Dana Point Downscales Headlands Project : Development: Residential plan goes from 394 homes to 370. Area has been focus of an environmental tug of war.

Controversial plans for a $500-million luxury hotel and residential resort on one of Orange County’s last large undeveloped coastal properties were downscaled Tuesday night from 394 homes to 370.

The City Council, which reduced the maximum number of homes which may be built, delayed final action on the overall plan until its meeting on April 5.

The landowners propose to build a 400-room hotel, two commercial centers and the 370 homes on a 121-acre peninsula called the Headlands, which overlooks Dana Point Harbor to the south and Dana Strand Beach and Monarch Bay to the north.

Largely because of its prime coastal location, the plan has been the focus of a bitter fight between environmentalists who want to save the peninsula as a natural resource and the landowners who have planned to develop the property since buying it in the 1940s.

Coastal sage scrub thrives throughout the undisturbed portions of the bluff-top peninsula, and it is home to 120 species of plants and several threatened species, including the California gnatcatcher and the Pacific pocket mouse. On Feb. 1, the U.S. Fish and Wildlife Service placed the hamster-like pocket mouse on the emergency endangered species list.

But the support the plan received from the council and city staff is based largely on concessions the landowner has made and the $2.5 million in annual revenues it is expected to generate for Dana Point.

The landowner also has agreed to dedicate 66 acres of park space to the city, has promised to spend $2.8 million for park improvements and will offer to sell the city 2.7 acres of prime land fronting Pacific Coast Highway at a less-than-fair-market price for a civic center.

“Based on the state’s history of raiding local government’s treasuries, it is critical that we do whatever we can to protect our ability to provide services for our residents,” Councilman Mike Eggers said Tuesday. “Annual revenues of $2.5 million are a significant piece of change.”

The owners of the land are Newport Beach-based M.H. Sherman Co. and Chandis Securities Co. (Chandis Securities, a firm that oversees the financial holdings of the Chandler family, is a principal stockholder of Times Mirror Co., which publishes the Los Angeles Times.)

If the council approves the plan, it then must be approved by the California Coastal Commission and the U.S. Fish and Wildlife Service.

Opponents of the plan, which include the South Coast Audubon Society and a local Sierra Club chapter, said this week they will continue to fight for more open space from the landowners.

Celia Kutcher, a spokeswoman for the Dana Point Headlands Conservancy, a grass-roots group dedicated to buying some of the Headlands property to save it from development, said her members will take their efforts to the city planning commission immediately.

The planning commission tonight will begin its review of the plan’s development agreement, a legal contract that will lock in the city approval for at least 10 years.

Kutcher said her group is “looking for ways to fund purchase of the land. We feel as much of the project as possible should be left as open space that is accessible to the public.”

Dan T. Daniels of Laguna Beach, the president of M.H. Sherman Co., said he would listen to any offer to buy some of the Headlands property.

“We are more than happy to talk to them about buying some part of the property when they are in a position to buy it,” said Daniels, adding that it would depend on which portion of the Headlands the group wanted. “I don’t think we would want a parcel purchased in the middle of our development.”

A major obstacle could be the listing of the Pacific pocket mouse. The mice, once thought to be extinct, were found on a four-acre section of the Headlands during a survey of the property last summer.

The U.S. Fish and Wildlife Service will hold a public hearing on the pocket mouse from 6 to 8 p.m. on March 24 at Casa Clemente Resort in San Clemente.