Borrego Springs – a town left dry

People need money and water. Just ask Borrego Springs, the San Diego County desert town of only 2600 year-round residents. Through the years, it has endured failures of its major businesses, as entrepreneurs have run out of capital. Meanwhile, citizens have vehemently disagreed over a critical question: is the water supply adequate for Borrego’s long-term survival? If not, will new investors try to rescue the crown jewel real estate assets that were recently padlocked?

Early this year, two Borrego landmarks closed down for lack of capital and, many say, lack of business acumen. The Borrego Ranch Resort & Spa and its adjoining Montesoro Golf & Social Club basically closed up shop in the height of the tourist season, after warning for several months that the end was near if more investors wouldn’t step forward. Montesoro had been through bankruptcy twice under different ownership and the name Rams Hill. The ranch had been owned by Copley Press under the name Casa del Zorro. “It was losing $5 million a year; it was a charity case for David Copley,” says Gregory Perlman of Sherman Oaks–based GH Capital, who managed both operations for a group of investors. David Copley and his mother Helen wanted to keep it open for sentimental reasons; management wanted to dump it.

Montesoro is a planned community with 800 homes built or on the drawing boards and a championship golf course. The ranch has 44 rooms, 19 villas, a restaurant, and pool. The golf course is still open but will certainly be closed for five months in the summer, says Perlman. The clubhouse is locked up. The ranch is essentially shuttered. Seventy people have lost their jobs — a lot for a town the size of Borrego Springs. Montesoro defaulted on water-bond payments, and an affiliate of the Borrego Water District has initiated foreclosure proceedings.

Beginning in 2004, Perlman began recruiting speculators to buy and resuscitate the facility that was renamed Montesoro. One of the major early investors was Iranian Jewish immigrant Ezri Namvar, a Los Angeles real estate swinger who several years ago was said to be worth $2.43 billion. But in December of 2008, he and his Namco Capital were forced into bankruptcy. According to the Los Angeles Business Journal, civil suits charge Namvar with running a Ponzi scheme, and federal investigators are probing the matter.

The Borrego Springs spread is listed as a creditor in both Namvar’s and Namco’s bankruptcies, and Perlman is named as the primary investor. In 2006, Perlman boasted to the Union-Tribune that Namco was a partner in Montesoro. “Namco is a family-owned opportunity fund with $4 billion in assets. Between the two of us, there’s a ton of capital,” said Perlman.

About three years ago, Namco’s interest in Borrego was bought by Philadelphia’s Lubert-Adler. It pulled the plug this year. The various partners had paid $10 million for Montesoro and pumped $15 million into it and in 2007 had bought the ranch for $4.5 million and put $10 million into it. “Lubert-Adler lost $30 million, Namco lost $15 million, and I lost $5 or $6 million,” says Perlman. Banks and other entities lost the rest. At the end, the ranch was losing $200,000 and Montesoro $250,000 a month.

Many Borrego citizens blame Perlman. “He acts like a rich kid with attention deficit disorder,” says Mark Jorgensen, retired superintendent of the Anza-Borrego Desert State Park, which surrounds the town. “He jumped on one thing after another and never finished it.”

For example, the partners bought a grocery store downtown with the idea of making it into a modern market “but let it go to ruin,” says Jorgensen. The investors bulldozed a 12-foot-wide, nearly two-mile road through the park to be used for off-road vehicles. The state sued and negotiations are ongoing.

The new owners “raised the rate on golf membership” and didn’t honor previous memberships, says Tom Gorton, former columnist for the Borrego Sun. Therefore, many residents quit and joined a nearby country club. Residents formerly could use the restaurant at any time; the new owners required reservations. “Taco Tuesdays” and jazz festivals that welcomed the locals were canceled.

“Shutting out the local community was a huge mistake,” says Lane Sharman, a member of one of the town’s founding families. “They created a lot of bad will” and couldn’t replace locals they drove away with affluent outsiders who could afford the prices they were charging.

Perlman and colleagues built a $3 million home with a guesthouse and plane hangar on 80 acres. “They bought properties willy-nilly,” says Dennis Dickinson, a retiree. “Most people assumed that sooner or later they would go broke.” Perlman knows he has critics but says most of the townspeople appreciated his group’s efforts.

Now the existing facilities, plus vast acreage set aside for future development, are all for sale as “an unpriced offering,” according to material distributed by Marcus & Millichap, which has the exclusive listing. But there are problems: the market for resort hotels and golf courses is miserable, and water woes could scare off buyers. Last year, 139.5 golf courses closed in the U.S. and only 49.5 opened, according to the National Golf Foundation.

Chris Karamitsos, cofounder of the National Golf and Resort Properties Group within Marcus & Millichap, hopes that somebody will buy both Montesoro and the ranch as a package. “There is over $120 million of infrastructure between the two,” he says. GH Capital and its partners “didn’t market well to an upscale audience,” he says. “They ended up not having the resources to do that. You can create an aura of exclusivity for the property, but that has to be combined with driving traffic to the place.” But the capital pulled out. Any buyer will need patience. “You won’t turn it around and have a huge profit the first year.”

A golf course needs water. The water and electric bill for the Montesoro course is close to a million dollars a year, says Perlman. There are two opposing camps in Borrego, as there are in other locales: real estate people say there is lots of water, and environmentalists say there isn’t. Mesquite shrubs, which have extremely deep roots, are dying, notes Jorgensen. One cause is the drop in the water table. Another is the drought.

The water table is dropping between two and three feet a year, says Dickinson. Water is being drawn at almost five times the rate it is recharged. He suggests that a court appoint a water master who would apportion usage. Now, most of the water is used by growers and golf courses.

Sharman thinks water could be apportioned equitably through an ordinance, and the water district should look for outside sources, such as piping water in.

Rich Williamson, head of the water district, says there are 50 to 100 years of water left in the aquifer. He gets that number from a staff person of the U.S. Geological Survey, which is doing a study. “Pessimism about water is extremely premature,” he says. But Dickinson thinks there will be trouble in 30 years.

“The basin is severely overdrafted,” says John Peterson, who was the county’s groundwater geologist for 22 years and now has his own firm. Some wells are going dry. “For the most part, we have not been able to identify any additional sources of water as the ground level continues to fall.”

“Water in Borrego is an economic issue,” says Peterson. “If your water bill went up to $1000 a month, you would use less water.” As the price of water rises, “It won’t be economical for fruit growers. That changes the economic dynamics of the valley.”

And as the price goes up, maintaining a golf course might get quite expensive. Somebody buying Montesoro and the ranch will have to ponder that, he says.