Pismo Beach company offers $25M for Diablo Grande; other might bid as well

The troubled Diablo Grande resort in western Stanislaus County has a buyer, although an auction is planned to flush out any higher bids for the development.

Housing Source Partners, a Pismo Beach-based real estate company specializing in condominium sales, has offered $25 million for the 28,500-acre resort, plus assumption of all liabilities, according to documents filed with the U.S. Bankruptcy Court in Modesto.

The resort initially was listed with a property broker at $150 million, a price that was slashed to $85 million in April. The property, in the hills west of Patterson, includes two championship golf courses, a vineyard and a residential development. About 400 homes have been built.

Initial plans for the resort were to develop a hotel and convention facility, a spa and retail stores along with 2,300 homes.

The partnership that owns the development filed a Chapter 11 reorganization bankruptcy this year after the housing downturn affected home sales. Chapter 11 allows the owners to continue operating while they work out a plan to return to profitability.

In Diablo Grande's case, the owners have been seeking a buyer.

The asset purchase agreement with Housing Source Partners, which must be approved by the bankruptcy court, includes $24 million for the residential development, golf courses and vineyard, with the buyer assuming all the resort's liabilities. Debts listed in the bankruptcy filing totaled more than $54 million. Housing Source Partners would pay an additional $1 million for agricultural land not designated for development at the site if no higher bidders are found for that land.

"We do have a buyer, a cash offer for all of the property," said Dwain Sanders, Diablo Grande's vice president of development.

Higher bids for resort are possible

In a bankruptcy court affidavit, Sanders said he had provided detailed information on the development to about 25 potential buyers.

When other bidders were told that Housing Source Partners had signed a letter of intent to purchase Diablo Grande, several indicated they might bid higher, according to the affidavit.

An auction is planned, with a final sale no later than Aug. 17, subject to bankruptcy court approval at a hearing in Sacramento on Thursday. Sanders said bidders would have to prequalify and then show up on an auction date to be approved by the court. Housing Source Partners would be entitled to a "breakup fee" if a higher bidder buys the resort, according to court documents.

The Aug. 17 date for completing the sale comes because Diablo Grande's short-term financing for the project runs out then, Sanders said.

Originally proposed 20 years ago, Diablo Grande was a vision of pharmaceutical entrepreneur Don Panoz, who heads the partnership that owns the resort. Panoz and the partnership fought through 21 lawsuits from environmental groups before the first homes were built in 2003. The partnership paid for virtually all of the public improvements to the development, investing more than $120 million in the project.

The financial problems at Diablo Grande surfaced early this year when the golf courses were temporarily closed, followed by the bankruptcy filing.

Water system problems also have plagued the development. Western Hills Water District was formed to serve Diablo Grande with water purchased from a Kern County water district.

Water contamination with trihalomethanes drew the attention of the California Department of Public Health, which recently cited the water district for failure to clean up the problem. Trihalo- methanes, formed in the water as a result of disinfection processes, are believed to increase cancer risks.

The water district has suffered from slow home sales, which left too few houses using the system, and not enough special tax revenue to pay for the operation of the water system.

Those problems could be resolved when a buyer with enough money moves the project forward.

A sale could end the bankruptcy process as well.

"I hope so," Sanders said. "It's been a long, tedious journey."

Bee staff writer Tim Moran can be reached at tmoran@modbee.com or 578-2349.

This story was originally published July 9, 2008 at 12:30 AM with the headline "Pismo Beach company offers $25M for Diablo Grande; other might bid as well."