On Dec. 8, a FEMA-imposed moratorium on all new construction projects went into effect in the flood-prone area around Natomas, Calif. That moratorium won’t be lifted until 2011 at the earliest, or until the Sacramento Area Flood Control Agency (SAFCA) finishes a $618 million levee improvement program to provide the Natomas Basin with 100-year level flood protection and a 200-year level over time.

Developers and builders that pulled building permits before Dec. 8 had 180 days to at least partially construct their buildings to effect those permits. But well before the moratorium, Sacramento’s housing market was tanking from a collapse in buyer demand. Some builders there have gone under and others have pulled up stakes, including Pardee Homes, which, according to ­local sources, sold 100 acres in ­Natomas—203 finished lots, 405 partially finished lots, and a 12-acre condo site—to Granite Bay Holdings for $25 million, or about 20 percent of Pardee’s estimated total investment. (Neither Pardee nor Granite Bay returned phone calls from Builder requesting comment.)

Another group, San Diego–based private equity firm Ranch Capital, recently acquired a townhouse project in Natomas from D.R. Horton called Provence. As of mid-October, the infrastructure for Provence was installed but the 187 home units were not yet built, says Kevin Smith, a principal with MDS ­Development, which Ranch Capital is paying to identify land acquisition opportunities.

Smith wouldn’t comment on what Ranch Capital paid Horton, but he did note that Ranch Capital didn’t pull permits before the moratorium because homes would require flood insurance “that would take $40,000 to $60,000 in purchasing power away from buyers.” Smith was coy about what kind of homes will be built, saying only that the company thinks “the market will support higher-density, 1,000- to 1,500-square-foot townhouses that target baby boomers looking to downsize.” He doesn’t expect the community to be limited to active adults, however.

During the levee repair, Smith says Ranch Capital will work with the city of Sacramento and surrounding towns “to come up with an absolute winning development.” And he’s not letting a little water seepage keep him from searching for other land deals. But he knows that communities on that land “have to be close to jobs and offer products that are affordable. In the last cycle, too many of us got carried away with three-car garages and five bedrooms.”