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REAL ESTATE - Storming the Southwest

SunCal Companies and partner D.E. Shaw are making a big bet on greater Albuquerque.

In December privately held developer SunCal Cos. finalized a $250 million deal to purchase a 57,000-acre tract of land in the arid New Mexico desert west of Albuquerque known as the Atrisco Land Grant. The parcel, twice the area of Boston, is one of the biggest land acquisitions ever for the Irvine, California–based developer of master-planned and mixed-use communities, mostly on the West Coast. Even more striking, though, is SunCal’s choice of investment partner: D.E. Shaw Group, a global investment firm with some $25 billion in assets that is better known for its quantitative hedge funds than its real estate deal making.

That perception could soon change. The Atrisco deal is one of the first to be struck by George Rizk, D.E. Shaw’s New York–based head of real estate investments, who took up his post last May and is stepping up the firm’s activity in the asset class. "We are agnostic as to property types or regions.

It’s all about value," says Rizk, who was hired from private equity firm Cerberus Capital Management.

The Atrisco property is one of the last remaining land grants in the U.S. and has a unique history. In 1692, King Charles II of Spain gave it to a military officer, Captain Don Fernando Duran y Chavez, for quelling an uprising of Pueblo Indians. President Theodore Roosevelt validated the grant in 1905, and in 1967 it was incorporated by descendants of the original settlers as Westland Development Co. Apart from a few minor residential properties, the tract still comprises mostly raw land.

As the only parcel on the outskirts of fast-growing Albuquerque that can accommodate more development, Atrisco was coveted by investors. "You can’t grow to the north, south or east; west is the only way to go," says William Myers, who oversees SunCal’s operations in the Southwest. "We feel very bullish that the area has to grow."

His firm wasn’t afraid to pay up. In August 2005, Westland Development said it would sell Atrisco to private investors for $200 a share. SunCal stepped in and offered $280 per share in May 2006, but was trumped by Sedora Holdings, a Nevada-based land developer that bid $305 a share. With equity backing from D.E. Shaw, SunCal countered with an offer of $315 a share in June that was approved five months later by Westland Development’s roughly 6,000 shareholders. As part of the deal, SunCal also agreed to contribute $1 million a year for 100 years to the Atrisco Heritage Foundation, a new entity that will preserve the site’s historical and cultural resources.

SunCal and D.E. Shaw insist they didn’t overbid and say they underwrote the deal using a conservative regional-employment-growth estimate of only 1.5 percent a year. In 2006 the actual rate of growth in Albuquerque was 2.5 percent. "The secret to success is to not underwrite your project ahead of job growth," says Marta Borsanyi, co-founder of development consulting firm the Concord Group, which advised both parties.

Adds D.E. Shaw’s Rizk: "It’s not the Las Vegas of a couple years ago, but that doesn’t mean that the growth rate is not extremely favorable for us. We believe our assumptions are well founded."

There certainly is reason for optimism. Albuquerque’s population growth in 2005 of 9 percent was nearly double the U.S. average, according to Moody’s That’s largely because businesses and property owners have come to view the New Mexico city as an attractive alternative to more expensive locations in Arizona and Nevada, says Gina Martin, a financial economist at Wachovia Corp. in Charlotte, North Carolina, who tracks metropolitan markets in the Southwest. Even though much of the U.S. housing market has cooled, this interest helped fuel a 16.8 percent increase in Albuquerque home prices in 2006, versus the national average of 7.8 percent.

SunCal and D.E. Shaw plan to spend billions of dollars to develop and market what Myers calls a "city within a city" that may include a golf course, hospital or university to anchor the master-planned community. The partners may also build a shopping mall. (Neither firm will disclose return expectations.)

Energy resources are a possible source of ancillary profits. As part of the deal, SunCal and D.E. Shaw transferred 100 percent of the rights under two existing oil and gas leases on the property to Westland shareholders but retained a 50 percent interest in any future oil, gas or minerals extracted from the land. So far, though, it is unclear whether any fossil fuels exist on the property, and SunCal says there are no plans to drill on the site.

The New Mexico desert may be an unlikely target for a money manager that runs hedge funds. But with absolute-return investors now dabbling in everything from weather derivatives to wine futures, building a city in the sand almost seems like a safe bet.