Is investment firm misleading local governments?

Every local government gets excited when it is approached by some large firm promising a massive project in the community. Especially in the current dismal economic climate, towns and counties are looking for anything that promises to bring people and jobs to the area.

But we shouldn’t be naïve about how these things work. If a project sounds too good to be true, it usually is. All too often, big real estate investors use local officials to get what they want, but never deliver the projects they promised.

That may be what is happening now in Barrow and Jackson Counties with the Walton Group, a Canadian-based company that proposes big projects in both communities.

In Jackson County, the Walton Group has purchased the 1,600 acre site known as the “old 4-W farm” just south of Arcade on Hwy. 129. The firm has been dealing with Arcade to get the site annexed for what it calls “Arcade Meadows.” That deal is currently pending because the Arcade government is again trying to wrest control of that area’s water service away from the county water authority (a move that will never happen) before the town deals with Walton.

In Barrow County, the Walton Group has bought 292 acres at Hwy. 81 and Hwy. 316 and is working to get the zoning and permitting in place for a master plan development it calls “Barrow Landing.” In November, Walton Group representatives met with the Barrow County Board of Appeals to get some variances regarding roads, lighting and landscaping. Tuesday night, the Barrow County Board of Commissioners approved the commercial rezoning of a small portion of the tract as well as a special use permit for a master planned development.

In both Jackson and Barrow counties, representatives of the Walton Group have clearly portrayed the company as developers. In both counties, the firm has a colorful map showing how it proposes to build out the property. And in both communities, local officials have registered their enthusiasm for the proposed projects.

But the problem is, the Walton Group doesn’t generally build out real estate developments. It is an investment firm and is involved in what is called “land banking.”

Here’s the way Walton promotes its strategic business plan:

First, the firm purchases raw land that it believes is in the path of growth around major urban growth centers. In the U.S., Walton has purchased land in Georgia, Virginia, Texas and Arizona. It also has Canadian holdings. Walton calls these purchases its investment strategy’s “acquisition stage.”

Next, Walton syndicates the land by selling shares to investors. In Walton’s case, the company sells these fractional shares to investors in Asia. It has offices in Malaysia, Hong Kong, Singapore and Japan.

These investors aren’t large, sophisticated institutional investment firms, but rather small investors who apparently get sales pitches at seminars done by Walton sales reps. The salesmen pitch the investment by saying that the property being purchased is raw, undeveloped land in the path of growth and that it is sure to rise in value. Investors reportedly pay cash ($10,000 per investment by some accounts), which allows Walton to quickly recoup its initial cost and also make a profit. In Jackson County, the firm reportedly sold $28 million in shares to 1,109 investors, according to a news release in 2009. This second phase Walton calls “syndication.”

At the same time Walton reps are getting money from small investors thousands of miles away in Asia, other Walton associates are taking care of phase three, the “land planning” stage. This is what has happened in Arcade and Barrow County when Walton representatives go to local governments to get land use changes, annexation and zoning deals.

Back in Asia, Walton sales reps make a big deal to potential investors about the land planning stage, saying that once all the zoning is in place, it will dramatically increase the value of the raw land they are buying.

Finally, Walton has stage four, which it calls the “exit” stage. This is when Walton flips the property to yet another owner or potential developer at what it hopes will be a large price. By getting key zoning and land use waivers in place from local governments, Walton and its investors hope to increase the value of the raw land to sell to another owner for a large profit in the future. Asian investors are told this process could take 3 – 7 years to accomplish.

Of course, there is risk for the Asian investors. The land may not get rezoned, or it might not resell quickly. The investors may pay more for the property than it is really worth. And since the investors are buying fractional shares, Walton apparently remains in control of what happens to the property while the investors have little control. (Walton tells investors to expect a 28.9 percent return on their investment.)

In short, Walton appears to have little front-end risk in the deal because it gets its money upfront while the Asian investors take the risk for the long term. The Asian investors make their money on the backside if and when the land flips.

But we’re not too worried about how this affects Asian investors. What local community leaders should be worried about is how Walton is approaching local governments portraying itself as a development firm when in reality, it is a land bank firm.

Local governments give Walton zoning and land use changes under the impression that the company is going to help the community by building infrastructure for a major project.

But the reality is, the government is helping Walton make money. The firm’s project maps are only “concept” plans designed to impress local leaders and foreign investors, but those plans have little basis in what might eventually happen. Walton does not usually build roads and other infrastructure on its holdings in the U.S.; it buys and flips land.

The bad thing is, Walton representatives haven’t been upfront about that when they talk to local officials. When asked, a Walton representative told a reporter for this newspaper that, yes, the company would be developing the Barrow County land. And a Walton spokesman told the Jackson County Water and Sewerage Authority that the firm wanted to “break ground on houses in 2014” in the Arcade project. (Walton is asking Arcade to annex its property because it would allow the housing density to go from 1,100 to 4,000 units.)

But is developing that land the firm’s real plan? Walton’s core business model calls for getting zoning in place then flipping the property. Actual development is something very different.

In fact, the president of Walton International told a group of Asian investors that “We don’t stick a shovel in the ground.”

So is Walton speculating, or really going to develop its Barrow and Jackson properties?

If those properties aren’t developed by Walton, our local communities stand to gain very little in the short term while Walton stands to make millions of dollars.
All of this appears to be legal, but it is disingenuous of Walton representatives to pretend to be developers when they are just land banking, speculating on land, not developing it.

And it’s naïve on the part of our local officials to blindly believe what they’re being told by any real estate firm without further verification.

Mike Buffington is co-publisher of the Barrow Journal and The Jackson Herald. He can be reached at mike@mainstreetnews.com.