A Developer Hits Pay Dirt

When the huge master-planned community of Valencia turned 30 last summer, developer Newhall Land & Farming Co. threw an old-fashioned ice cream social in two neighborhood parks, complete with balloons, kids on bikes and the chairman scooping glob after glob of frozen dessert.

It’s that type of small-town feeling that Newhall Land & Farming has tried to foster since it built its first homes in 1965 in the development named after the oranges that grew there, about 30 miles northwest of downtown Los Angeles in the Santa Clarita Valley.

Over the years, Valencia’s planned neighborhoods have won praise for the pleasing arrangement of homes, apartments and condominiums; the sheltered system of paseo walkways that allow residents to amble about, free from the threat of automobile traffic; and the use of other amenities such as neighborhood recreation centers and parks.

That small-town feeling has been big business for Newhall Land & Farming, and it has been even better business of late.

Newhall Land & Farming recently announced a whopping 75% jump in net income for 1995, far exceeding its ambitious goal of increasing earnings by at least 30% a year for the rest of the 1990s.

In fact, although many other Southern California real estate developers have stumbled badly, Newhall Land managed to squeeze through the region’s harrowing recession and real estate crash with only one money-losing quarter, and that came about because of a financial hit from the 1994 Northridge earthquake.

“We’ve managed to keep our health,” said Chairman and Chief Executive Thomas Lee, whose office is filled with branding irons and other artifacts from the company’s more bucolic past. “We’re proud of that fact, and we know there are several real estate companies that disappeared or were under water. Fortunately we’re more diversified than many or else we would have been down there with them.”

But there are flaws in Newhall Land’s homespun fabric.

Local competitors tussling with complicated governmental permitting and entitlement processes long have complained that, in the eyes of politicians and regulators, developers fall into two camps: Newhall Land & Farming and everyone else.

Some of its projects have been controversial. A large discount mall called Valencia Marketplace, which Newhall Land will be building next to Interstate 5, has drawn fire from a merchant group and others who contend the mall will harm nearby businesses and will draw tax dollars away from the relatively new city of Santa Clarita.

And there have been run-ins with local environmental activists, most recently over the bulldozing in October of 105 oak trees to make way for Valencia Marketplace. A few years ago, Newhall Land agreed to pay nearly $400,000 in penalties and costs to repair the damage from improperly altering the course of the Santa Clara River and two tributaries and for disturbing the habitat of two endangered species.

“They are a large, powerful company, and they tend to walk all over people,” said Lynne A. Plambeck, vice president of Santa Clarita Organization for Planning the Environment, a local environmental group.

Lee becomes animated when discussing the local quarrels in which Newhall Land & Farming has become embroiled from time to time.

“Obviously, there has been some controversy over our development. It really is the nature of our business,” Lee said.

“We devote a lot of effort trying to do things in a cooperative way,” he said. “But sometimes it isn’t possible, because if you did everything everyone wanted, you wouldn’t be in business very long.”

Diversity and cost cutting, which included selling properties and laying off some employees, helped Newhall Land survive the downturn when others did not. But an important part of Newhall’s success boils down to a simple fact: It’s good to get there first. Newhall Land & Farming has been around as close to forever as you get in the Southern California business world.

The company traces its roots to railroad financier and land baron Henry Mayo Newhall, who bought the 48,611-acre Rancho San Francisco for a mere $90,000 in 1875. Renamed Newhall Ranch, its remaining 37,000 acres total more than twice the size of Manhattan.

The land was ranched and farmed until the 1960s, when tax law changes meant the land would be assessed at the higher residential rate rather than the agricultural rate. Newhall Land entered the development business.

With nearly 100,000 acres, about half of which are developable, Newhall Land is one of California’s largest land companies, with holdings throughout the state and in Arizona. And even though the company has greatly pruned its agricultural operations, Newhall Land continues to be one of the state’s big farmers. (The company is no longer run by Newhalls, although three sit on the board of directors. Newhall Land is a publicly traded limited real estate partnership.)

Newhall Land’s primary focus remains Valencia, which consists of several neighborhoods constructed over the years by Newhall Land or other builders to which Newhall Land has sold property. Valencia is now home to more than 32,000 people who live in about 12,000 single-family homes, apartments and condominiums. About 5,000 acres have been developed, and Newhall Land has set itself a stiff pace of developing the remaining 10,000 acres within 10 years.

Valencia boasts of more than 25,000 jobs at shopping centers, including a regional mall that is 95% leased, medical facilities and two industrial parks.

The older one, Valencia Industrial Center, is enjoying a historically low vacancy rate of 4.4%. The industrial park has attracted a diverse group of more than 500 companies to its 9.5 million square feet of space, including a growing entertainment presence. The park houses 12 sound stages--the pool of “Melrose Place” is there--and several post-production operations.

Urban planning expert William Fulton said Newhall Land has defined its market by creating an identifiable community.

“In the context of the Los Angeles economy, where they are situated is pretty advantageous for them,” said Fulton, Ventura-based publisher of a monthly newsletter called California Planning & Development Report. “The question mark in the long run is how much they’re going to be able to operate within the environmental constraints on the property they own.”

It is the income from its industrial portfolio--the industrial parks, shopping centers, office buildings and apartments--that provided Newhall Land’s cushion during the region’s real estate fall. Newhall Land’s business began to pick up again in 1994 as the Southern California economy began to revive, and last year the company earned $27.3 million, up 75%. Revenue rose nearly 31% to $175.6 million.

Newhall Land also adopted a more intense growth strategy of getting the most value out of its land by lining up all necessary government approvals for development, of expanding its residential product line and of aggressive development and sales of income property. To grab more market share, Newhall Land has increased the home density in some neighborhoods and gone after more first-time buyers, a segment of the market that fared better during the recession.

(Newhall Land got out of the home-building business in the late 1980s and instead sells land to builders or forms joint ventures where Newhall Land provides the property and acts as the bank, participating in the profits as the homes are sold.)

Other Valencia developments in the future will include two “lifestyle villages,” one situated around a golf course and the other around a lake. Newhall Land is in the initial planning stages for a new town called Newhall Ranch on 12,000 acres west of Valencia. That plan, which has generated its share of controversy, will feature 24,700 homes, a golf course, a lake, parks, schools, a 200-acre business park, retail centers, an extensive trail system and more than 5,400 acres of open space. Construction is expected no earlier than 2000.

Income-producing projects started in 1995 and 1996 will be worth about $250 million and will nearly double the value of the company’s commercial income portfolio.

“We continue to see solid evidence that employment is growing,” Lee said. “That means business is doing better. From our point of view, if business is growing, then they need more space. And as more people go back to work, that puts more people in the market for homes.”

“The company is well-positioned,” Lee said. “As long as the economy is doing a little bit better, we should do quite a bit better.”

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Newhall Land & Farming at a Glance

Newhall Land & Farming owns nearly 100,000 acres in California, making it one of the state’s largest landholders. Newhall’s holdings in Arizona may be sold soon. About half of Newhall’s land in California is available for development.

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Property Acreage Cowell 110 Merced 3,940 New Columbia 14,000 Suey 38,800 Newhall 37,490 Scottsdale 1,830 Total 96,170

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Chairman & Chief Executive: Thomas L. Lee

Employees: 250

Major businesses: Newhall farms, develops master planned communites, builds retail and industrial properties and sells land

Claim to fame: These are the people who built Valencia, 30 miles northwest of downtown Los Angeles.

1995 revenue: $175.6 million

1995 earnings: $27.3 million