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A Different Reality
Slowly but surely, you come to realize that when you’re on the Irvine Ranch, you know you’re on the Irvine Ranch. It has a sense of place…
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This column assumes that Donald Bren never came to own The Irvine Company. Instead, it contemplates a different reality for all that land, one that never existed but could have. You are entering…(music please)…ah, shucks, it’s not “The Twilight Zone,” but it is strange.
Fact: All of the economic events presented in this column actually happened. Only the parts about who, exactly, might have owned The Irvine Company (TIC), and their fates are fanciful.
Close your eyes and go back 26 years. It is 1976, and for tax reasons, TIC is for sale.
The Irvine Company could then be characterized as land rich and cash poor. To get cash, TIC sells tracts of land to homebuilders. In 1976, the housing market is red hot, so there are many companies interested in buying. But they look at the underlying economics and come to a stark conclusion: TIC’s very vastness is a burden. The property tax bill alone is a killer. Obtaining government entitlements (to use the land) is torture. Paying for the infrastructure (roads, sewers, water systems, etc.) before tracts can be sold to homebuilders will cost hundreds of millions. And the homebuilding market is fickle; it can flame out tomorrow afternoon. The smart players own only so much land as they can use in 12 or 24 months because any other alternative is too risky.
There are many potential bidders, only one of which is real, the Mobil Oil Company. This is where we pretend the Bren Group never existed. We assume instead that Mobil Oil Company wins the bid. What happens next?
First of all, the oil business is not for sissies. It has spawned many mega-fortunes, but even more failures. It is no coincidence that Texas, big tall Texas, is the center of America’s oil industry. Texas produces rough, tough buccaneers and it takes rough, tough buccaneers to stomp around in search of the next gusher. Amongst all those buccaneers, Mobil Oil stands out. Buying something as complex as The Irvine Company, well, only Mobil would do it.
After winning The Irvine Company bid, the first thing Mobil does is ship top executives from Texas to tame it. As Texas buccaneers, they loathe government bureaucracy. Unfortunately, land development mostly is about working successfully with government bureaucracies to obtain entitlements. Intellectually, Mobil’s Texas buccaneers understand this, but hate it, hate playing the game. In Mobil’s home town, Houston, the land-use problem had long-since been solved by creating a local government that had zero land-use restrictions: no zoning, no government hassles and no problems. You could construct a high-rise next to a school and didn’t even have to build a sidewalk to get from one to the next. [Remember, this really was/is true.]
The Mobil executives figure Good Ole Orange County is kind of like Good Ole Texas. No problems. Build.
Except, naturally, Mobil runs into a bunch of local folk who don’t want anything crammed down their throats, least of all from Texas carpetbaggers.
Thence grows the Entitlement War(s) and even though the Boys from Texas win their share, it’s much slower than their worst dreams, and the profits are not Texas size. Worse yet, the tree-huggers are passing out petitions to kill off any new development. Then, bam! It’s 1980 and interest rates rise to their highest levels since the Civil War. The Prime Rate catapults over 20%. The real estate industry, heavy on debt and very sensitive to interest rates, immediately collapses.
Mobil struggles through the downturn and is stung by industry criticism about owning a provincial real estate company, which was an experiment to begin with, and so by the early 1980s, Mobil looks for a graceful way to dump the company. The question is: Who will buy?
About that time, the Reagan Administration deregulates the Savings & Loan industry and suddenly S&Ls are given the power to invest in almost anything: gold, diamonds, fur, paintings, stocks, bonds – anything any S&L wants. But what they want most is what they already understand: real estate. When Mobil puts The Irvine Company on the block, there are 23 S&L suitors. The winner is California Savings & Loan (CSL). CSL (a fictitious business) fires all the old Texas guys, brings in its own team, and things begin to turn.
During the high-flying ‘80s, Reagan’s confident grin is infectious and the Orange County real estate industry prospers.
But there is a problem. So many S&Ls and banks and builders are so over-confident they overbuild the national market and in the late 1980s, real estate crashes hard. By 1990, the national real estate market is in its worst shape since the Great Depression. Builders go broke by the thousands and their banks, and most particularly, S&Ls, are left holding the bag(s). Swiftly, it becomes a national crisis, Congress steps in, creates the Resolution Trust Corporation (RTC), re-regulates the S&Ls, and the financial/real estate bloodbath ensues.
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CSL, the S&L that bought The Irvine Company, becomes insolvent and is seized by the RTC. All of its assets, including TIC, are thrown into one huge RTC pot. The RTC’s marching instructions are to sell off the assets as quickly as possible, which means at very distressed prices. The RTC does not care who comes to own the assets or if they are well-managed or about anything else except auctioning them off a.s.a.p. [Truth: It is a prime example of the Capitalistic doctrine of Creative Destruction at work and it, The System, is absolutely ruthless.] There are no favorites. So TIC assets are split into small portions (or pools) for the bidders and over a four-year period, are sold off in a series of more than a dozen auctions. The winners are called Vulture Funds and the way they make money is to sell their newly-purchased assets as quickly as possible, at slightly higher prices, which means in smaller portions to smaller players, who, in turn, are betting on their ability to make wind fall gains from this national debacle.
By 1996, The Irvine Ranch has been auctioned off, sliced, diced, and broken into almost a thousand pieces with almost a thousand different owners. There are so many of them that there is no concern for regional issues like major traffic arterials; or the trade-offs, say, of park land in one location for entitlements in another; no concerns about having jobs close to homes, or about creating “good” architecture; no coordination among the players because what one wins the other might lose. In short, the relevant local governments are deluged with hundreds of short-term, narrow agendas, and it’s a mess.
The Laguna Canyon Wilderness Preserve never comes into existence. Ditto the 34,000-acre Irvine Ranch Land Reserve. The Irvine Spectrum is not even a dream. The Newport Coast becomes Entitlement Lawsuit Hell. The Toll Roads are never built. Nor is Newport Hills Drive. Traffic is a disaster. Every architectural style under the sun is employed, but mostly it’s cheap because cheap is more profitable (trust me, I’m a developer, I know). The myriad developer interests are backed by so much money that competing, huge lawsuits clog courtrooms. The county of Orange, when faced with such overwhelming contradictory pressures, has the governmental equivalent of a nervous breakdown; the last employee who knew what she was doing quits in 2001 and essential services grind to a halt. Under such circumstances, the State of California is mandated to step in, and does, but it has no clue and things become even worse.
The lawyers smile a lot.
This is what we face as we slide into the New Millennium: a chaos of competing interests, each seeking to maximize immediate profits and therefore forced to engage in influence peddling, legal chicanery and every kind of dubious trickery known to man.
Instead, what really happens? Instead, in 1976, the Bren Group buys The Irvine Company. Then, in the early 1980s, Don Bren buys out his partners and the whole place becomes one man’s vision. What is that vision? Close your eyes and imagine. You’ll see a lot of palm trees. You’ll see modern architecture for places of employment and Mediterranean architecture for places of residence and shopping. If you scratch the surface, you will find none of it is cheap. In fact, when individual plots of land are sold to users and small developers, they find themselves subjected to Irvine Company architectural review which increases their building costs (quality is expensive). Plus, the palm trees become popular throughout the region, as does the habit of decorating them with ornamental lights during the holidays.
Slowly but surely, you come to realize that when you’re on the Irvine Ranch, you know you’re on the Irvine Ranch. It has a sense of place, or presence, which has become unmistakable. Those buying in, the people and companies, come to know it, know the quality will be maintained, so they buy into the entire meticulous, clean, mindset.
As for Donald Bren – here is a guy who has pulled off what probably is the single most profitable real estate play of the 20th Century – what is he really? Close your eyes again. He owns one of the world’s biggest prizes. What does he think? I think he thinks the prize is a huge canvas; and I think on the inside, he is an artist, and I think like all artists he is obsessed. With what, you ask? That’s easy: that the end results be World Class.
Donald Bren, artist, with World Class goals for his lands in our backyard, who would of thunk it?
Michael Ray was born and raised in Corona del Mar, currently lives in Laguna Beach and makes a living as a real estate entrepreneur.
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