Giant Ritter Ranch Fights to Stave Off Foreclosure

Ritter Ranch, the giant planned community being developed on the outskirts of this desert city, is in foreclosure proceedings and could collapse in a tangle of bankruptcies and lawsuits if negotiations to save it fall through.

Foreclosure proceedings were triggered earlier this month, when the Bankers Trust Co. of New York filed a notice of default against the Ritter Ranch Co., citing $26 million in outstanding payments. The bank’s action coincided with a decision by the city of Palmdale, which is unhappy with the slow pace of the project, to freeze payments to the developer from a municipal bond issue.

The dispute over the fate of these bond payments may now prove to be the make-or-break element in negotiations to avert foreclosure.

“We are still trying to keep this thing alive,” said Paul Nadel, a director of the Ritter Ranch Co. “Our hearts are still in it, but you get kicked in the teeth enough, and you do start to wonder.”

The troubles of Ritter Ranch, which was envisioned as home to 20,000 residents, stem from the bust in Palmdale’s real-estate market, Nadel said. Palmdale just about exploded with the boom in the 1980s, then succumbed to a severe economic slide in the ‘90s, just as the Ritter Ranch project was supposed to get underway.

Hence, no firms have started building homes there, and although the company says it has builders lined up, it has exhausted its loans. “Many builders have no interest in going [to Palmdale] anymore,” Nadel said.

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It will take three or four months for the bank to foreclose on the property.

During that time, Ritter Ranch’s owners, Merv Adelson, the founder of Lorimar Telepictures, and Irwin Molasky, a former Lorimar executive, plan to press for an agreement that would allow the project to go forward. “We feel Palmdale is on the verge of a return to prosperity,” Adelson said.

Adelson and Molasky’s faith in the return of boom times is not so different from the feeling of scores of other developers, whose speculative dreams have carpeted Southern California’s deserts with tract homes.

But if they are wrong and Ritter Ranch unravels, economically depressed Palmdale--already identified with one of the highest foreclosure rates in the nation--will become home to a foreclosure that dwarfs all the others.

The 18-square-mile Ritter Ranch property, which was put on the market at $27 million in 1988, was to be a master-planned community for 7,200 homes, schools, fire stations, golf courses, parks and trails. Six thousand acres were to be set aside as wilderness.

Such a development would change the character of this city of about 112,000 people.

Although some residents opposed it, to local business people Ritter Ranch “was always something we were looking forward to,” said Palmdale Chamber of Commerce President Sandy Corrales. “I would hate to see that glimmer of hope go away.”

The city holds an important card in the current negotiations over Ritter Ranch finances. That’s because in early 1995, Palmdale approved the sale of $50 million in municipal Mello-Roos bonds to pay for public improvements--street lights, roads, sewers and so forth--at Ritter Ranch.

The tax-free Mello-Roos bonds are to be repaid from special property-tax assessments on the development and are secured by the land itself.

For this reason, the bonds are considered high-risk. Indeed, statewide, $700 million worth of the $5.8 billion in Mello-Roos bond issues are in default or drawing into reserves to cover payments, said Peter Schaafsma, executive director of the California Debt Advisory Commission.

“Basically, it’s the municipal equivalent of junk paper [high-risk debt],” said David Brodsly, a vice president of Moody’s Investors Service in San Francisco.

Palmdale sold the bonds on the condition that Ritter Ranch would get the proceeds as it showed progress on the development. Instead, the city has committed $15 million in bond funds to improvements while seeing little progress, said City Manager Robert Toone.

City officials were also troubled by Ritter Ranch’s requests to shift bond funds to portions of the project with less-expensive homes. They fear that approving such a change would leave Palmdale open to lawsuits because it represents a change in a contract to which bondholders agreed.

And the city dreads a worst-case scenario in which Ritter Ranch would end up a vast, unfinished development in the middle of the desert, lined with new roads, street lights and little else, Toone said.

So on June 25, city officials slammed the door on handing over new bond money to developers.

This decision by the city--technically to terminate an agreement with Ritter Ranch under the terms of the bond--prompted Bankers Trust to start foreclosure proceedings in order to negotiate in Ritter’s stead. Thus, the lender has kept a foot in the door to restore the flow of bond money.

“Bankers Trust would say we forced their hand, and I think that’s a fair statement,” said Paul Thimmig, bond counsel for the city.

The success of the resulting negotiations will depend on whether the city, Ritter, Bankers Trust, other creditors and major bondholders--notably the Franklin/Templeton Group of Funds in San Mateo--can agree on a host of intricate issues.

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The city, for example, wants guarantees that it won’t be sued by bondholders if it changes the terms of the bond. The city also wants assurances that Ritter won’t sue the city, and it wants to be sure that Bankers Trust is really prepared to contribute another $25 million upfront to the project.

So far, the lender has provided only $15 million of that and promised $10 million more later, say both sides.

For its part, Ritter accuses the city of being overly rigid in its requirements and unrealistic about the kind of development the current housing market will support. “It’s incredibly frustrating,” said Nadel.

Although all sides say their meeting today may help resolve some of these issues, Nadel says the city “has been playing hardball.”

There are many possible outcomes. Ritter Ranch could go forward without significant delays if an agreement is reached soon. Or Bankers Trust could complete foreclosure on Ritter Ranch. Then, the property would likely revert to the bank or the previous owners, a group of shareholders who hold a lien on the property. This group is in second position behind the bondholders, according to their trustee, Michael Criste.

Sale of the land might follow. The bonds might then be redeemed, and the bondholders will get some of their money back, plus whatever the sale of the property yields.

In another scenario, Bankers Trust or Criste’s group could find another developer to step into Ritter’s shoes, city officials say.

“These problems are very temporary,” said Criste. “I suspect Ritter Ranch will get built and be successful.”

It’s not clear exactly how any of these possible outcomes would affect Palmdale.

Even if there is a default on the bonds, the city’s General Fund will not be tapped, so no Orange County-style crisis looms.

But default or early redemption of the bonds might slightly mar the city’s reputation among investors, say experts. And lawsuits against the city over any perceived mishandling of this issue could be costly.

“There is quite a bit of support in the community here for Ritter Ranch,” said Palmdale Mayor Jim Ledford. “But it’s important for our economic health to live by the contract [with bondholders].”

As to whether a Ritter Ranch foreclosure would have a substantial effect on the local economy or on future investment in the Antelope Valley, there is a variety of opinion.

Ritter Ranch supporters say the city needs an upscale, planned community to counter the hodgepodge, boomtown-style growth that transformed the city in the 1980s.

But detractors point to the city’s deeply depressed real estate market, and say that what Palmdale needs now is industry, not homes.

“It’s not like we have a housing shortage,” said Al McChord, economic development director for the city.