How Utah Came to Own a Half-Built City in the Desert

Part two in a series.

At one time, there was a café and a beauty parlor next to Tammy Smith’s remodeling store in Coral Canyon, Utah. Today, her business, Bliss Design Center, is one of the only shops left in the retail district of this new development located 20 minutes up the highway from the city of St. George, in the southwest corner of Utah.

Over the past year and a half, the stores closed down one by one, Smith said on an impossibly bright and warm Monday last month. Customers were scarce. Wide roads sat almost empty. Many of the homes that were supposed to bring life to this slice of desert — and customers to Smith’s store — are either for sale, in the process of being foreclosed upon, or simply never got built at all.

Like many Western boomburgs in the wake of the recession, Coral Canyon is struggling. Unlike others, however, big chunks of this subdivision belong to the state government.

Once just a dusty stretch of shrub land off Interstate 15, Coral Canyon came to life 10 years ago through an agreement between an obscure state agency and SunCor, an Arizona-based developer. The deal was that SunCor would lease the land from Utah, build houses, and then pay the state for the value of the land once the houses sold. The plan called for roughly 2,000 houses on 2,600 acres.

It was a good deal for the Utah School and Institutional Trust Lands Administration , or SITLA, which manages about 3.5 million acres held in trust to benefit Utah’s schools. Those acres are all that’s left from an original land grant of 7.5 million acres given to Utah by the federal government upon achieving statehood. Some 22 other states received similar grants, with the requirement that they put the land to its “highest and best use” and that they put the proceeds in a trust to pay for schools.

During the past decade, land agencies in several of those states tapped into the real estate frenzy. In Utah, revenues from development and land sales rose from million in 2003 to million in 2007. Coral Canyon was SITLA’s largest development by far — a showcase for how Utah could generate economic growth and money for schools at the same time.

But the recession changed all that. Pinnacle West Capital Corporation, SunCor’s parent company, has pulled out of the real estate business. The half-completed Coral Canyon development went up for sale last year along with other SunCor projects in Arizona and New Mexico. Rather than waiting for a hedge fund to scoop up Coral Canyon and flip it for a quick buck, state officials decided to step in.

In May, Utah’s land agency bought out SunCor’s stake in 172 finished lots for .4 million. The state now finds itself with a half-finished development on its hands, two hours from Las Vegas and four hours from Salt Lake City. Whether that turns out to be a good investment will depend on how long it takes for the housing market to bounce back.

“A new thing for us”

State officials say they aren’t worried about the risks involved. Doug Buchi, an assistant director at SITLA in charge of real estate development, says he has “no doubt at all” that the market will turn. When — and if — that happens, he expects to be able to sell each of those lots to builders for about ,000, more than twice what the state paid for them.

“We just felt that it was best for us to take control of our own destiny rather than rely on the market,” Buchi says. “It’s a new thing for us.”

The state has an advantage over private landowners. Since it doesn’t pay taxes on land it owns and since it’s not answerable to shareholders, state officials can sit on a property until demand returns, reaping the benefits of patience.

The deal has won praise from Margaret Bird, an expert on state trust lands with the Utah Office of Education. Bird has spent decades trying to raise as much school money as possible from trust lands.

“I think it’s a win for the community and I think it’s a win for SITLA,” she says.

Utah’s arrangement is relatively rare among state land agencies. In Arizona, for instance, the state can only sell land through public auctions and has less say in what happens to the land after it sells. But the model could become more common in Western states as the collapse in land prices forces state land agencies to find new ways to make money, says Armando Carbonell of the Lincoln Institute of Land Policy in Cambridge, Massachusetts.

“It might be in the best interest of the long term value of these trusts to be a co-developer and retain an interest in lands,” he says. “Certainly in a time of real estate market volatility it’s advantageous to have a long-range partner to pick up the pieces if things fall apart.”

Roger Carter, city manager for nearby Washington City, was pleased with the state’s buy-back. State officials have worked well with their local counterparts, he says.

Of the four residential developments that SITLA has worked on, Coral Canyon is the most ambitious showcase. That’s a powerful incentive for state officials to see that it’s disposed of properly, says Mike Gardner, president of SunCor Utah, who has worked on Coral Canyon since the beginning.

“This is their best project,” he says. “They want to show that this is the way it’s going to be done.”

And state officials are not afraid to take their time.

“We’ve essentially mothballed the commercial acreage that is part of Coral Canyon,” Buchi says of land set aside for new retail. “Then we are looking for individual builders who have an interest to come in and buy five or 10 lots of the 172 that are finished and build homes that are appropriate for the overall community. And then the rest of is we’ll just wait for the market to say it’s time to put some more lots into inventory.”

That may take a while. In all of Washington County, the area surrounding Coral Canyon, there are about 6,000 lots ready for building, according to Buchi. State land in the county could one day be converted into another 25,000 to 30,000 lots, although state officials are in no rush to develop those. In May, Washington County recorded the third-highest foreclosure rate in Utah, which itself has a higher foreclosure rate than the national average.

Until that trend turns around, little is likely to happen on the hundreds of desert acres once slated for Coral Canyon. Wide roads built on the edges of the development anticipating future growth now dead-end into brush.

But there are small signs of hope. Building permits in Washington County are up this year, although nowhere close to mid-2000’s levels. Some of the foreclosures are also being picked up, says Carter, the city manager.

“We don’t anticipate it will be gangbusters like it was back in 2006 and 2007,” says Carter. That “probably wasn’t very healthy anyway.”