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Bakken investments equal gold

If you’re a real estate developer and you’re not considering options in western North Dakota, you’re missing out on a $1 billion construction market, says Jeff Zarling, president of Williston, N.D.-based Dawa Solutions Group. Building permit valuations last year in the Bakken’s three hub communities — Williston, Minot and Dickinson — totaled more than $1 billion with millions of dollars in additional activity taking place in other oil patch communities like Watford City, Stanley and Tioga. And Zarling says the pace of development shows no signs of slowing down soon. Dawa Solutions Group will host a conference later this month in Bismarck focused on providing the most recent Bakken-related development information to real estate developers, investors, construction companies and service providers.
“It has taken a long time to prove to developers and investors that this energy development is different than the two previous oil development cycles in North Dakota,” Zarling says. “We have come a long way since the first hotel and apartment projects cracked the nut in 2008.”

International Interest

The list of developers working in the Williston Basin has indeed become increasingly diverse in the past 12 to 24 months as investors and developers who initially hesitated to enter the market have come to view it as a long-term play. Regional developers who were among the first to recognize western North Dakota’s emerging market continue to be active in the area, but they are now sharing the space with Wall Street investors and international firms representing investors from Australia to Singapore. Among them is North Dakota Developments LLC, a subsidiary of UK-based real estate investment firm Property Horizons.

“We’re looking to capitalize, as everyone is, on the huge boom that is happening in western North Dakota,” says North Dakota Developments CEO Robert Gavin.

Property Horizons began exploring commercial and residential real estate investment opportunities in the Bakken about two years ago, according to Gavin. After concluding that the situation was not a typical boom-bust oil cycle, the company formed North Dakota Developments and spent about a year building relationships before moving forward with project plans.

The company is currently at various stages of development on three projects with a combined estimated cost of about $250 million. A workforce lodging project just outside of Watford City known as the Great American Lodge has been permitted for 204 beds and is expected to be fully operational this month. Gavin says the company has already submitted an application to add another 240 beds and could potentially expand to 1,000 beds in the future if demand warrants the increase and regulators approve. At 1,000 beds, the property represents a $70 million investment, which will be funded by overseas investors. Earlier this year, North Dakota Developments successfully raised between $4 million and $5 million over the course of five weeks in Australia to help fund the project and the company expects to gather up to $40 million in the coming year. Gavin says Australia has been a successful fundraising market for the company’s North Dakota projects because that country is also experiencing a commodity boom by way of iron ore, so investors understand the situation they are being asked to participate in. “When they hear about a boom happening because of the availability of another commodity such as oil it’s very easily recognizable to them because that’s what they are experiencing in their own country,” he says.

North Dakota Developments has also tapped investors in Singapore for its Bakken projects. Gavin says that market has produced slightly more investment dollars than Australia to date, but he expects Australia’s significantly larger population to offer greater long-term fundraising potential.

Other projects in the works at North Dakota Developments include a $75 million, 228-acre residential development north of Williston known as Horizon Ridge. The development is expected to consist of high-end, single-family homes ranging in price from $300,000 to $400,000. In late July, Gavin said the company was finalizing a marketing plan for the development and expected to finance the project through local banks, which he says are quite comfortable financing residential properties.

Additionally, the company is awaiting tribal approval to move forward on a $100 million, 40-acre mixed use development in New Town which is expected to include housing and a travel center.

After two years of boots-on-the-ground involvement in the Bakken, Gavin says he’s noticed that there are good and bad aspects of being a foreign business in the area. “The bad thing is you really need to put a lot of time and effort into building up relationships and trust,” he says. “It’s not like London or New York City where you can bring a big suitcase of money and do business. It’s about trust … and it takes a lot of time to be trusted. But the great thing about working with Midwesterners is once you’ve built that trust and credibility up, they’re great people to work with. By doing the groundwork we’re now progressing things incredibly fast and making huge progress.”

Gavin agrees that many developers and investors doubt the reality of the Bakken’s real estate climate until they make a site visit and see it for themselves. His company has established a Williston office and regularly entertains clients to show them the opportunities available for investment. He believes the root of the misunderstanding is as simple as the terminology used most frequently to describe the production ramp up. “The problem is that when people hear the word ‘boom’ they also think ‘bust,’” he says. That notion should be discredited, he says, adding that his firm is fully committed to the Bakken’s development. “We wouldn’t put all our resources from three offices across three continents into North Dakota if we didn’t think this was a long-term project that we’ve committed to,” he says. “We fully intend to be in western North Dakota for the next 20 to 30 years.”

Enter Wall Street

Compared to international firms, regional developers may have cultural and technical advantages when dealing with the people and climate in western North Dakota, but they also face challenges in the unique business environment. Paul Hegg, president and CEO of Sioux Falls, S.D.-based real estate investment and development firm Hegg Companies, says his firm began exploring the Bakken’s development opportunities about two years ago and soon learned that the fast pace of business is unlike anywhere else. “You don’t get 60 to 90 days to look at an opportunity. You have a week,” he says. “You have to react fast and if you don’t, you lose out on the deal.”

Land prices can change by the day, sometimes by the minute, he says, so companies need to be nimble and able to lock in prices quickly. Construction costs are also higher in the Bakken compared to other areas in the region. Additionally, Hegg cautions that acquiring financing for Bakken projects is not always easy, and it is not likely to be had at normal market condition terms. He says that while it’s not uncommon to finance 75 to 80 percent of a project in South Dakota, the current standard in the Bakken is 50 to 60 percent loan to cost. “That in itself is a sweeping change from what people expect,” he says. “It requires more equity, or what we’ve done, which is bring in Wall Street money.”

Hegg formed a private equity fund known as Bakken Select earlier this year with the specific intent of educating Wall Street investors on real estate opportunities in western North Dakota and raising money to finance its development projects. The structure of the fund is rather unique in the Bakken market, according to Hegg, in that it creates a stop-gap between the first position mortgage and equity, resulting in an equity commitment that more closely resembles normal market conditions. Hegg says investors have been attracted to the company’s local knowledge and expertise, but also to the fact that the company has scaled its projects up to a size worthy of investment. “They aren’t really going to look at anything that isn’t north of $100 million in size, so we scaled it north of that number which attracted them to us and allowed us to create that unique financing structure,” he says. “We think we’re one of the few that has come to the market with that concept.”

While Hegg Companies remains active in markets in Sioux Falls and elsewhere throughout the region, most of the company’s focus is now on the Bakken. The company is currently developing several projects with a combined estimated cost of $100 million. Among them is a $42 million, 239-unit high-end apartment complex in Minot known as North Highland Apartments. Construction began in August and the entire complex is expected to be complete next summer. The company is also working on an office space in Williston, workforce housing in Watford City and storage facilities throughout the region.

Local Funding

Joe Oppidan, president of Minneapolis-based Oppidan Investment Co., says his company does not find financing to be particularly difficult in the Bakken region and he takes pride in the fact that the firm uses internal equity and community and regional banks to finance its projects. “This is rural America in an emerging growth industry in a state that is multi-dimensional,” he says. “We have to work with our lenders and price appropriately [and] the lenders are there. The smaller banks, the regional banks that have got to work for loans, understand it.”

Oppidan Investment Co. also became involved in the Bakken region about two years ago. It has made rapid progress since, completing apartment buildings in Watford City and Williston and welcoming its first tenants to a 120,000-square-foot commercial development in Watford City and a 180,000-square-foot commercial development in Minot. The company is also at various stages of development on large commercial projects in Tioga, Stanley and Dickinson and a residential development in New Town. All told, Oppidan estimates the company’s financial stake in the Bakken region to total more than $150 million.

“We’re going vertical,” he says. “This is not speculative development. We’re truly in the game to elevate the lifestyle to assist the livability of these communities in whatever fashion they will allow and are requesting.”

While the Bakken region is not Oppidan Investment Co.’s main focus, Oppidan says he is passionate about developing that region because he hails from a small Minnesota Iron Range town and understands the mining economy. “I just like making projects happen in these smaller communities,” he says. “We just need to educate people that this oil thing is going to go for a long time and give them the opportunity to see it first-hand.” PB

Kris Bevill

Editor, Prairie Business

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