MASTER PLAN : Diverse Community in Santa Clarita Is Big Jewel in Crown of Newhall Land & Farming Co.
Tom Lee stops his 1988 Lincoln Continental at the top of a small hill in Valencia, an hour northwest of downtown Los Angeles, and points to the right side of the street. There, workers are building a row of $500,000 houses that run along an arroyo. To Lee’s left, a block away, is a row of smaller houses, priced from $160,000 to $200,000. “We purposely mix them here,” said Lee, president and chief executive of Newhall Land & Farming Co., which for the past 21 years has been developing Valencia, a “master-planned community.” Lee added, “We think it’s important there be a lot of diversity in a neighborhood.”
Dwarfs Manhattan
Newhall’s “neighborhood” is longer than an evening stroll. The housing tract is part of the 37,000-acre Newhall Ranch on which Valencia is being developed. The ranch, stretching west from Valencia into Ventura County, covers 58 square miles, or about twice the area of Manhattan.
Newhall Land & Farming Co. ranks as one of California’s biggest landowners, with 123,200 acres in all, including seven real estate parcels in central and northern California devoted to agriculture. But the crown jewel is the Newhall Ranch. Into the next century, as long as people buy homes in the Los Angeles area, this property should be the equivalent of a real estate annuity, with profits continuing to roll in.
Last year, Newhall’s residential and commercial development in Valencia accounted for 75%, of the company’s $183.3 million in revenue, and 93%, of its $48.1 million in pretax operating income.
Valencia (named after oranges grown on the ranch) currently covers 3,500 acres of the ranch, but Newhall’s master plan calls for the community to spread over 10,000 acres. There are now 8,000 single-family houses and condominiums in Valencia, 3,000 more either being built or approved for construction, with enough room to build 50,000 overall.
Lee, 46, figures he can work another 20 years, then retire, and there will still be land left to develop. “Obviously, we’ve got a long way to go,” he said.
The Newhall Ranch in 1875 was known as El Rancho San Francisco and covered about 46,000 acres when Henry Mayo Newhall, a transplanted Yankee, bought the land for $90,000, or less than $2 an acre.
It is the value of this land today that has provoked a nasty dispute among Newhall’s investors. The company went public in 1969 and today Newhall officers and directors own 21% and Newhall family members own an additional 16%. In March, to preempt the threat of a future takeover, the company asked its unit-holders to adopt defensive measures. One key proposal requires 75% of Newhall’s units to be voted in favor of a takeover, up from a simple majority vote.
One of Newhall’s major investors, the Chicago investment firm O’Connor Securities, fought back by running several full-page newspaper ads claiming that the proposals, by blocking unfriendly merger bids, would deprive investors of the chance of getting a higher price for their units.
The proposals passed in May, but another group of dissident investors sued Newhall in Los Angeles Superior Court to have the provisions thrown out. Both sides are still in court, and much of the squabbling centers on how much Newhall is worth.
There’s no argument, though, about why someone would want the company.
Valencia is still smaller than the Orange County master-planned communities of Mission Viejo (8,500 acres developed) and Irvine (6,000 acres). Those developments surged in the 1960s and 1970s as people fled Los Angeles and headed south toward the Pacific Ocean.
‘Waiting Our Turn’
But now that Orange County is crowded, people are looking north to find affordable housing and a bit of space--and there sits Newhall Land with Valencia, “waiting our turn,” as Lee put it.
“A lot of their good fortune is what’s called luck,” said Jon Fosheim, president of Green Street Advisors, a Newport Beach research firm that follows publicly held real estate companies. The luck, he said, is that Newhall owns one of the last big parcels of undeveloped real estate near Los Angeles.
Joel Shine, president of American Beauty Homes, a prominent home builder in the Santa Clarita Valley, said “certainly had Los Angeles developed at a much slower pace and there was an adequate supply of housing in west L.A., it would be a much tougher sell for them to get people to move to Santa Clarita. Notwithstanding that, they’re still doing a very good job.”
As a master-planned community, Valencia is intended to be self-contained, with stores, parks, hospitals and schools. The idea has been around since the 1940s, when William J. Levitt revolutionized suburbia by building 17,447 nearly identical houses on Long Island, N.Y.
“Levittown,” was unusual because it was not centered on an industry or other source of employment. Valencia, however, offers a variety of housing, from $75,000 condominiums on up. Newhall also is building an industrial park that currently houses 300 companies and their 8,500 employees. Although Newhall builds nearly all of its houses, it sells much of the land for industrial and commercial development.
House Rules
But variety is limited even in Valencia. Although the company offers different types of housing, Newhall--like many other master-plan developers--requires that its neighborhoods conform to several rules.
Houses can be painted only certain subdued colors; “there aren’t any pink or blue houses here,” Lee said. “They agree to maintain their landscaping. They won’t park campers in front of their houses. They won’t dismantle cars in their front yards. It’s just very effective in getting a community off on the right foot.”
Valencia’s population is now 25,000 and would reach about 75,000 if all 10,000 acres of Valencia’s master plan are indeed developed, Lee estimated. Last year Valencia, Newhall, Saugus and Canyon Country were incorporated into the city of Santa Clarita. The population of the entire Santa Clarita Valley, now exceeds 125,000 and could reach 358,000 by 2010, a recent Los Angeles County Regional Planning Commission report estimated.
Despite the growing interest in Valencia, Newhall can’t build houses willy-nilly. Government clearance for a new tract can take up to five years, and Newhall must guess how many houses it will need to meet the expected demand. If it builds too many it could be stuck with rows of unsold houses.
And Newhall has occasionally misjudged the market.
“Back in the late-60s there were a couple of months when the first Valencia project was the hottest selling housing project in the whole United States,” Lee said. “So everybody sat down with their calculators and figured out that if you extrapolated that sales rate of a couple of months over the next 20 years, there’d be 200,000 people living here virtually overnight. It just didn’t happen.”
Why? Three recessions between 1969 and 1982 didn’t help housing sales, nor did the double-digit mortgage rates in the early 1980s.
Earthquake Hurt
Then there was the earthquake centered in nearby Sylmar in 1971, which registered 6.5 on the Richter scale and killed 56 people. The quake “scared everybody,” recalled Scott Newhall, a Newhall Land director and a 74-year-old great-grandson of Henry Mayo Newhall. “We went into a terrible decline for a while. But we kept going.”
Only last month did Newhall unveil plans for Valencia’s first major shopping center, a $180-million mall scheduled to open in 1991. Newhall will sell the 80 acres for the shopping center to a joint venture composed of Newhall, Cincinnati-based developer JMB Federated Realty Associates Ltd., and May Centers, the development arm of May Department Stores of St. Louis.
Newhall originally expected a shopping mall to be built in 1975, but there weren’t enough people to attract the stores.
To help buffer itself from economic setbacks, the company in March sold a 33-acre residential parcel in Valencia to an Orange County builder, Warmington Homes, for $17.5 million. By selling the raw land, Newhall got a cash infusion and didn’t have to go through the trouble of developing and then selling the homes. The sale also slightly decreased its risk of having an excess housing inventory. “We would expect to do more of this” in the future, Lee said.
The sale also illustrates why it is hard to make year-to-year comparisons of Newhall’s revenue and profit growth. Last year, for instance, Newhall’s profit fell 9% from 1986 to $39.6 million from $43.7 million, because the company sold more industrial land in 1986. Despite the drop, the company has earned more than 20 cents a dollar of revenue for the past three years.
Those irregular land sales and the economy’s cycles also make it hard to place an exact value on Newhall, giving the company and its dissident investors plenty of room for argument. Guessing the company’s value involves projections about how fast Newhall can develop Valencia, which in turn requires lots of assumptions about housing demand, local government’s willingness to allow development, inflation and other unknowns.
Each year, Newhall hires an independent firm to appraise the value of its holdings, and the value totaled $707 million at the end of 1987 (of which the Newhall Ranch accounted for 83%). The 1987 valuation equals $35.35 per Newhall unit, based on Newhall’s 20 million units outstanding. (In 1984 Newhall converted from a corporation to a limited partnership, but its partnership “units”--which are comparable to shares of stock--continue to trade on the New York Stock Exchange.) But the stock market--reacting to the recent takeover speculation--valued Newhall as of Monday’s close at $42.125 per unit.
Some other recent valuations, disclosed in the court battle between Newhall and the dissident investors, have placed Newhall’s value as high as $92 a unit. But Fosheim scoffed at such appraisals, saying they are based on “gigantic variables” such as future land-use regulations, which could include slow-growth initiatives that would crimp Newhall’s business.
Local planning rules were of little concern to Henry Mayo Newhall when he bought the land a century ago. Newhall was a native of Saugus, Mass., (hence the names of Valencia’s border towns), and he made a fortune as an auctioneer and railroad financier in San Francisco.
Newhall died after a horse-riding accident in 1882. A year later, his five sons formed Newhall Land & Farming to manage the land. Early on, they used the land mostly for cattle ranching.
St. Francis Dam Disaster
The company’s first major setback came in 1928, when the St. Francis Dam north of the ranch burst, killing 100 people on the ranch and burying Newhall’s fields under tons of sand. Then the stock market crashed and the Depression set in, bankrupting some Newhall family members who had borrowed heavily from the company.
But just as the company neared ruin, the city of Los Angeles agreed to pay the company $750,000 in damages for the dam disaster. That kept Newhall alive, and the firm again prospered after oil was found on the Newhall Ranch in the late-1930s.
It wasn’t until the early 1960s that Newhall decided to build homes in response to a new tax law, which called for Newhall’s property taxes to be levied on the “highest and best use” of the land--which meant housing. So Newhall decided it might as well use the land for that purpose. The construction of Interstate 5 at that time also helped spur Newhall’s development.
The company hired planner Victor Gruen to design a master-planned community, construction began in 1965 and the first residents moved in two years later. Magic Mountain amusement park opened in 1971 and was owned by the company until 1979, when it was sold to Six Flags Inc.
Scott Newhall, who with his wife, Ruth, owns 1% of Newhall Land, knows better than most how the Newhall Ranch has changed.
After spending 20 years as editor of the San Francisco Chronicle, he returned to his roots. He owned the local Newhall Signal newspaper between 1963 and 1978, and he still writes thunderous, acerbic editorials that run on the Signal’s front page.
Recently, as he drove a reporter down California 126 to his home in Piru, about 15 miles west of Valencia on the Newhall Ranch, Scott Newhall recalled how Valencia once was little more than onion fields. “There wasn’t anything, just like that there,” he said, motioning toward the barren hills in the distance.
