Don't be so sure because that's the way it went last time

Implications: There are lessons to be learned here. The company whose CEO talks here about current market conditions has been the subject of one of the most long lasting and intensive series of legal maneuvers by several corporate successor entities regarding the development of acreage in California. Hardly a real estate law class is taught in California without having this precedent setting case included.

Analysis:

Entrepreneurial egos have been bruised and entire corporate lives have been spent with this company and its Bridgewater project. The travails here were so difficult that sale of the Bridgewater project has been required to allow operation of several corporate entities including a NYSE listed company. Bridgewater and California Coastal Communities are but the latest of a series of names for the project and its corporate sponsors.

What happened was that the Bridgewater property came into the ownership of the Signal Companies, a conglomerate, in the ‘70’s. Signal was originally Signal Oil and had developed oil fields to the north of the Bridgewater property starting, I guess, in the ‘30’s. I can say that those oil derricks on the beachfront south of Long Beach and north of Newport Beach have always been there in my lifetime, which started in the ‘30’s. Signal’s oil operations became a part of Standard Oil and the remainder conglomerate became a part of Allied Chemical later on. Tucked away in a corner was a division named Signal Properties. That division operated almost unnoticed in a small way with one-off kinds of commercial developments – office buildings and the like. Until … the company acquired the Bridgewater property which was a major part of the undeveloped California coastline in Huntington Beach. The history of how this entity was acquired by Signal originally is not clear to me, but I’m sure those good burghers thought that this property would be good to them like the rest of the area had been. I can talk myself into believing that the approval process for the acquisition was universal and collegial, and that the acquirers were sure of quick approval of their plans.

This is where the mistake part begins to play. As the area was increasingly populated, the moneyed/upper income residents of the area disputed the wisdom of the then planning process. The California Coastal Commission came into being. Title to the project passed in distress to the Koll Company, a very successful OrangeCounty developer of the time. I remember that this company felt its best abilities were in government approvals and so announced. 20 to 30 years later the successor entity, California Coastal Communities, is essentially just beginning the development work on the property. Koll in the meantime became a NYSE corporation and was essentially in my opinion forced to divest the Huntington Beach property in order to carry on its mission of nationwide commercial-industrial construction and development. The Koll Company and its principals were and are excellent developers, but this one got them. This was a major mistake in judgment made by primarily a young man and regretted later by a more mature organization. Koll was right in saying that they have abilities – they were wrong in saying that government approvals were their principal strength. Their principal strength was in financing as evidenced by the fact that they’ve kept this entity alive without cash flow from operations. This is not the only down market the Koll Company has been in – it seems to be the one project that they’ve never been able to bring to a resolution/complete.

On of the lessons here to me is that you can’t expect to do a lot of unrestricted or non-comprehensive planning in the United States today. For instance, in California today look at the Tejon Ranch Company south of Bakersfield/north of Los Angeles with its 270,000 acres, the largest single undeveloped acreage in the Los AngelesCounty area to my knowledge. The surrounding areas are primarily agricultural except for the southern boundaries. Here, however, the whole of Los AngelesCounty is organized to join the planning process and the Navy is concerned about flyways it has enjoyed heretofore without interference.

But the major lesson is that the farther you get away from single phase developments to be completed in less than say two years, the multiple of risk accelerates. The problems include the fact that large acreages will be developed in several economic periods – up and down – and liquidity in larger projects is generally not good. In other words, the bigger deals are relatively easier to enter for those few who have the funds, but harder to sell to advantage for the same reason of lack of buyers until subdivided after a long period of planning and construction. An entity that starts a large development had better start at agricultural land values, in joint venture with a land owner with an advantageous land basis or with government sponsorship that will alleviate the economic burden. For example of the latter two, look at DMB’s joint venture with Caterpillar in the Buckeye, West Phoenix metro area (8,500 acres, I remember) and Forest City’s agreement with Albuquerque/New Mexico regarding the development of 55,000 acres adjacent to Albuquerque. There are also many examples of projects started in recent years at land costs approximating agricultural land values, but not many to my knowledge. To my way of thinking, every one of the major projects started at higher land values – by far the majority of developments started since the year 2000 - is going to be challenged by insolvency as this residential down market continues to unfold and the further excesses of the current commercial and industrial land market come home to roost in the near future.