Remedial Real Estate

Charles Molineaux

July 1, 2008

F or Hugh Morton, the real estate stars are decidedly out of whack. "What kind of luck is that?" he asks. "I make this major commitment in a county that has now turned into the only one in the whole country threatened with the loss of accreditation for its schools."

A major player in the 350-acre Villages of Ellenwood and Ellenwood Town Center mixed-use development in Clayton County's northeast corner, Morton is one in a long list of real estate veterans watching, aghast, as the values of major projects face the danger of a county having its education declared worthless. This  not only would be a potential disaster for Clayton's 52,800 public school students, but also for developers such as Morton, whose projects presuppose a properly functioning school system.

"This is not good all around," warns Phil Barry, commercial real estate broker with Grubb and Ellis. "From a commercial real estate standpoint, the county and community should be aware that a solid school system is fundamental to good economic growth with commercial businesses coming into the county."

"It's a mess," agrees Mike Parish, president of FMP Real Estate Service, which has just started building 55,000 square feet of new retail in the Ellenwood Town Center and opened a 190,000-square-foot Wal-Mart adjacent to it in May. Parish now has joined Morton in supporting, and donating to, frantic efforts from the real estate community to reform Clayton County's profoundly troubled school system, starting at what is widely considered the source of its problems – the Clayton County school board.

Parish recalls believing he had his eyes open. "We knew early on that there were some strange politics there. I was not aware that it was as bad as it has gotten." 

Fatal flaws
The depths of the difficulties became apparent at the beginning of the year when a conflict between board members brought an investigation into the conduct of the school board by the Southern Association of Colleges and Schools (SACS).

Pervasive allegations of nepotism, micromanagement, misappropriation of funds, conflict of interest, severe ethical lapses and inappropriate behavior led to a February finding by SACS that the Clayton County school district was "fatally flawed."

SACS demanded the district meet nine key requirements such as the institution of competent governance, a financial audit and a clear mechanism for enforcing ethics. Otherwise, it recommended the district's accreditation be revoked, effective September 1.

With no accreditation, Clayton students faced the prospects of their diplomas being considered null and void when they apply for college as well as the potential loss of funds from Georgia's HOPE scholarship program.

Community groups came forward demanding school board members resign. So too did area real estate professionals, realizing the stakes for commercial development in the area.

"You have an unfortunate situation," says Frank Norton Jr., president of Norton Realty. "It's going to affect the relocation of businesses that want to establish in Clayton County."

It's a crisis Parish finds confounding and stupefying in an area, which, by most measures, has virtually everything going for it. "This community has incredible potential," he says. "It's in a position to really capitalize on the need to avoid traffic and get closer to town. It's adjacent to the largest airport in the country. I can't imagine a community of this size, so close to Atlanta, having such problems."

But "a county's got to maintain a positive image," Norton warns, "to relocate a major warehouse, office growth, commercial growth. And so those folks now are sidelined at least temporarily until that mess gets settled."

Parish acknowledges he'd been warned. Part of the financing for his Ellenwood project comes through special Tax Allocation District (TAD) bonds but "we were advised early on not to go to the Clayton County school board for their portion of the tax increment because of the politics there."

A shadow over other projects
As Clayton's school turmoil roils, it also casts a worrisome shadow over a potential commercial real estate bonanza: the much-anticipated redevelopment of the U.S. Army's Fort Gillem. The newly formed Weeks Robinson Properties is seeking to turn 1,200 acres of the post into residential, light industrial and retail.

"We're concerned," says CEO Forrest Robinson. "As you're looking at real estate you factor in questions: ‘Is the community government pro-business?' ‘Are the schools good?' "

Robinson says it would be an easy mistake to dismiss the importance of schools to a development heavily weighted toward commercial and industrial development. "If we've got an industrial building down there and we're trying to draw somebody to it ... the deciding factor may be quality of life.

They may decide, ‘Well, if my people aren't going to live in this community because of the school system, then maybe I want to put my business in Henry County.' "

Disturbing demographics have added to challenges for commercial projects.

"With the concerns about the school system," Morton points out, "we've found that families with young kids are more inclined to buy houses in Henry County than Clayton County. These days we're seeing more singles and retirees."

The empty-nester trend already is gross enough to frighten the number crunchers. When FMP Real Estate ran statistical analyses for potential purchasers of TAD bonds at the beginning of this year, it determined almost none of the families who had bought homes in the Villages of Ellenwood had young children.

"That set off alarms," Parish recalls. "A.G. Edwards was the underwriter of the bonds and that was a problem for them," which took a sizable bite out of the TAD bond sizing for the project. Some of its infrastructure spending will now have to be scaled back.

At this point Parish finds himself thankful for the placement of his babies, less than a mile from both the DeKalb and Henry county lines. "If you stop having growth in this immediate area, it makes the area less attractive to commercial tenants and retailers. Fortunately, we are so close to Henry and DeKalb it draws retail sales out of all three of the counties."

Ironically, the Villages' location also offers the unusual opportunity for a stark contrast on Clayton County's problems. FMP's Preserve at Conley Creek is, for all intents and purposes, the same neighborhood as the Villages at Ellenwood – same developer, same area and the homes are going up at the same time.  

With one important distinction – The Preserve is just over the DeKalb line from The Villages and Parish says his DeKalb homes are selling dramatically better "because of the school system."

Morton hopes new leadership at the Clayton County school board will mean a new chance for the schools, but with SACS' September 1 deadline approaching, the outlook is uncertain. "They're moving in that direction but it sort of seems, at this point, there's not enough time," he says.

Meanwhile, Morton is calling for even greater involvement from the real estate industry. "This is something we have to do. Obviously, we've contributed some funds to this thing but we need to do more than that."

Robinson agrees the time has come for developers to develop a more active role. "When you see people get involved in the community like that, it's good for everybody. They would be crazy not to."