THE ROLLER COASTER RIDE
The 1976 Corps decision placed enormous burdens on almost every aspect of the company. The legal department, regulatory affairs, customer service, the financial areas of the company and senior management were hardest hit.
Nevertheless, the community development business went on and - the good news - one permit had been granted. Planning for the completion of Collier Bay permit area was in high gear.
Our sales department, - while dealing with customer service issues - continued to sell. Our Engineers continued to engineer. Our Architects continued to design. Our Construction Managers continued to build. Our Utility Department continued to lay utility lines and manage utility plants. We were still in business.
And by the end of the year there was a little positive news to report.
Operating losses - that is losses before the Permit Provision - were reduced from the prior year.
While recorded sales for houses and condominiums were down 16% for the year gross profits from them were up 40% - a portent of better things to come.
And new sales contracts for single family homes were up for the year.
Hotel Operations were beginning to contribute to the company's earnings which were growing rapidly.
The Rotunda agreement provided $1,850,000 in revenue for the year.
Sales of wood products to the Mid-east contributed $3,950,000 to revenues.
And the Permit problems were being addressed.
In his Letter to Stockholders, Dad put it in to focus:
"Stockholders... may view with satisfaction the manner in which the Company, in the face of the permit denials, has moved to fulfill its obligations to its Marco Island customers by protecting their contractual and financial positions. we believe that the Marco "option program," ... is unique inn real estate annals. More important, this attention to the customer, which graphically reaffirms your Company's reputation for honesty and integrity, will ultimately inure to the benefit of our shareholders. For corporate character is the vital base upon which we are determined to rebuild Deltona into a new position of strength and progress"
His father would have been proud.
Thanks to Dad - there was one more piece of good news.
Late in 1976 the Company concluded an agreement with the Murchison Brothers - of Dallas Cowboy fame - to joint venture a new Florida Island community - Tierra Verde.
Tierra Verde was an island community on the south end of Pinellas county. Development had originally begun in 1959 and was originated by the Green Company who had been the purchaser of the old Mackle project in St. Petersburg - Lewis Island in the mid 50s.
The property had been almost fully developed. Tierra Verde was just two miles south of St. Petersburg at the Gulf entrance to Tampa Bay. Just four miles south of the island - on the same causeway access was the fabulous Fort DeSoto State Park with its miles of public beaches.
The Murchisons had been a lender to the Tierra Verde project and had foreclosed on it.
In addition to 600 mostly developed, mostly waterfront lots was the Port of Call Hotel, a 120 room facility near the project entrance. The hotel was located on a Tierra Verde waterway and featured a small marina with dock space and a locally well known lounge. Under Deltona's management the name was changed to the Tierra Verde Hotel, Yacht and Tennis Club.
With the loss of the Marco land product the high-end waterfront home sites were a welcome addition to the sales department.
Perhaps we were going to make it after all!
The theme for the 1977 Sales Convention was a popular song of the day:
THE RETURN TO BUILDING 1977 - 1981
During the late 60s and throughout the 70s the industry had been shaken by numerous land scandals. Land sales were not as easy to make as they had once been. Statewide - the inventory of developed, un-built on, lots was huge. The land scandals of the sixties and early seventies had left a bad taste for many. Resale values of lots were not keeping up with the retail prices of lots being offered. While Deltona's reputation was un-blemished and its resale position was much better than anyone's we were still affected by the industry problems.
While some companies were moving in other ways to deal with the problem we went back to our foundations for a new direction - building and construction.
About the same time several other factors helped set a new direction.
Interest rates had returned to a relatively low level. By early 1977 the prime rate was down to 6.25% from its 12% peak in 1974. Appreciation of homes and condominiums was strong - especially in Florida. And tax laws were very favorable. A owner of a second home could deduct substantially all of the costs of ownership against other income. And yet he could still use the home for vacation purposes with no limitations.
The combination of the potential appreciation and the tax shelters available made the ownership of a second ....or third ... vacation home a very attractive investment.
Condominium sales began to boom.
We were in a wonderful position to take advantage.
Even though much of the Marco beachfront inventory was on the "bulk sale" market to pay refunds, there was still some land left on which the company could build condos.
In the fifteen years since the founding of the company 1,570 condominium units had been constructed at Marco and 84 units in all of the Three Seasons communities. The last two brought to market were the Gulfview, a 21 story beachfront high-rise at Marco and the 84 unit Fairview at St Augustine Shores. Both had been introduced in 1973. Both had started off well but - with the recession and higher interest rates of the next few years - sales slowed. When it came time to close on the early sales cancellations were substantial. Unsold inventory had been a problem throughout 1974, 1975, 1976 and early 1977.
No new condominiums were brought to market for the next four years. In the spring of 1977 the annual report was still referring to "working with a diminishing inventory of completed but unsold condominium apartment units at Marco Island and St. Augustine Shores."
Later in 1977 all that would change however.
The sale of condominiums began to soar.
In mid 1977 the company introduced a new garden apartment project at Marco, the 182 unit Mariner complex.
It sold out in a matter of weeks!
In late 1977 the 80 unit Seawatch was offered for sale and sold out in a matter of days!
By the end of the year the largest condominium project ever contemplated by the Mackles - the 1261 unit South Seas Club - was on the drawing boards.
The first phase of the South Seas Club, South Seas East was released to the sales organization in March of 1978 and was sold out within one month.
One successful condo offering was followed by another.
The second phase, South Seas North, was introduced in the summer of 1978.
South Seas West Phase I came on the market in December 1978 and was sold out by April 1979.
The Summit House, an ultra luxurious 22 story, 128 unit beachfront building opened for sale in March 1979. Dad and Mom bought two units!
South Seas West Phase II came on the market in June 1979 and sold out quickly.
And there was a strong market for lower priced Condos in the Three Seasons communities as well.
We had struggled with the first ones at St. Augustine in 1973 - now there an entirely different reception.
Early in 1980 - on a parcel fronting on Lake Monroe - The Lakeside Condominium complex and immediately thereafter the Edgewater Condominiums were released for sale. By the spring the total 568 units were almost completely sold out.
The 418 unit South Seas Northwest complex, comprising two beachfront high-rises, opened for sale in early 1980.
Royal Seafarer, a 128 unit luxury beachfront high-rise was introduced in the late summer of 1980 and was sold out by year end.
The first phase of Tropic Schooner - the first condo project at Marco Shores - opened in April 1981 and was immediately sold out.
The initial success of Three Seasons condominiums in Deltona Lakes led to the introduction of the first phase of the Conquistador complex in St. Augustine Shores in 1981. The first phase included garden apartment units on the Matanzas River.
In the space of four years over 2000 condominium apartments units had been brought to market - and sold.
But we were running out of build-able Marco beachfront!
High on my priority list - and already under way - was the creation of new condo product. It was soon obvious that the demand required serious long range planning. The "start up" time for a new project was a year or more.
But it was a nice problem to have!
This time finding "dynamic solutions" would be fun!"
We began to look to other parts of Florida to develop new beachfront condominium product.
High on our list of interesting areas was Vero Beach.
Dad had done work there in the 1950s and I was very attracted by the large amount of available beachfront. By the early 1980s we had our first piece of land in the Vero area under option.
Single family home sales were seeing the same growth as the condo sales during the period.
In 1977 single family revenue was $19,700,000.
By 1981 over we were doing over $50,000,000 in sales annually.
For financial statement purposes revenue for condominium projects were reported on a percent of completion basis while single family revenue was reported as homes closed.
The total Condo and Single Family housing revenue for the period was:
1977 - $ 29,787,000
1978 - $ 35,694,000
1979 - $ 49,687,207
1980 - $106,055,000
1981 - $139,622,000
In addition to the focus on home and condo construction, the period from 1977 into 1981 saw a number of other developments as well.
Corporate staffing increased and planning began on a new multi-story building that would be the new home for Deltona. The property would also be the company's first entry in to the booming commercial market. The building being designed would provide rental office space over and above Deltona's own needs and allow us to profit from third party lessees - perhaps opening up a new line of business.
During the period retail land sales nearly doubled from a low point of $18,985,000 in 1977 to $35,100,000 in 1981.
And in January 1979, the first new company community (not including the Tierra Verde venture and the Rotunda management agreement) in six years was opened - Seminole Woods. While it was not on the scale of the earlier communities, it was a sign of the company's growing need for new specialty land inventory which supplemented the traditional Three Seasons inventory.
The success of the past three years had encouraged us to begin the planning process for our remaining lands in Tampa, Orlando and Putnam County.
Early in 1981 the company introduced a totally new real estate product: Vacation Ownership.
Vacation ownership - or Timesharing - had been hot since the mid seventies. There had been enormous success in the industry - and notable scandal and failure. But the well conceived, well managed properties were doing very well. And the profit potential was enormous.
We had the property. We had the selling organization. We new how to run resorts.
Now - in 1981 - on a prime parcel in the center of Marco's crescent beach we released The Surf Club to the sales organization.
The Surf Club was designed as a 120 unit private resort. Each unit was a luxury two bedroom suite overlooking the Gulf of Mexico. The first of two phases would include 44 units. Weeks - priced to reflect the popularity of each season - were offered from $6,100 to $15,200. Total sell-out for the Surf Club was estimated to be $60,000,000.
Initial sales were excellent.
Other operations were growing as well.
Deltona Utilities by 1981 was serving over 30,000 families in all Deltona Communities.
Utility Revenue had been $3,500,000 in 1976.
By 1981 they were up to almost $10,000,000.
So the five year from 1977 to 1981 saw a return to the growth and prosperity that had characterized the first decade at Deltona.
Profits - even after the Marco Provisions - were reported for each of the five years.
Of course some of that profit came from the sale of the Marco Beach Hotel and from the Bulk land sales that Neil was achieving.
But basic operations were healthy and growing.
And there was a new map of Deltona's "Florida"..... highlighting all of the communities .... even the future city of Tampa Palms.
THE SECOND BLOW
Unfortunately - for the second time in eight years - the financial environment was turning sour again.
Inflation which had peaked in 1974 at 12.3% had come back down to 6.5% in April of 1978.
From April 1978 it rose again to a new high of 14.7% in April of 1980.
The Fed - determined to put a stop to it - tightening credit like never before.
The Prime rate, as low a 6.25% in early 1977 soared to over 20% in August of 1981.
The Feds actions resulted in a recession in the fist part of 1980 and another longer recession starting in mid 1981 and lasting until the end of 1982.
Worst of all - for the real estate industry - mortgage rates went from below 9% at the beginning of 1978 to 18.5% in October 1981.
And we were in the worst situation possible.
We were still working our way out of the Marco Problem. We were over-leveraged - both from the Marco situation and from the new construction debt we had taken on. Condominium projects which had anticipated certain construction interest costs now saw that line item double.
We had gambled all on the continuation of strong demand for Florida condominium product.
In spite of inflation and high interest rates we were still successfully producing construction projects within estimated costs.
The impact would come in another way.
Banks normally require that a high percentage of a condo be sold before they will agree to a construction loan and construction can begin. This was not a problem given the rapid pace of sales that we were experiencing.
Our condos were - without exception - 100% sold under binding contract before the first spade of dirt was turned.
In the 1973 - 1974 period when moderately high interest rates caused significant cancellations - we had learned that a 10% non refundable deposit was not be enough to motivate a contract holder to "close". Also in the earlier period there had been a certain number of purely speculative buyers contracting for more than one condominium unit who were even more likely to cancel.
So Deltona had - early in the new condo boom - installed some tougher standards.
Fifteen percent cash would now be the minimum down payment. And no one could purchase more than one unit in any building. Maximum mortgage amount would be 75% of the sales price. The rate on the mortgage - of course - would not be set until closing.
The sales department resisted but the new standards were adopted.
It was not enough.
The four beachfront towers of the South Seas Club, the Summit House, the Royal Seafarer as well as the Tropic Schooner on Marco Shores, the Lakeside-Edgewater complex at Deltona Lakes and the Conquistador at St. Augustine Shores were all still under construction as the rates rose to new highs.
Anywhere from 18 to 24 months would pass between the signing of the contract and the closing.
As they were constructed rates just continued to rise. ....higher .... higher .... higher ...
Over 2,000 condominium units - roughly $200 million dollars worth - sold with firm contracts and hefty down payments - were under construction but not yet closed.
Financial statements, reporting on a percent of completion basis had already recorded a large part of the revenue and profits on those units.
It was coming time for all of those customers to close on their contracts.
Over half of the contract holders refused.
A $100,000 condo unit sold when mortgage rates were at 9% anticipating a 75% mortgage for 25 years would plan on a monthly payment of $629. Now with rates at 18.5% his payment would be $1,168 - almost double!
The fifteen percent down payment would not be enough to hold him to his contract.
By 1982 we were experiencing a huge cancellation rate. What had been reported as millions in sales now was millions in cancellations and unsold inventory!
To make matters worse a large number of the cancellations began to file suit to recover their 15% deposit! While they were generally not successful the added cost of defending these lawsuits ate in to the small cushion that the deposit provided.
The second company crisis in ten years was on.
As customers refused to close Housing Revenue dropped from $139,622,000 in 1981 to $39,089,000 in 1982
In 1981 we had reported a profit of $4,842,000.
In 1982 we reported a loss of about $4,400,000 from operations and about $14,800,000 from the last Marco Permit Provision.
In 1983 we reported a loss of $11,681,000 entirely from operations.
And in 1984 we $23,896,000 entirely from operations.
$40,000,000 in losses from operations in three years!
The 1981 Letter to Stockholders, published in the Spring of 1982 began to tell the story - beginning with the positive news but then addressing our growing concern for the future.
"We are pleased to report good financial results for 1981. This was an extraordinary year - one that depressed the building industry nationally and even in Florida, for the second consecutive year. But Deltona's fundamental strengths enabled us to turn in record revenues and improved profits; ..."
"But with the disturbingly high mortgage rates and the deepening recession, not everything went our way in 1981. New housing orders were down, cancellations of housing contracts were up, and 1982 confronts us with major challenges. We can't control interest rates and other external factors, but we are striving to stay profitable in 1982 despite reduced revenues. Our management team consolidated operations, tightened controls, deferred projects reduced personnel and cut all non-urgent expenses. We have also implemented new marketing programs in an effort to stimulate sales."
In spite of the darkening clouds, Dad and I ended the Letter with a positive outlook .... and a variation on an old Mackle adage....
"We will remain viable through this downturn. ......As long as the sun shines and the seas sparkle here in Florida, Deltona has excellent growth potential."
The Letter to Stockholders for 1982 took a different tone.
"This year, the recession which had plagued the U.S. housing industry since 1980 finally reached Florida. Deltona felt its full impact. The extreme downturn in our business which began in mid-1981, together with the adverse effect of the economy on the Marco Option program, weighed heavily on the company. Despite severe cost-cutting measures and personnel reductions, Deltona had the worst year of recorded losses in the company's history."
Desperate times called for desperate measures.
From late 1981 on we were again fighting for our very survival.
Staff was cut to the bone - again.
The planned acquisitions in Vero Beach and the planned new commercial building and corporate headquarters on Coral Way were doomed. Options on the Vero property were dropped and the land for the new headquarters was put on the market.
To raise cash to pay debt the asset sale program again became top priority.
Under an agreement with Ben Hill Griffin, the Polk County Property was deeded back to him.
The Orlando property was sold.
Miami headquarters at Five Points was sold and leased back at an exorbitantly high rate.
The Tony Lema Memorial was discontinued after 14 wonderful events.
New discount programs were announced for the sale of condominium units now back in inventory.
I instituted several significant structural changes.
I reorganized the company.
For years as the the company and its communities had grown all departments and all operations had been directed by senior department heads located in the Miami home office. The company was structured into departments of Marketing, Construction and Development, Product Development, Finance, Legal and so on. And 95% of its sales thrust was not local but national and international through the Branch and Franchise sales network.
Now we would become de-centralized making Marco, The Three Seasons and - soon to come - Tampa Palms operating entities.
They would operate as subsidiaries much as Deltona Utilities Inc., Deltona Asphalt Company, Deltona Mortgage Company, Deltona Realty and Imperial Lumber had.
For a short period we experimented with making the marketing organization itself an operating subsidiary allowing it to offer its services to other developers not in competition with Deltona. After an unsuccessful attempt the effort was abandoned and the senior marketing executive was dismissed.
The reorganization was prompted by financial imperatives but also the state of the Company and the Industry in the early 1980s.
The international selling organization was becoming less and less effective - and more and more costly. The communities were maturing. Local builders and business operators were reaping profits that we had ignored because of the focus on the out-of-state selling organization. Tampa Palms had a built-in local market demand that could be met with much lower selling costs. The resale prices of lots in the Three Seasons communities had not kept up with retail prices.
Putting more focus on the local market and profit opportunities - I thought - would situate us better for the future.
To deal with the competition of lots on the resale market I reduced retail land prices.
I also - for a while - discontinued the sales and construction of single family homes in order to concentrate sales efforts on the huge glut of condominiums in our inventory.
The effects of the restructuring and the anticipated new properties would be slow in coming.
The language of the 1983 Letters to Stockholders was gloomy.
"1983 was truly a year that tested the basic strength and character of the company and its people. The fact that Deltona has endured is testament to the stability and the confidence of the entire organization."
As 1984 began things were not much better.
We described conditions in the first part of the year in the 1984 Letter to Stockholders.
"...in spite of gains in land and housing sales over 1983, by mid year it had become apparent that several conditions were severely impairing our ability to reach satisfactory sales levels. While the housing market statewide was generally strong, the second home condominium market in South Florida continued to be depressed. Interest rates which had been on the decline began to move up during the first six months of 1984. and the cost of rebuilding our marketing program .... proved to be in excess of the capital available to the company. Losses continued to mount; cash flow continued to be negative, land development had to be curtailed and debt obligations became delinquent."
There were some positive things happening, however
We had restarted our Three Seasons housing program.
Neil Bahr had gotten back involved with Deltona Marketing again after an absence of ten years.
We had raised $12,250,000 thru a stock sale to Morgan Guarantee Trust.
In early 1984 Governor Bob Graham and I signed a final settlement on the Marco Issues. As a result we were now assured of 14,500 additional units in Marco Shores and Horrs Island.
The settlement also gave us 50 acres of prime commercial land in Dade County.
And - most importantly - initial development work had begun at Tampa Palms and an opening was scheduled for the end of the year.
But our resources were very low.