Aiming to Profit From Preservation

High in Black Star Canyon between Irvine and Corona, Hidden Ranch’s streams, oak groves and brush-covered hills look much as they did centuries ago when Juaneno Indians ground acorns at the remote site, carving deep holes that remain in the bedrock.

The mostly pristine area could be a developer’s dream: a site for an enclave of small ranches, perhaps. But a private investment group is betting that it can turn the 807-acre ranch into a permanent nature conservancy--and make a sizable profit in the process.

By dedicating Hidden Ranch as a preserve, the Laguna Beach group would get credits for saving natural resources under a state conservation program. It then could sell the credits to developers and public agencies that need them to offset damage to sensitive habitats they plan to bulldoze nearby for homes, roads and other projects.

The investment group recently bought Hidden Ranch for $2.3 million from Southern California Edison Co. but thinks these conservation credits could be worth as much as $10 million.

“If it works, we’ll make money by protecting the environment,” said group member Gregory Vail, a real estate agent and land-use consultant.

That’s precisely what officials had in mind when they started the program in the mid-1990s, but until now no one has set up a conservancy in Southern California as a pure entrepreneurial venture.

The Laguna group is the first, and if it succeeds, it could encourage others to set up large tracts of undisturbed land, selling credits for saving the land. That, in turn, could spur faster development as developers simply buy the credits they need to offset construction on isolated areas of sensitive habitat elsewhere.

“[Developers] would much rather write a check and just walk away than be saddled with all those responsibilities,” said Caitlin Bean, coordinator of conservation banks for the state Department of Fish and Game.

Numerous conservancies and preserves have sprouted up to mitigate the damage construction causes to the environment, but most are small deals in which individual developers are forced to set aside or buy wildlife habitat to complete pending projects. A few, such as a 37,378-acre Orange County conservancy, are set up under special state plans to carve out huge areas where many species of rare animals and plants can thrive.

“We would prefer to protect large, contiguous blocks of habitat,” like Hidden Ranch, which better conserve natural resources, Bean said. Large banks also give landowners a chance to make some money on land that officials want to preserve, she said.

Credit Bank’s Success Is Not Guaranteed

The Laguna group is taking considerable risks. Continued goodwill from wildlife officials is essential. Demand could dry up if the economy stalls. Changes in environmental policies could undermine them. Similar preserves could woo away developers. Already, in San Diego County, a glut of conservation banks has made credits worth little.

“This may turn out to be foolishness,” said group member Samuel Goldstein, a former big-band drummer turned property investor. As his SUV bumps along a dirt road on the ranch lush with spring grass and blue-blossomed California lilac, he adds: “If it does [turn out badly], it’s sure a nice place to bury some money.”

The investors--Goldstein, Vail, real estate accounting specialist Michael Meyer and real estate lawyer Kenneth Kaplan--regard themselves as conservation-minded. They have much company. Four of five Americans in a Gallup poll in March said they were worried about loss of wildlife habitat, and three-quarters favor tougher enforcement of environmental regulations.

Environmental credit trading has proved workable in such places as Florida and California’s Central Valley and has become a tempting way for people to replace talk with action.

“People want to show you can invest in habitat and make a good return for it,” said Michael J. Bean, wildlife policy chief for the conservation group Environmental Defense. (He is not related to Caitlin Bean.)

The financial model for the group is Steve Morgan, an entrepreneur whose 7-year-old Wildlands Inc. operates eight banks, mostly near Sacramento, and sold out credits from two earlier ones. He said he has succeeded without help from lenders, who laugh at the collateral: “frogs and snakes and birds.”

He warns it’s tough to forecast credit sales.

“Can they sell out that acreage in five years or is it going to take them 15?” Morgan said of the Hidden Ranch group. “You don’t really know. You’re looking into a crystal ball.”

The Laguna group understands the risks. “This is not for the faint of heart. But if we didn’t think there was a good upside to this we wouldn’t do it,” Vail said.

In creating Hidden Ranch Conservancy, the Laguna group saw a number of favorable factors coming together. The property is home for at least one pair of California gnatcatchers and acres of streams. Caltrans needs a huge batch of credits for a nearby road-widening project. Developers are complaining of land shortages, and land prices in Los Angeles and Orange counties are soaring.

In the end, the investors set aside the work sheets and projections and proceeded on the gut feeling that the ranch was a bargain, like a first-time home buyer taking the plunge after months of searching neighborhoods.

“When you cut right to it, we were able to buy 800 acres of high-quality habitat at a very fair price,” Kaplan said.

Hidden Ranch Envisions High Profit Potential

Edison purchased Hidden Ranch in the 1970s as a site for a power plant but never built one. Amid industry deregulation, Edison listed the ranch for sale at $6 million two years ago as a developable site, but potential buyers saw huge costs just to bring in modern utilities.

Edison, struggling with huge losses, sold the ranch last December to the Laguna investors, who see the conservancy as the best option for the property.

State officials are promoting the proposed preserve as a model of California’s 6-year-old conservation bank program. Bigger than any project Morgan has done, Hidden Ranch is a high-quality habitat nestled next to the open space of Cleveland National Forest. The National Audubon Society would manage it, and the investors would ensure a $1-million endowment over five years.

“We want to inspire other folks to go this route,” the state’s Caitlin Bean said.

The Laguna group sees the profit possibilities. Hidden Ranch contains, for instance, 173 acres of coastal sage scrub and 19 acres of oak woodlands, which gives the group a like number of credits. Vail figures that area could fetch as much as $50,000 an acre for each credit.

Eight acres of sage scrub where the two gnatcatchers live are probably worth $80,000 to $120,000 an acre, he said. The group has received numerous calls about the gnatcatcher credits, but at least one, Forest Lawn Memorial Park, Covina Hills, found the price too steep, the cemetery’s lawyer said.

Hidden Ranch’s biggest hurdle is getting buyers to commit to purchasing $1.4 million in credits up front. The group persuaded Edison to carry back a loan for that amount at the time of the purchase, but the loan must be repaid before a conservation easement can be placed on the land.

Under an agreement with wildlife agencies, credits will be sold mainly to developers and public agencies within 25 miles of Hidden Ranch. Habitat within 10 miles of the coast and in western San Bernardino County is ruled out because it’s too different from the ranch, and Vail said a part of San Diego County within the zone isn’t a realistic market.

That leaves parts of Los Angeles, Orange and Riverside counties as the service area, with deals more likely to be made in the first two because of their high land costs. Credits also may be sold outside the 25-mile zone with special approval from the wildlife agencies.

Some land-bank experts and biologists question how much support the wildlife agencies will provide in the long term.

Gregory S. Reden said officials encouraged his family to create a conservation bank when attempts to subdivide the family’s property in Riverside County ran into two endangered species, the Stephen’s kangaroo rat and Quino checkerspot butterfly.

The bank, created 2 1/2 years ago, “started off with a bang--a couple of large sales in the first six months,” Reden said. But sales soon tapered off--a decline he attributes to U.S. Fish and Wildlife officials’ fear of being sued over sales of his credits. “They have not allowed as many developers to flow into our bank as we expected,” he said.

Some environmentalists also question whether granting credits to locations such as Hidden Ranch is proper because the sites are likely to stay undeveloped for the foreseeable future anyway. But they generally support the Hidden Ranch project.

“It’s good that land is recognized as having a value for habitat and preservation,” said Dan Silver, coordinator of the Endangered Habitats League in Los Angeles.

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Hidden Treasure

Developers can wipe out wildlife habitat if they support a nature preserve nearby. Wildlife agencies authorized Hidden Ranch Conservancy in the Santa Ana Mountains to make such trade-offs across a swath of Southern California.

Source: Hidden Ranch Conservancy

Graphics reporting by E. SCOTT RECKARD / Los Angeles Times