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t's lunch in a Scottsdale restaurant. The attendees are mainly retired scions of industry, professionals, and business. I came because the group is having a presentation by one of the largest real estate developers in Arizona, and I've come to hear the story of a "typical" Arizona entrepreneur.

Mark Sklar, one of the three original (and still intact) partners at DMB was originally from Wisconsin and studied history. He has the midwesterners' value system and sense of engagement.

He and his wife moved to Arizona to strike out on their own in 1971. For seven years he was in the travel business before becoming partners with Bennett Dorrance and Drew Brown to form DMB, a company known for its excellence in real estate development and community engagement. As he runs down the list of boards he is on, from arts advocacy to Alzheimer's centers to camps for special needs children, he tells us the company credo: profitability, legacy, partnership and fun.

DMB was formed in 1982 out of some land syndications. Drew Brown was Mark's lawyer, and Bennett was Drew's client. They spent a long time getting to know each other, trying to understand if an enterprise among the three of them would make sense. Mark, Drew and Bennett are entrepreneurs who started off by buying and selling land, using money they raised from syndications.

In 1989, the Resolution Trust Company afforded them an opportunity to buy a bunch of stuff from defunct savings and loans. No one else would invest, because no one knew where the bottom of the market was. Sound familiar? So they bought a lot of property, including the famous blue building on Alma School Road in Mesa, Arizona. Of course they had the means to do it. It's not a strategy for everyone.

About fifteen years ago, the company took a philosophical jump into the planned community business. They view themselves as developers, planners, and zoners and marketers of planning communities: large communities (like Verrado and DC Ranch) with lots of different product, and recreational communities for people who want vacation homes (Forest Highlands).

DMB also has a significant amount of investment in California: in Orange County at Madera Ranch. They also have a property in San Francisco Bay that is currently under water; it was formerly a salt mine owned by Cargill.

DMB prefers to do joint ventures with landowners rather than buy property. They're a project-centric company that pushes authority down into the field into each project's General Manager.

They have done quite a bit of succession planning, including diversifying their capital base outside Bennett Dorrance's personal capabilities. They now have two financial partners from the Bay Area, a board of directors, and a real plan to allow the company to succeed them without a sale or liquidation.

And now...about the market. Mark's guess is that it won't turn around before Q3 of '09 or have righted itself until 2010.

We have an oversupply of single family residential, which will create a longer time to recover this time around. It was fueled by easy money, and the idea that single family residential could be an investment. Two and a half years ago, DMB was so concerned about this that they hired a team to knock on every door in Verrado and see if someone was living in the home. They found that about 25% of the homes were investor-owned.

Arizona has a worse oversupply of single family housing than California, because it has strong employment, a right to work state, and it is easier to bring a product to market here than in California, so that encourages inmigration.

167,000 homes were built in 2004-2006 in Arizona, where there is a need for 35-40k a year based on inmigration. The oversupply will be with us for a while. Here's why:

1)We have had a dislocation in the financial markets that has been unprecedented. Sklar is seeing a lot of institutional lenders do really stupid things; they are handcuffed because they don't know what their portfolios are worth, and they are walking away from sound, underwritten transactions. They just don't know when the regulators will come in.

Bill Gross's newsletter for the past two years has been talking about the shadow economy — large scale transactions that have been securitized and sold to people who didn't understand the underlying value of the assets. The result of this continues to affect the real estate markets.

2)Huge increase in commodities costs.
4)Interdependence with everything that happens in the national economy.

How does he feel? Negative for the short short term. The economy is one problem for Arizona. Employee sanctions laws are another. The inability of people to sell homes elsewhere slows the state's inmigration. (2006 102,000, 2007, 67,000 people.) DMB has taken their land of the market to discourage more building for right now. They have no wish to contribute to the oversupply. They are also tightening budgets, lengthening timelines, and have laid off twenty people. But DMB is optimistic for the long term. With the business and political leadership we have now, he thinks Arizona has a rosy future.


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