Irvine Co.’s Future Rides on Newport Center Vote

David Dmohowski, Irvine Co. manager of government relations, says the last two weeks have been “brutal.”

He and his staff have been rushing from one homeowners association to the next, stepping into the ring as champions of the company’s plan to complete construction of its posh Newport Center office and shopping complex.

The giant development company has conducted a $500,000 campaign, replete with cable television presentations and personalized letters to voters from its chairman and owner, Donald L. Bren.

The campaign is aimed at allaying Newport Beach residents’ fears of increased traffic congestion and explaining how the $300-million development plan--sweetened with provisions for parks, teen and cultural centers, a health club, a day-care facility and $47 million in road improvements--will benefit the community as well as the company.

The tremendous effort and expense shows that, whatever the outcome for the community, the Irvine Co. believes that it stands to benefit considerably if voters approve the planned expansion of Newport Center at Tuesday’s special city vote on a general plan amendment listed as Measure A on the ballot.

Bob Reicher, manager of real estate consulting for the Costa Mesa office of Deloitte Haskins & Sells, said the Irvine Co.’s ability to complete Newport Center is “one of the keys” to the company’s future.

“If they don’t get it,” he said, “it would have a severe impact on their income and cash flow for the foreseeable future.”

Irvine Co. officials say they have not estimated future revenue from the Newport Center expansion they are proposing.

However, a major accounting firm, taking into consideration the additional leasable space, anticipated rental rates and assuming 5% annual inflation, calculated that if Measure A passes and the center expansion goes forward as planned, it will have generated $822 million in gross revenue for Irvine Co. by the time the entire program is completed in 15 years.

And by the year 2001, the study shows, the Newport Center expansion will be producing annual revenue of $93 million--$12 million from retail, $28 million from apartment rentals and the lion’s share, $53 million, from office leases. The totals will increase each year as rents are adjusted for inflation and market demand. The actual profit, or loss, to the Irvine Co. would depend on such factors as the cost of construction and the rate of interest on funds borrowed for building.

Real estate analysts say the company also would realize important intangible gains if it wins Tuesday’s election.

Signal for Investors

Perhaps most important, they say, is that the company would prove to prospective lenders and joint-venture partners that it is not being crippled by the rising no-growth tide in Calfornia.

The Irvine Co. says that over the past 2 1/2 years it has spent $2.5 million hammering out its current comprehensive master plan for Newport Center.

If voters reject that plan, which has been approved by the Newport Beach City Council, the company says development of the center’s last vacant lots instead may occur parcel by parcel, with the result that the public will lose much of the open space and other concessions that the company made during the master-planning process.

Described as “the crown jewel” of Irvine Co.’s huge landholdings, Newport Center, overlooking the yachts in Newport Harbor and encompassing some of the most valuable real estate anywhere, has always been a major revenue producer for the company as well as the location of its corporate headquarters.

While the Irvine Co. has thousands of other acres on which to focus its development, analysts say Newport Center is one of the most rewarding places for the company to indulge in its stated business objective of creating a portfolio of assets to produce long-term income.

“You can’t build a portfolio by building housing to sell to people. You build offices and shopping centers,” said real estate marketing consultant Al Gobar.

Among the county’s shopping centers, Newport Center’s Fashion Island in 1985 ranked fourth in annual volume of sales, with $164.9 million. David Mudgett, head of Irvine Co.’s retail operations, estimates that the center this year will gross $200 million and that revenues will soar to $300 million in 1989 if plans can go ahead to add 188,000 square feet of shops and restaurants to the existing 1.35 million square feet over the next two years.

While prestige office buildings in many parts of the county are plagued by high vacancies, the Newport Center office buildings encircling Fashion Island generally have more tenant demand than they have leasable space. Even with one building partially vacant due to renovation, Irvine Co. officials say that office vacancies in Newport Center hover at a mere 5%, while similarly high quality buildings nearer John Wayne Airport have average vacancies of about 19%.

The low vacancy rate stems largely from the unique ocean-view location of most of the Newport Center offices, and from the fact that the office complex is within an easy commute--even on Newport Beach’s choked streets--for many of the executives who work there and live in nearby exclusive enclaves such as Big Canyon, Spyglass Hill and Lido Islands.

Prevented by the city for the past 11 years from constructing a new high-rise in the center, the Irvine Co. is chomping at the bit to build a 16-story building, with ocean views, that will bring top-dollar rents of $3 a square foot. Later it wants to build two 11-story office buildings with equally high rents and 144,000 square feet of garden office buildings.

Also eager to take advantage of current low-interest rates and a strong housing demand, Irvine Co.’s plans call for construction of 1,496 housing units near Newport Center in the next seven years--most of them apartments that will be owned and managed by the company and will rent at an average of $900 a month.

In addition, the company proposes to build a 30,000-square-foot complex of restaurants at the intersection of Jamboree Boulevard and Coast Highway and a 30,000-square-foot cinema complex with at least six screens and 2,500 seats.

Among the concessions the company would be required to make if Measure A passes are the provision of 160 acres of open space and parkland, three acres--valued at about $3 million--for a cultural center, and a 20-year free lease for a teen entertainment center that will cost the company about $1 million in lost revenue.

The company also said that it will build a major highway called Pelican Hills Road about eight years earlier than the company otherwise planned and at an extra carrying cost of $2.5 million a year. The new highway, Irvine Co. officials claim, will more than offset the additional traffic problems to be generated by new development at Newport Center.

In return, Irvine Co. would have “the long-term certainty” of “the development rights to complete the center,” said Dmohowski. With that blanket approval, he said, the company will have the flexibility to gear the timing of its development to take advantage of emerging market opportunity.

“It would put them in command of their destiny” if Measure A passes, real estate marketing analyst Sanford Goodkin said. Also, he said, it would “show financial institutions and investors that the Irvine Ranch is still very viable.”

Irvine Co. contends that voter rejection of its plans would break the stride of its ongoing revival of the 20-year-old Fashion Island mall, which for years has been overshadowed by its closest competitor, mammoth South Coast Plaza in Costa Mesa. The competition has stiffened in recent weeks with the debut of a new wing at the Costa Mesa mall that features bigger and flashier versions of two of Fashion Island’s mainstay department stores, J. W. Robinson and the Broadway.

Irvine Co. Vice Chairman Thomas H. Nielsen said Fashion Island would suffer from defeat of the ballot measure because “one loses a lot of momentum in that type of delay and a lot of enthusiasm--not only in the community but among the merchants as well.”

Mudgett said that in the last two years the company has built a $25-million atrium wing at Fashion Island that houses boutiques and the Irvine Ranch Market, and has spent about $15 million on landscaping, parking improvements and other face lifts at the mall. In the rest of Newport Center, an additional $4 million has been spent planting palm trees along streets and installing new entry monuments, while a $20-million renovation of the common areas of office buildings is nearing completion.

Watching With Interest

Lanny Eberling, a Newport Beach land developer and former chief financial officer of Irvine Co., has been watching the makeover of Newport Center with interest. “Considering the amount of money they have invested, the only way they can get a return is from new development,” he said.

Mudgett says that only further expansion can justify the cost of much of the recent expenditure in Fashion Island. Failure of the ballot measure, he contends, would effectively halt plans to add 70 new stores and restaurants with a greater variety and price range of merchandise and to turn the rather sleepy mall into a “town center” with activity day and night.

But Allan Beek, leader of the opposition to Measure A, contends that Irvine Co. “doesn’t need Measure A to pep up Fashion Island.” He points out that the city’s existing general plan for the area would allow a 60,000-square-foot mall expansion, as well as 2,000 more theater seats.

Some real estate marketing experts say that Fashion Island now seems to be on the right track and that its success could be speeded by the expansion plans.

“Just the renovation of Fashion Island has increased foot traffic a lot,” said Robert Peterson, manager of Coldwell Banker’s Anaheim office. He contends that “for Newport Center to continue to compete, it is important for it to be completed.”

Residential development planned for Newport Center would call for Irvine Pacific, Irvine Co.’s building arm, to construct up to 1,496 apartments. Roland Osgood, president of the company’s Land Development Group, said the project would represent 15% to 20% of Irvine Pacific’s business over the next five to seven years.

However, Measure A would not significantly add to the number of homes that could be built under the city’s current general plan, which calls for 991 apartments and 252 single-family homes, for a total of 1,243 units.

The biggest change that would come with passage of Measure A would be reflected in construction of office space at Newport Center.

Increase in Office Space

Approval of the measure would permit a nearly 76% increase in office space now planned for addition to the center. Instead of the 747,000 square feet that can be built under the existing general plan, Measure A would permit the addition of 1.3 million square feet of offices to the 3 million square feet already in place.

“That’s what it’s all about,” Beek said. He contends that if so much office space had not been added to the plan, there would be virtually no opposition to it. Opponents complain in their literature that the office towers are “visually offensive,” generate more traffic than any other kind of development” and are filled with “thousands of employees who must drive 20 to 30 miles to work every day, jamming the freeways and making smog.”

Irvine Co. officials retort that they cannot afford to build the extensive road improvements they have proposed without the financing that would be raised by construction of the office buildings. The expanded retail operations and apartment revenue, they say, would not yield enough return on investment to justify the road-improvement costs.

Richard Sim, president of the Irvine Co.’s office and industrial subsidiary, said that if Newport Center cannot provide expansion room for the firms already renting space in its office buildings, some of the highest prestige tenants--such as major law and accounting firms--will continue to relocate to new high-rise towers in Costa Mesa and Irvine.

And Sim further claims that if Newport Beach loses its glitter as the county’s top business address, it won’t be just Irvine Co. that suffers. Newport Beach residents will feel it in their pockets, he said, because “their property values will go down.”