When Newhall Builds It...Families Move to the Urban Edge

Tom, could you give our readers a status report on your company's Newhall Ranch development? The Los Angeles Board of Supervisors approved the project, just west of Valencia, last year, but there has been significant litigation. When will ground break?

The lawsuits filed against Newhall Ranch were moved to Kern County, and the trial took place the first week of March. We feel that the EIR clearly outlines how all the project's impacts can be mitigated. But we need the judge's ruling to move forward.

In the meantime, we're working on maps for two of the five villages that will eventually make up Newhall Ranch. Right now, our plan is to break ground in 2002 and start marketing to builders in 2003.

Valencia, adjacent to Newhall Ranch, is nearing build-out. It has about 9,000 unbuilt lots-roughly 2,000 in the hands of builders and 7,000 remaining to sell.

At USC's most recent LUSK Center Real Estate retreat, urban infill was discussed as the smartest way to build enough new housing over the next decade to support growth within an L.A. metropolitan area equal to the size of Chicago. How difficult is it to do infill development, and how does its success impact your efforts with suburban fringe development in the north County?

First of all, infill development makes all the sense in the world. One, people are closer to jobs, and two, the infrastructure and public transportation are already in place.

But it's very difficult to get these projects approved. The people who live around developable infill sites are already concerned about traffic and crowded schools. So they tend to be tough opposition.

In addition, urban infill simply can't provide all the housing for our rapidly growing population. We need to accept the fact that most housing will continue to be developed on the urban fringe. We just need to do it more efficiently-i.e., at higher densities-so we consume less land.

It's important that policy-makers don't get so focused on infill that they forget most people still want a single family home in the suburbs.

One market trend highlighted at the LUSK Center forum was that the new homebuyer-the young dot.com singles who are delaying marriage-is quite different from the traditional homebuyer of the last two decades. How does such demographic change affect the housing market in the suburbs?

The exciting thing about that shift is that it's going to create a much stronger market for infill development, such as the projects being developed in Downtown L.A. and Oakland.

How will that impact suburban development? The fact is, housing demand is so great that siphoning off some buyers to urban infill won't have a significant impact on the demand for traditional housing in the suburbs.

But your offerings are changing. Tell us, for example, about the lifestyle villages that are a planned part of Newhall Ranch.

We introduced the concept of the "lifestyle village" a number of years ago, and the first project-Valencia's Bridgeport Lake community-is off to an excellent start. The village is being built around a lake, as opposed to our more traditional neighborhoods in Valencia where the focus is a school, clubhouse and park, although Bridgeport will have those as well.

We've sold all 700 lots, and one builder has already started selling homes. Everything should be up for sale by the end of the year.

Let's turn to some of the development challenges that Newhall faces, including water. When we last interviewed you in December of ‘98 you said, "At this point we're very comfortable that the water supplies we have available, or will become available, will be more than adequate for the project. Again, we expect to be able to supply the project without using groundwater." Water supply has become an even bigger issue since that interview, and the PUC is holding hearings on the subject late this month. Do you still stand by that statement?

Absolutely. The water issue being raised by our opponents is a red herring. They realize the issue is emotional so they're focusing on it as much as possible.

The County has a very clear process to ensure that we demonstrate a sufficient water supply-without a net change in groundwater use. If we don't have the water, the County won't let us build the houses. It's that simple.

As you know, a bill generated out of the East Bay in Northern California and authored by Sheila Kuehl has passed the Assembly and is working its way through the State Senate. That bill would, among other things, require new developments over a certain size to demonstrate adequate water supply very early in the process. Do you care to comment on this bill-not just specifically for your project but for developers in general? Is this sensible public policy?

It's sensible public policy to ensure that adequate water supplies are available at an appropriate point in the process. But Kuehl's bill places unreasonable demands on developers. For example, we're planning to build Newhall Ranch over the next 20 to 30 years, and the EIR clearly identifies three general sources of water. But to state where every drop of water is available right now would be virtually impossible

A much more sensible way of doing it is through a system like L.A. County's Development Monitoring System (DMS), which ensures that no new phase or increment of a project is started unless all the needs-infrastructure, utilities, water, etc.-can be met.

Ventura and L.A. counties have been fighting over the impacts of large developments on their borders-Newhall Ranch in L.A. and Ahmanson Ranch in Ventura. We interviewed L.A. County Planning Commissioner Esther Feldman last September and she said, "We have no procedures for regional planning across counties. Unless one jurisdiction accommodates the other because it wants to these issues usually end up in court." Is she right? Are there regulatory processes that incentivize regional cooperation, especially for large projects like yours?

I disagree with Esther because the EIR developed through the CEQA process does not recognize boundaries. All the impacts of a project must be mitigated, regardless of county borders. And Newhall Ranch mitigated a number of impacts in Ventura County.

Ventura County is raising these issues as a subterfuge-they're simply no-growth people who are against development not only in, but near their County as well.

But does a project in L.A. County really have to mitigate impacts that fall upon Ventura County? The jurisdiction that reviews the EIRs-L.A. County in this case-isn't as interested in another jurisdiction's problems, are they?

There has been a fair amount of acrimony between the two counties-but acrimony doesn't necessarily exist between all neighboring counties.

In this case, however, L.A. County anticipated possible legal challenges from Ventura County, and bent over backwards in the EIR process to ensure the impacts were fully mitigated.

The Speaker's Commission on State and Local Government Finance has just recommended that the Legislature consider changing California's local finance structure by swapping a half-cent of property taxes now sent to the State by local jurisdictions for an equivalent amount of sales tax now being sent to localities by the State. This proposal is meant to mitigate the big-box/auto mall land-use incentives built into local government's dependence on sales tax. Do you, as a developer, have a position on this issue?

That swap makes a lot of sense. The State needs to provide incentives to local jurisdictions to build affordable, infill housing. Right now, most cities and counties are struggling with financial problems, and the incentive is to develop commercial property because it generates sales tax revenue. But if cities could be given the same incentive to develop affordable housing in urbanized areas, they would. And frankly, housing is needed more than commercial development.

To tackle this, a package of nine bills intended to facilitate "job center housing" is being sponsored by a broad coalition in Sacramento this year.

California's affordable housing crisis is by all accounts growing, and a Housing Crisis Taskforce recently came out with bold recommendations for the City of L.A. One of their criticisms has been that suburban developments like yours do not provide enough affordable housing. Is there a way for government to deal with the region's pent-up demand for affordable housing, as the marketplace doesn't seem to address it well?

Government exactions have made delivering market-rate housing at any kind of affordable level virtually impossible. In the City of Santa Clarita-before we even put a shovel in the ground-our fees and exactions for one home are $42,000. If an "affordable" home costs $100,000 to $150,000, then the government fees alone represent a third of its value.

Without a specific government subsidy or relief from exactions, it's very difficult to make homes affordable to a majority of people.

Let's move on to the issues of mobility and transportation. The impacts of any large housing development on the local and regional transportation system are substantial. In December, Esther Feldman said, "Nearly every development proposal before [the County Planning Commission] ignores public transportation, including setting aside areas for Metrolink or light-rail, not to mention buses." Recognizing the fact that Newhall is meant to be internally focused, how does your development company grapple with such challenges without pricing yourself out of the market?

Transportation upgrades are partly the reason that housing on the suburban fringe is so expensive.

Over the next four years, we're planning to invest about $120 million in highway improvements-half for local highways in the Valencia area, and half for freeway interchanges.

We also bought an old railroad right-of-way from Southern Pacific a number of years ago that runs through Newhall Ranch, which could be used for public transit in the future. We've reserved it as a transportation corridor in our plan.

Could you comment on the value of the Santa Clarita Transportation Alliance, which you helped create last year to lobby for more State and Federal transportation dollars for North County. Give us a sense of its agenda and what success it has had.

Historically, we have felt alone in advocating the return of gasoline tax dollars to our community.

But when the Santa Clarita Valley business community recognized this huge outflow of tax dollars, they got together with our elected representatives from the County, State and Federal levels to lobby for returning dollars to this community. And it's been very effective.

Let's close by asking you about Newhall's recently announced stock buy-back program. What do you hope to accomplish? And what signal have you gotten from the public markets?

Our publicly traded shares are well below the company's real value, so we're just taking advantage of that by selling assets into strong real estate markets in order to back our undervalued units.

We're about halfway through the program, and it's going well. We announced our plan to buy back about 6.3 million shares-20% of the outstanding balance-last September.

We often hear that it's not a good time to invest in real estate companies because it's late in the cycle. So we haven't been singled out. What's unusual is that almost all of these undervalued real estate companies-including Newhall Land-are performing exceptionally well right now.