BREN: Orange County’s Reclusive Billionaire : Is Donald Bren America’s Richest?

Sometime soon, a court-appointed referee in Michigan will decide how much Donald Leroy Bren, billionaire, owes Joan Irvine Smith, heiress, for the 11% stake in Irvine Co. that he bought from Smith and her mother in 1983.

Along the way, the referee may shed some light on a more intriguing question: Is Donald Bren the richest person in America?

Like most wealthy individuals, the 57-year-old real estate magnate shrinks from public discussion of his riches. Bren declined to be interviewed for this story, and a spokesman said speculation that Bren may be far richer than previously thought is “not even close to reality” and relies on faulty logic.

Yet the 6 1/2-year legal dispute over Bren’s purchase of Irvine Co.--a nonpareil collection of office and industrial buildings, apartment complexes and 64,000 acres of mostly undeveloped land in the heart of Orange County--has brought the question of his wealth into sharp relief.

At its core, the case turns on a simple disagreement.

Bren has argued in court that Irvine Co., his principal asset, was worth just $1 billion in 1983. That value was assigned to the company in a transaction in which the Beverly Hills-born developer bought out a group of wealthy fellow investors that included Herbert Allen, Alfred Taubman, Milton Petrie, Max Fisher and the late Henry Ford II.

Joan Irvine Smith, a holdout in the deal, triggered the court case by demanding an appraisal of the company’s assets in Michigan, where Irvine Co. is incorporated. She claimed that the concern was worth at least $3 billion at the time of the buyout.

If Smith prevails when the referee rules, as early as this month, she stands to receive up to $500 million for her 11%, including interest charges, rather than the $88 million plus an unspecified amount of interest that Bren would pay her.

For Bren, such a defeat would be painful. Yet it might also help certify him as a deal-making genius who paid sophisticated investors bottom dollar for a jewel that now appears to be worth far more than its value six years ago--whatever that may have been--thanks to the mid-’80s boom in California real estate.

This is a company big enough to build not just subdivisions but a whole town from scratch--the city of Irvine, with 100,000 people at the center of a booming commercial zone with almost as much office space as downtown Los Angeles. It is the largest private real estate holding in a major U.S. metropolitan area, a holdover from the days of Old California and the vast Spanish land grants.

“Bren is a horizontal Donald Trump,” quips Sanford R. Goodkin, a KPMG Peat Marwick real estate consultant who has worked closely with Irvine Co. in the past but had no part in the court case.

More seriously, he adds: “Irvine is the most precious piece of property in Orange County, and one of the most precious in North America. And the increase in its value (through the 1980s) was dramatic, beyond what any appraiser could have foreseen.”

Stephen Roulac, managing partner of Deloitte & Touche’s Roulac Group real estate unit, who was retained as a witness for Joan Smith at the trial, strongly--if predictably--endorses the notion of a run-up in value. “It could be 6 to 10 (billion dollars) now,” he maintains.

Roulac claims that Irvine Co.’s properties today should be valued on a “new paradigm” that takes into account a step-up in mega-deals during the ‘80s, increased foreign hunger for U.S. real estate and the company’s “monopoly” position in a section of Orange County that has remained vigorous in the face of traffic and regulatory bottlenecks that many believed would choke new development. In Roulac’s view, many Irvine Co. properties are only now entering the most lucrative phase in their development cycle as Southern California’s urban sprawl closes in on them.

Forbes Ranking

If that logic is correct, Bren, who owns 92% of Irvine Co.’s shares, might be within striking distance of John Kluge, the media giant who topped Forbes magazine’s annual “rich list” last year with an estimated net worth of $5.2 billion.

Forbes estimated Bren’s fortune--including interest in a pair of high-rise office buildings in West Los Angeles and the Newport Beach-based Donald Bren Co. home-building company--to be “at least $1.85 billion.” That put him at No. 16 on the list, a mere $50 million behind the magazine’s richest Californian, computer entrepreneur David Packard. Sources familiar with Irvine Co. have said the Forbes estimate tracks closely with an internal evaluation that the company conducts annually for its banks and small group of shareholders, which includes a handful of individuals who never agreed to sell their tiny stakes to Bren.

In court documents, Bren’s attorneys labeled Roulac a “fraud” and dismissed his estimates of Irvine Co.’s value as absurd. Speaking privately, one Bren representative has said of the high estimates: “What you have here is a primer on the woes of the savings and loan industry. Appraisers set ridiculously high values on properties; S&Ls; loaned against those values and went broke.”

Larry Thomas, a spokesman for Irvine Co., said: “We think it’s absolutely inappropriate to be speculating after this much time and effort on what a judge should be doing and is in the process of doing.” Thomas added that, in the company’s view, the referee’s ruling won’t reflect on the company’s present value.

“This theory that a judge’s ruling in favor of Joan would somehow enhance the value of a company or its chairman is preposterous and is not supported by any rational theory or logic,” Thomas said.

Bren’s advocates believe that any victory for Smith might simply reflect a decision by the referee that she was entitled to some portion of future value, so even a ruling that the company was worth $3 billion for purposes of the court case wouldn’t necessarily imply sharply higher value today. In the past, they have repeatedly said that Bren doesn’t intend to cash in on the foreign investment boom by selling the company and that a decision for Smith would actually decrease his net worth by forcing him to pay her as much as a half billion dollars.

Yet one Irvine Co. insider who declined to be named said recently: “I guess we’ve all speculated, if it was worth $3 billion then, what’s it worth now?”

Another Bren associate--himself a habitue of the Forbes rich list--believes that the magazine’s estimate of Bren’s wealth is much too low, even after deducting a presumed $1 billion-plus in Irvine Co. debt. “He’s probably worth $4 billion,” says the associate, who declined to be identified.

Bren himself gave credence to some high numbers in 1986, when he agreed to settle a court case in which the Orange County tax assessor had argued that the Irvine Co. properties should have been valued at $3.6 billion for tax purposes when they changed hands in 1983.

The company eventually accepted a $2.95-billion valuation, which it still contends is too high. But Bren’s attorneys kept the agreement out of the Michigan case under a rule of law that generally bars settlements from being admitted in evidence.

Wherever the numbers finally fall, it seems clear that Bren in 1983 captured a magnificent property that in at least some respects has already yielded more than his own planners believed possible.

Irvine Co.’s “cash flow” properties--an array of office buildings, shopping centers, industrial buildings and ground leases that produce a steady stream of revenue--were appraised by the courtroom adversaries in a range of $1.07 billion to $1.15 billion as of 6 1/2 years ago.

But the deceptively small gap between the appraisals widened at the bottom line, as Bren’s attorneys insisted that the properties’ true value must include substantial further deductions for taxes on any sale of the assets and a so-called portfolio discount that could be expected if they were sold all at once. In 1983, Irvine Co.’s total value was further reduced by about $560 million in acquisition loans, which Bren quickly repaid, and other debt.

Rapid Development

Since then, the company has rapidly developed new cash flow properties. It expanded the Irvine Spectrum office and industrial park, which sprawls around one of the premier commercial locations in Southern California at the junction of two major freeways, the San Diego and Santa Ana. When it’s completed, Irvine Spectrum will be the largest such park in the world.

There are 10,000 apartments, many built in the 1980s, making the company Orange County’s largest landlord. The company adds at least 1,100 units each year.

Then there are the five office towers at Irvine’s Jamboree Center, so close to the San Diego Freeway that big tenants clamor to get in even though Irvine Co. charges some of the highest rents in Orange County.

Development of those projects appears to match or outstrip an internal five-year business plan from the early 1980s that predicted no growth at all in the company’s industrial facilities and an increase of only 50% in its shopping center space.

Yet some observers believe that the most significant advances came in the profits from home building on the company’s huge expanse of acreage, which extends in mostly contiguous parcels from the Pacific Ocean at Newport Beach inland to the Santa Ana Mountains, a distance of about 22 miles. In places, Irvine Ranch, as it’s somewhat disarmingly called in Orange County, is nine miles deep.

The ranch is nearly five times larger than the island of Manhattan and is more than twice the size of Walt Disney Co.’s 28,000-acre holding in the heart of Florida’s resort land.

About 1,500 houses and condos are built each year on the ranch. That’s a sizable chunk of the 12,000 or so new homes built in Orange County each year. So dominant is the company in this market that when its builders began putting up Mediterranean-style stucco houses in pastel shades--Bren admired the style from visits to Spain and Italy--the look soon jumped off the ranch to nearly every other new subdivision in the county and beyond to San Bernardino and Riverside.

The land is so desirable that home builders--normally an imperious bunch with extra-healthy egos--will jump through hoops to buy it. In an unusual competition presided over by the company, some of these builders spend as much as $100,000 a whack developing proposals to build on the land--with no guarantee of being picked.

And the land is expensive. An acre next to a golf course in Tustin--once a sleepy little town, now a sprawling collection of subdivisions--goes for as much as $1.1 million these days, although the company says that’s an unusually high price and that many of its acres go for as little as $500,000. Still, Tustin is miles from the ocean and the hundreds of seaside acres that the company owns between Newport Beach and Laguna Beach. Experts believe that seaside property will fetch well more than $1 million an acre from home builders.

In court, Bren’s witnesses from Chicago’s Real Estate Research Corp. had predicted that acreage other than choice coastal properties would sell in a range of $327,739 to $926,084 in 1989. But it would have been difficult back then to see the phenomenal jumps in land prices that occurred in the late 1980s. Although the jumps have since slowed, some Orange County parcels doubled in value in 1988 alone, according to a survey by county government.

Those who build on Irvine Co. land, meanwhile, must settle for a fixed percentage of profits, according to people familiar with the company’s operations. If business is good--and the homes’ prices go way up--Irvine Co. also gets the lion’s share of the additional profits in a system that it has devised to extract the maximum value from the land. When new home prices were rising $10,000 a month in 1988, those extra profits were considerable. But some of Southern California’s biggest builders keep coming back, and many haven’t been particularly discouraged by the nationwide real estate slump of recent months.

“You put up with that because building on the Irvine Ranch means a guaranteed income stream, though sometimes a slim profit,” says one builder.

“But there’s no doubt in anybody’s mind who knows anything about Orange County real estate that the land is worth two to three times any figures I’ve seen in print,” said the builder, who--like others who might have business dealings with Orange County’s ubiquitous giant--declined to be named.

Irvine Ranch

Irvine Ranch is what remains of a 108,000-acre ranch that James Irvine and his partners assembled from three Spanish land grants in the 1860s. They paid $25,000. Joan Irvine Smith is the great-granddaughter of James Irvine and the last family member to control a large block of stock. Until the 1970s, the land produced little but cattle, oranges and lima beans, although that was enough to make the Irvine family wealthy.

The land is unique in that it lies across apparently inexorable paths of development thrusting northward from San Diego and southward from Los Angeles. Yet its ultimate value is maddeningly difficult to assess, because of the extended time frame--presumably 50 years or more--during which the land will be developed and because of geographical and political barriers to its use.

Bren’s managers have argued that approximately 30,000 acres will never be developed because they lie on marshland or have slopes of more than 30% (although even steeper slopes have lent themselves to building in densely populated areas such as the Hollywood Hills). The pace of economic expansion and the reluctance of political jurisdictions such as the cities of Irvine, Laguna Beach and Tustin to accept more development also hold down the pace of building and thus depress the value of the land, the managers have said.

When you build entire neighborhoods at one stroke, as Irvine Co. does--complete with homes, shopping centers, offices, even firehouses and schools--you tend to get a big reaction, and in traffic-choked Orange County the reaction is rarely favorable. A huge Irvine Co. project near Laguna Beach, for instance, drew 8,000 protesters recently after the company said it would build 3,200 homes there. The heat made the company back down and rethink the project.

Illustrating how the company may have underestimated its potential for growth, however, Bren’s management in the 1983 business plan predicted that the Reagan-era economic recovery might be “limited” by budget deficits. It said that housing prices would rise less than the inflation rate and that the company could expect home sales in its area to be in the $80,000 to $150,000 range, while “the high-end housing market in excess of $200,000 will be weak.”

In fact, Orange County housing boomed in the decade, as population increased and job growth outstripped the company’s assumptions. In the past few years, the county has repeatedly been named the most expensive market for single-family homes in the nation. In 1988 alone, the median sale price of existing homes in the Irvine area, to choose one example, shot up 24%, to $235,000.

That has meant some pretty spectacular growth for the company. While it doesn’t reveal its revenues, estimates that the company has not disputed show revenues climbing from about $400 million in 1984 and 1985 to $607 million last year, enough for Forbes magazine to rank the company as the nation’s 285th-largest private concern in terms of sales.

If Bren has indeed become the richest American, his extra billions seem not to have measurably added to the quiet luxury of his life. His Newport Beach home is said to be modest, though richly adorned with some of the museum-quality canvases--primarily by Abstract Expressionists, including Rothko and De Kooning--that have placed him among the country’s top art collectors.

He drives himself the few miles to work each day and spends an occasional weekend clad in jeans and bumping over his undeveloped land in a Jeep.

Earl A. (Rusty) Powell, director of the Los Angeles County Museum of Art, notes that Bren has pledged a $1-million donation to the museum over 10 years for the support of contemporary art and has similarly supported the Newport Harbor Museum. As a LACMA trustee, Powell says, Bren has “rarely attended board meetings. But he steps up to the plate when you need him.”

A longtime friend of Sen. Pete Wilson, Bren has been a major contributor to Republican candidates and was among the small corps of $100,000 donors to the party coffers during the last presidential campaign. By the middle of the 1980s, Irvine Co. was one of the largest political contributors in California--in 1985, it was the largest--and still wields considerable power in Sacramento and, to a lesser degree, in Washington.

Yet Bren is much less well known than Kluge, Trump, Ronald Perelman, Rupert Murdoch, Ted Turner, Marvin Davis and other billionaires who may, in fact, be worth less. Shy and aloof, even his employees find him “friendly when you run into him, but you don’t just run into him that often,” in the words of one.

Reclusive Man

Bren is single, his two marriages having ended in divorce. He has three children. If he has been inclined to downplay his wealth, that may be understandable. As recently as 1983, Bren’s first wife, Diane, from whom he had been divorced for 22 years, filed a lawsuit in Orange County that accused him of having defrauded her by hiding “secret properties” during their marriage. The case was eventually dismissed, according to court documents.

Bren’s late father, Milton, was a Hollywood producer whose credits included “Borderline” and “Tars and Spars.” But the elder Bren made a small fortune investing in real estate, including extensive parcels along Sunset Boulevard. The son, who attended the University of Washington on a ski scholarship and later served as an officer in the Marine Corps, built an empire of his own around his Donald Bren Co., a home-building firm, before joining a group of investors to purchase Irvine Co. from the family foundation in 1977 for $337 million.

At that time, he was an ally of Joan Irvine Smith, who accused the foundation directors of squeezing her out of big decisions. Smith--once a member of the horsy set in Virginia’s exclusive hunt country but now even more reclusive than Bren--wanted more control over the company’s affairs. But she evidently didn’t get as much control as she wanted, for she soon fell out with the new board, too.

According to one source familiar with the 1977 transaction, Bren was initially introduced to Herbert Allen and his uncle, Charles Allen, a pair of New York investment bankers, by Ray Stark, a Hollywood friend of all three. Allen included Bren in the cadre of investors because of his close familiarity with California real estate. But Bren and Detroit developer Alfred Taubman, both strong personalities, quickly found themselves at odds over operating control of the company.

When Bren proposed to buy out his partners in 1983, all but Smith quickly accepted his price, and the partners have nothing but their reputation for investment savvy at stake in the current case. Allen, Taubman and others testified that they believed $1 billion to have been an excellent price for the property.

Joan Smith lost a challenge to the buyout in Orange County Superior Court but subsequently asked the Michigan courts to raise the price paid for her shares. Ironically, she could have accepted a Bren compromise that would have allowed her to remain a shareholder and double her stake in the company by participating with him in the buyout. But she declined, according to testimony at the trial, because she didn’t trust Bren to serve her interests in an ongoing partnership.

Bren’s attorneys and others have made much of Smith’s reputation for litigiousness--according to a count compiled by one Bren lawyer, she has filed at least 10 suits against Irvine Co., some while sitting on its board.

Yet some observers lean toward Smith’s tenacious belief in the very high value of the Irvine land, regardless of what the courts may say.

“In a court case, you sometimes leave common sense behind,” says Goodkin, the KPMG Peat Marwick consultant. “But Joan has always understood the value of the land intuitively. She’s often been correct.”