Bren Tells Court About Irvine Co.’s Troubles in 1982

The Irvine Co.’s problems with securing zoning for further development grew so severe in 1982 that its chairman of that time suggested liquidating all of the company’s undeveloped land, Irvine Co. Chairman Donald L. Bren testified Monday.

In his first day of testimony in a trial to determine the market value of the Irvine Co. at the time he acquired majority ownership and control in November, 1983, Bren also described his concerns that the company had lacked effective leadership and a viable business plan.

At issue in the trial is the amount that Bren must pay heiress Joan Irvine Smith and her mother for the 11% stake they held in the company before Bren’s 1983 buyout. The proceedings are being held in Michigan, where the Irvine Co. is incorporated.

Smith, granddaughter of the Irvine Co.’s founder, is demanding $500 million, including interest, for their shares, while Bren is offering to pay $88 million.

Bren, who in 1982 was a 35% shareholder in the Irvine Co. and a member of its executive committee, recalled his efforts to oust the company president, Peter Kremer. Kremer ultimately agreed to resign in late 1982.

Under Kremer’s direction, Bren contended, the Irvine Co. had reaped short-term profits without planning for or reinvesting in future development.

“There was no reinvestment of the company back into the land,” Bren told the court. Instead, he said, revenue from land sales was “being built up in short-term accounts in the bank.”

Kremer, who reportedly is in Africa, could not be reached for comment.

Because of a community-relations breakdown, Bren testified, the company was perceived as “untrustworthy” and “greedy” and was unable to obtain necessary government approvals of its development proposals, including plans to develop the company’s 9,000 coastal acres between Corona del Mar and Laguna Beach and to expand the Newport Center retail and office complex in Newport Beach.

In February, 1982, Bren said he sent a memorandum to the board of directors outlining his concerns. He complained that the objective of the company’s previous management had been “to maximize short-term profits, at the expense of long-term profitability . . . to make the company look good on a year-by-year basis, so that management would receive the maximum compensation in bonuses and benefits.”

Revenue From Land Sales

From 1977 to 1983, the Irvine Co. was co-owned and managed by a consortium of businessmen led by Detroit shopping mall magnate A. Alfred Taubman.

Most of the company’s revenue during that period, Bren said, came from the sale of previously zoned land. He said very little additional land was zoned for construction, and the company did not add appreciably to the number of income-producing retail, office and apartment buildings it owned.

Over those five years, Bren said, the company sold 90,697 acres of land, including an 83,881-acre ranch in Montana. During the same period, he said, the company increased its retail space by only 18% to 2.2 million square feet, boosted its apartment count by 6% to 3,534 units, and increased office space by 40% to 1.6 million square feet. The company’s industrial space, meanwhile, declined 37% to 663,000 square feet.

In the memo, Bren called the company’s judgment and decision making “frightful.” For instance, he said the company received $17 million when it sold the Ford Aeronutronic property in Newport Beach, which was resold 11 months later for $35 million.

Bren said that after he wrote his critical memo, Kremer met with Taubman, who was then chairman of the company. Kremer’s depiction of the company’s business prospects was so gloomy, Bren said, that Taubman suggested to Bren that the group of businessmen who bought the company for $337 million in 1977 should bail out.

‘Impossible to Do Business’

Bren said that after Taubman met with Kremer at Taubman’s Palm Desert home, Taubman telephoned Bren and said Kremer “felt it was impossible to do business with the local cities and with the county.”

Bren said Taubman informed him that it was Kremer’s opinion that the Irvine Co. had peaked as an investment after the dramatic increases in real estate values between 1977 and 1981.

“He (Taubman) said, ‘I agree with Peter Kremer. We really ought to look at some way out. . . . We ought to look at a liquidation,’ ” Bren testified.

Bren said Taubman asked him to study the possibility of forming a new corporation to manage all of the Irvine Co.’s income-producing properties, such as apartments and shopping centers, and to sell off the company’s 68,000 acres of remaining undeveloped land.

Bill Campbell, lead attorney for the Irvine Co., said that in previous testimony, Taubman said he could not recall any discussion about the possibility of liquidating the Irvine Co.’s land.

However, Bren said Taubman’s liquidation suggestion, combined with repeated reports by another Irvine Co. director, Herbert Allen Sr., that an Arab investor might want to buy the company, led him to doubt his partners’ long-term interest in owning and operating Orange County’s largest land development operation.

Believed in Firm’s Future

Bren said he believed that it was necessary to act quickly to protect his investment, especially since an agreement was about to expire that had discouraged members of the ownership consortium from selling their stock in the company for five years.

Bren said that although he agreed with Kremer’s assessment of the company’s problems in 1982--including a deep recession and a shortage of financing for roads and other development infrastructure--he thought that the problems could be overcome with better planning.

“I believed the company had upward mobility,” Bren told the court.

In a Sept. 12, 1982, memo, Bren criticized the company’s new business plan and urged more emphasis on development of moderate-income housing and employment centers.

Also, Bren said, he proposed that he replace Taubman as chairman for one year so that he could implement his own business plan. When Taubman balked at the idea, Bren instead became co-chairman until he was able to complete arrangements for his 1983 buyout.