volume is way down from the peak of the boom, in January 2005 — these days, there's half as many homes being sold each day as there was back then. Combine that with the implosion of the subprime mortgage sector and the subsequent tightening of credit. The picture is not pretty.

Reached Tuesday, local realtor Dean
Kessler — a whiz for statistics — said that parts of the Goldman Sachs report may indicate that the situation isn't quite as bad here in Humboldt County as it is in the rest of the state. There are as many homes being sold as there were during the boom, Kessler said. It's just that there are about 70 percent more homes on the block. The sellers' market is gone, but that doesn't mean people have to give their homes away.

"I respect the work [Eschker] has done," Kessler said. "All I know is that out there in the marketplace there are still buyers, and they are still out there buying in the marketplace. Which is a lot different situation than brokers in other parts of the country."

Case in point, Kessler said: He has an acquaintance in Phoenix. One year ago, according to the acquaintance, there were 6,000 homes on the market. Now there's 54,000 homes on the market. If Goldman Sachs' numbers are to be believed, even California doesn't have it quite that badly.

Would a real estate crash affect the price of a Pacific Lumber "kingdom"? Does a kingdom then go for only $3 million, making Pacific Lumber's recovery plan even more problematic? Or does the kingdom become even more valuable, as it insulates one from the zombie hordes that will take over the streets of our cities in the wake of the crash?

Time may tell. But probably not.

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