Dan's Papers - May 1, 2009

Just to give you an idea of how everybody in the United States was completely behind the idea that the real estate boom was going to go on forever, you ought to take a peek at the 2009 first quarter numbers that have just come out for the CPF revenues for the East End towns.

In case you have forgotten, CPF was thunk up in the late 1990s as a way to get the wealthy people who were driving real estate prices up and up and up to help out in getting the bucks together to preserve some of the land for future generations.

CPF stands for Community Preservation Fund. Before it, somebody would buy a farm for $20 million and the open space people would faint dead away. After CPF, somebody would buy a farm for $20 million to develop it and they would have to pay 2% extra as a tax to CPF.

So sometimes properties would get developed. And sometimes the town would step up to the plate and match the purchase and save it. Lots of land got saved using this method. The developers happily paid. And the savers happily bought from time to time.

Over the years, from the 1990s when it began all the way up to 2007, the amount of money paid into CPF just skyrocketed. In 1999, for example, for the whole East End, $13.2 million went into CPF. In 2007, the total was a staggering $96 million. I know there were five towns involved in this, but if the average town budget in 2007 was $60 million, the CPF total, to be used for land preservation only, averaged $20 million.

Of course, all the towns could mortgage some of these purchases to the expected future CPF income for the next 15 years. What the hell. If a house that cost $400,000 in the 1980s was now selling for $2 million, who could deny that this house would soon be selling for $5 million? There were those who predicted that the annual CPF for the East End would soon rise to EQUAL the town budgets in a few years. The towns would run out of open space to buy.

Well, the first quarter numbers for the CPF income for 2009 are in and the amounts contributed to it are stunning for their paucity.

The 2007 CPF, as I said, was $96 million. In 2008 the CPF was $56 million. And for 2009, if things continue along at the pace they have established during the first three months, the CPF for the year will be $15 million. You have that right. CPF revenue, based on the gross dollar sales of real estate transactions will have collapsed by more than 80% in two years.

How this will affect the budgets of our individual towns, which have already committed many millions of dollars of CPF every year through 2020 to future payments for property already bought, shows just how blind everybody was. For example, in East Hampton, the annual amount mortgaged to future fund income is more than $4 million a year. That's a pretty careful bit of mortgaging if the CPF is $30 million, as it was in 2007 for that town. If you take in $30 million every year, you can afford $4 million for stuff already bought. But if the CPF stays its course for the balance of 2009, the total donation to CPF will be just $4.7 million. Whatever gets taken in goes to what's been already bought. And that's that.

I think all of us, watching what happened over the last 10 years, just plain liked it, except for the fact that the average person could no longer even THINK of buying a house in the Hamptons. For the locals, this was painful. The children of the locals would be moving away unless the parents conveniently died exactly when the kids came of age so the kids could inherit the house. The rule of thumb that a roof over your head should cost you one quarter of your salary was out the window. In fact, for the average citizen, your salary was probably one quarter of what a roof over your head would cost - and it would just be a shack.

It indeed was la la land and way out of whack. This wasn't great, old masters being auctioned off at Sotheby's. This was a roof over somebody's head. And now, of course, there are people who used to have these roofs living in parks in Oakland, Tulsa and Portland in tents. And there is NOBODY living in their houses.

Well, that's a whole other article, I suppose. Hopefully, it will all come back into place, but perhaps without the unbridled, unregulated and uncontrolled F rated securities that in the past were reported as Triple A by so-called regulators.

We'll be smaller and leaner, but the CPF could settle in at $50 million a year and things would be just fine. And this time without the danger of a collapse happening again.