A Rocky Road to Development : HUD-Backed Project: A California Dream and Nightmare

During the first 100 years or so of Robinson Ranch, from the time Orange County pioneer Louis A. Robinson first settled his family in the land of rugged, scrub-brush canyons and ridge tops with spectacular vistas that stretch to the ocean, little changed until 1981.

But in the last decade, the 827 acres tucked in the foothills of the Santa Ana Mountains have been part of a drama that zeroes in on the perils of development, California style.

It’s a story of how a small, ambitious family-run company nearly went bankrupt, how the federal government insured the project and lost millions of dollars, and how one of America’s wealthiest men stepped in at just the right time and made millions by finally turning Louis Robinson’s ranch into a quiet bedroom community.

Last week, it became a backdrop for the unfolding scandal at the U.S. Department of Housing and Urban Development when a report surfaced saying that the William Lyon Co., run by the Newport Beach developer that finally made money on the deal, was unfairly favored by a key HUD official.

The 1985 report by HUD’s regional inspector general in San Francisco said the property was sold to Lyon even though his bid was not the best of those considered by HUD. It also said two Southern California developers who bid on the property charged that the sale was influenced by Lyon’s political connections and his friendship with a top HUD official.

The official, former HUD acting assistant secretary Shirley M. Wiseman, this week denied the charge. Lyon has declined to comment about the Robinson Ranch project.

But the problems at Robinson Ranch began long before Lyon Co. was involved. HUD documents obtained by The Times show a project hampered by mistakes and controversy from the start.

“Clearly, it was a bad underwriting decision to have made (the) loan,” said Edwin Baker, an administrator at HUD, which lost between $10 million and $12 million on the project. “That was a dumb thing for the department to do in the first place.”

In 1981, when the federal government first got involved in Robinson Ranch, it was the largest HUD project of its kind ever undertaken, eventually reaching $35 million. Four years later, when HUD threw in the towel and put the property out to bid, the William Lyon Co. got it for $16 million.

Even before that controversial sale, HUD files show:

* When HUD was deciding whether to invest in the Robinson Ranch project in 1981, its appraisers overestimated the value of the land by more than 200%, according to a 1985 report by the department’s inspector general. The report said HUD inaccurately appraised the property at $17.3 million because it compared the ranch to more prestigious sites in Laguna Beach and San Clemente, instead of similarly remote canyon areas. The report said the 1981 value was actually about $5.5 million.

* The lending company that orchestrated the HUD loan guarantee--DRG Financial Corp. of Washington--was recently banned from doing business with HUD when Secretary Jack Kemp said that 29% of the government projects it was involved in defaulted. Kemp said those defaults have cost the government more than $500 million. HUD officials have not blamed DRG for the problems at Robinson Ranch.

* In December, 1983, when the project was on the brink of default, three California members of Congress came to the project’s defense when DRG suggested that the Robinson Ranch loan be increased from $35 million to $42 million to avoid foreclosure. HUD balked at the idea and put the property up for sale instead. But first, in a letter to HUD, Rep. Jerry Lewis (R-Redlands) and then-Reps. Robert Badham (R-Newport Beach) and Jerry Patterson (D-Santa Ana) urged HUD to “give full and careful consideration to the refinancing proposal.”

The Lyon Co.’s green- and white-striped flags flap along Robinson Ranch Road. Residential communities of quiet cul-de-sacs and “Children Playing” signs have sprouted along the lower levels of the development.

Up a fairly steep incline, the highest slopes are still dotted with dozens of bulldozers, wood frames and a sales office that overlooks an ocean view.

Several real estate sources in Orange County estimate that the William Lyon Co. has received gross income of $72 million to $97 million from the roughly 400 Robinson Ranch homes sold so far. Based on a generally accepted profit margin of 15%, they said the Lyon company would be expected to earn between $10.8 million and $14.3 million on those homes.

There are about 200 homes still to be built on the property, many of them the more luxurious models with up to 3,400 square feet, five bedrooms and spectacular views. The sources said profits on these homes would typically be higher.

Developer Harriet A. Harris once envisioned reaping those millions for her company.

Robinson Ranch was going to bring her small, family-run company, Ridgewood Development Co. of Costa Mesa, into the big leagues of Orange County developers. Before Robinson Ranch, her company had built only a few small tracts in West Covina.

Harris spent seven years working on the Robinson Ranch project before it went sour. It began in 1977, when Harris started a deal to obtain the land from the Robinson brothers. Three years later, the lending company, DRG, told her about HUD’s Title X program and how it could be used to finance the construction.

Title X was designed to provide incentives for developers to build on property where it would otherwise be difficult to obtain financing, in contrast to more typical HUD programs that are aimed at housing the poor.

Robinson Ranch, for example, was so remote that it had no sewers, roads or electricity. There was expensive construction that had to be done before the houses could be built, and most commercial lenders are unwilling to risk such a large up-front cost.

So the government guaranteed the loan under Title X, allowing lenders to provide the money without risk. DRG was the lender on the Robinson Ranch project.

Title X is a “Great Society” program from the Lyndon B. Johnson era, started in 1965, that market conditions kept from becoming popular until the 1980s. Robinson Ranch was the first Title X program ever processed by the Santa Ana HUD office, and Earl G. Fields, the local manager, remembers they had to go through their handbooks to find out how the program worked.

In 1981, after a cost analysis of the project, HUD agreed to guarantee a loan of $30.2 million to develop Robinson Ranch, partly because HUD thought the infrastructure might be a catalyst for development of the entire Santa Ana Mountains area, Fields said.

But Harris’ initial euphoria over the HUD loan was short-lived.

Within months, the company learned that the cost to build a required sewage treatment plant would be more than double their original estimate, almost immediately making the project millions of dollars over budget.

Barely 18 months into the loan, with monthly payments of up to $400,000 on the principal and interest, DRG sent its first warning to HUD of a possible default on the loan.

Harris said HUD suggested an increase in the loan of nearly $5 million. But it took HUD about 18 months to approve the increase, almost as long as the original application for $30 million.

“In hindsight, it was a critical juncture of the loan, and I don’t think the project ever recovered from the delay,” Harris said. Frustrated, Harris blames HUD for the project falling apart.

“We learned you never pick a fight with the federal government,” she said. “It’s like trying to dance with a dinosaur.”

HUD official Fields now agrees that the delay was costly to the developer. But he insisted: “We tried to gather information as quickly as possible, and it had to be routed through Washington. If they wanted more information, we had to go back and get it. I think all of the persons who were working on it were working in good faith.”

But Baker, head of HUD’s single-family division in Washington, said the sewage problem should have been seen by HUD before it issued the loan guarantee in the first place. The orders for how much sewage treatment the company would have to provide came from a local water district. The cost was open-ended because the company was required to build whatever the local agency ordered, and HUD had no control over the situation.

Baker, the Washington HUD official, said the sewer cost was considered a “rolling cannon” that should have been a red flag to HUD analyzers.

The conclusions of HUD’s 1985 inspector general’s report also raise questions about whether the department should ever have been involved in the ranch project. The project would have been considered infeasible if land values were used that were more accurate than the inspector general’s, HUD officials in Washington said.

The inspector general’s report said the original HUD appraisers compared Robinson Ranch to four other sites--two near Laguna Niguel, one in San Clemente and one in San Diego County. As a result, they estimated the property to be worth $17 million, about $12 million more than the inspector general estimated.

“In our opinion, each of these four comparables were in clearly superior market locations than the subject site is,” the report says. “The two comparables near Laguna Niguel and San Juan Capistrano are located near the ocean and a major U.S. interstate highway. In contrast, the subject site was rural, without any water and sewer facilities, remote from services and in a new direction of growth.”

In a written response in November, 1985, Fields defended the department’s original appraisal, saying that information used by the inspector general was not available to his analysts at the time.

“Appraising is not a science but an opinion based on the best information available to the appraiser at the time. . . . The political as well as economic conditions can contribute to either prove the appraiser’s conclusions to be valid or invalid,” he wrote.

Thinking back, though, Fields said last week he is uncertain whether he would do it all over again. “I don’t know if we would have under the same circumstances,” he said. “I think it was universally believed that it was a good project and a good project for the area. Mrs. Harris was the victim, I think, of circumstances well beyond her ability to control.”

Shortly after HUD approved the Robinson Ranch loan increase to $35 million, the department revised its rules to prohibit such large loans.

HUD Secretary Kemp stopped the department’s Title X program recently, in part because of the high number of defaulted projects, large losses to the government and reports of golf courses and expensive condominiums in some projects.

In the developing HUD scandal, DRG is under investigation by a federal grant jury on charges it violated HUD regulations. In 1985, the firm hired former HUD secretary and current U.S. trade representative Carla Anderson Hills to lobby HUD for relief from restrictions imposed on the company because of its problems.

But Fields said he never saw DRG use any political influence in the Robinson Ranch project. And he said he was never ordered to give preferential treatment to DRG or Ridgewood by his superiors in Washington.

Harris also said she is not a politically active person. But she and her husband are active contributors to political candidates and causes, records show.

And her husband, Willard, was appointed by Reagan to the President’s National Fitness Foundation in 1981. Also, when Harris’ company buried a time capsule at its Robinson Ranch ground breaking, two of the contributions came from President Reagan and Gov. George Deukmejian.

Harris said it was she, not DRG, who solicited the support of the three members of Congress when her project ran into trouble. Former Rep. Badham also said he remembers talking about the problems with Harris, whom he also called a contributor and participant in his campaigns.

“I generally always prefer to see the job completed,” said Badham, who left office this year when he decided not to seek reelection. “Unless it was a company that was really derelict or bad, I would like to see the project completed.”

Badham said he was unaware that DRG was already having trouble at HUD when he wrote his letter in late 1983. By the next year, HUD Inspector General Paul A. Adams first raised warning signals that DRG and other firms were violating government regulations at HUD’s expense.

Lewis, who is still in Congress, and Patterson, now a lawyer and the city attorney for Dana Point, did not return telephone calls last week.

When Lyon bought Robinson Ranch, he proved that it was possible to turn the property into a lucrative development. By then, however, much of the foothills area was already under construction. Roads and other facilities were already in place.

Some Orange County real estate sources said Ridgewood Development was trying too much too early in that area. And HUD became a partner in their mistake. In addition, the housing economy turned sluggish during Ridgewood’s attempt to develop the land, and the company was plagued with uncontrollable problems such as bad weather and labor strikes.

“I believe that we did the best job we possibly could have done under the circumstances,” Fields said recently. “We used what foresight we could for a project that would have some influence on opening other projects in the area.”

Harris said she has accepted the result. “There was a sea of faces, and they did what they could, but it wasn’t enough,” she said after the default. “We ended up being in the wrong place at the wrong time.”

Times staff writers Michael Flagg in Orange County and Robert Stewart in Washington contributed to this report.