Sales Slump Leads to Cuts at Rancho Santa Margarita

Santa Margarita Co., which owns 40,000 acres in the southern half of Orange County, said Friday that land sales have fallen off so sharply that it will delay some planned projects and lay off 15% of its employees.

The announcement comes immediately after the Irvine Co.’s decision to lay off 11% of its work force and delay about $100 million worth of real estate projects. Both companies have blamed the reluctance of banks and thrifts to make real estate loans for their downturns.

The actions provide more evidence that the real estate slump, which has already hurt small commercial developers and home builders, has spread even to the region’s largest companies, which are laying off workers, cutting spending and halting or delaying projects.

Both the Irvine Co., based in Newport Beach, and Santa Margarita Co., based here, pay for their operations through the sale of land. But with home sales slow, builders are not buying much land any more. Nor can they get loans to acquire land and build houses, even in places where home sales have not dropped, such as Rancho Santa Margarita.

In a memo to Santa Margarita Co.’s 130 employees--21 of whom were laid off--President Anthony R. Moiso said Friday that the company is anticipating “very low revenues” for the next two years.

“Our builders are requesting deferments, lower land prices, our patience and our help,” he said in the memo. “Because our company depends on land-sales revenues, our cash flow will be impacted dramatically--much more than we thought.”

Santa Margarita Co. is developing this planned community east of Mission Viejo, which the company also once owned. Plans call for completion of development about the turn of the century, with a population of 40,000 people. About 15,000 people live there now.

The company said it is in better shape than most of the builders and developers who buy its land, because it can turn to a wealthy partner--Boston investment firm Copley Real Estate Advisors--for money.

Copley, which invests billions of dollars for big investors such as pension funds and insurance companies, owns half of Rancho Santa Margarita and is one of the largest real estate investors in the nation.

Santa Margarita Co., which is privately held and owned by the wealthy O’Neill family, is vague and protective about how much spending it will forgo and which projects will be dropped or delayed.

Earlier this year, the company announced ambitious plans to build a downtown from the ground up on what are now empty fields. The firm said that project will be little hurt by the slowdown.

The company said its big Las Flores residential project next to Rancho Santa Margarita is too new to be affected, because it is still moving through the approval process in county government.

One commitment that is now a drain on the company’s cash, however, will continue to be met, the company said: the building of South County roads. The area already has traffic jams brought on by construction in Rancho Santa Margarita and nearby cities.

The company is helping to pay for two major road systems whose construction costs will eventually be passed on to the people who buy houses in the area or repaid from tolls.

“Our commitment to those projects is still a priority,” a spokesman for the company said.

Like the Irvine Co., Rancho Santa Margarita said some of its woes are from the credit crunch caused by the exit of most of the nation’s thrifts from the real estate lending business, and some problems arise from the reluctance of banks to make real estate loans these days.

Even though new homes continue to sell in Rancho Santa Margarita--the company said sales last month were the same as a year ago--the builders who buy the company’s land can’t borrow money to build.

Houses continue to sell in the town, the company said, because they generally cost less than the average new home in Orange County, which is one of the most expensive housing markets in the nation.

Sales of county’s more expensive homes, which can easily run to $400,000 or $500,000, have slowed, and many builders suspect the market could get worse. But there is still a market, builders said, for lower-price homes, especially because interest rates have not risen much.

Santa Margarita Co. has built on a smaller scale and hired fewer people than the Irvine Co., which owns about 64,000 acres, or one-sixth of Orange County.

The Irvine Co. once employed 1,400 workers, before billionaire owner Donald L. Bren--in anticipation of just such a downturn in the cyclical real estate industry--began to lay off workers in the late 1980s and contract out for much of the work they had performed.

Nevertheless, so severe is the present downturn that both companies needed to trim costs still further.

“The severity of the downturn causes us to make some very hard decisions,” Moiso says in the memo. Those decisions include delays, suspensions and eliminations of projects, salary and bonus reductions and spending cutbacks and layoffs.

“With significant ‘belt-tightening,’ we are capable of weathering the storm,” Moiso said. “Unlike many in our industry, (the company) will continue to have sufficient sources of operating funds.”

Moiso is a member of the O’Neill family, owners of the Santa Margarita Co.