Letter #188: Donald Bren and Stan Ross (2011)
Chairman & Owner of Irvine Company and Managing Partner at EY Kenneth Leventhal | Urban Land Q&A
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Today’s letter is the transcript of a conversation between Donald Bren and Stan Ross to celebrate Donald’s reception of the Urban Land Institute’s first Vanguard Award. In this conversation, the pair discuss the primary focus of the Irvine Company’s business plan in the early days and the planning that went into the master plan, why the Irvine Company has been so successful when other master plan communities have failed, whether the Irvine Company can be duplicated elsewhere, whether the Irvine Company would expand out of Orange County, Donald’s leadership style, what Donald wants the legacy of the Irvine Company to be, and who Donald has been inspired by and most admires.
Donald Bren is the owner the Irvine Company and the foremost steward of the Irvine Ranch Master Plan, the blueprint for America’s largest and most acclaimed planned metropolis. Today, the City of Irvine currently has a population of over 300,000. Donald joined the military as a US Marine Corps officer out of college before returning to Newport Beach to build a house, where he founded the Bren Company to build more local homes and help launched the Mission Viejo Company which planned and developed the 11,000 acre city of Mission Viejo. Donald went on to create other master-planned communities like Westlake Village and Newhall Ranch in Southern California and Foster City in the San Francisco Bay Area. He then joined a group of investors to purchase the Irvine Company from the Irvine Foundation, and was elected as Chairman of the Board, then became principal shareholder and chief steward of the 93,000-acre Irvine Ranch.
Stan Ross was the chairman emeritus of the USC Lusk Center for Real Estate. Like Donald, Stan joined the military after college. After serving in the US army, he met Kenneth Leventhal, a pioneer in the world of real estate accounting. Stan joined Kenneth’s accounting firm Kenneth Leventhal & Co. into the ninth largest accounting firm, advising companies such as Boise Cascade Co., Levitt & Sons, and Singer Co. He also represented major real estate developers such as Donald and A. Alfred Taubman, most notably their syndicate’s bid for the Irvine Company. Stan was particularly revered for his expertise in mergers and acquisitions, reorganizations, and creative financial structures. Leventhal & Co. eventually merged with Ernst & Young, and after four years, Stan joined USC.
I hope you enjoy this conversation as much as I did!
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Transcript
Stan Ross: We appreciate you taking time out of your busy schedule to share some comments with us. And so I don't want to waste any more time. And let's move into a few questions that we'd like to share with the audience. First of all, could you share with us some of the magnificent planning that we saw that went into this master plan for Irvine? Could you tell us what the primary focus of the company's business plan was, going back into those early days? Was it primarily or solely residential? Or did you quickly expand into commercial and mixed use?
Donald Bren: Stan, you've asked me a number of questions there. And first of all, I'd like to say to you that I respect you. You're an incredible talent. You and I have worked together for the last 34, 35 years. And I have great respect for you. And thank you for that. You've asked me several questions there, and let me try to answer you on that. I think, first, you have to go to before the master plan, you have to go to the land. The land. And it's about location, location, and location. I believe everyone in this room understands that. And particularly, a location that is on the Southern California coast, with the beach at one side, and the mountains 22 miles inland, located equidistance between Los Angeles and San Diego, and the market forces that come to bear from both of those metropolitan areas. That's an incredible start for a master plan. As far as the plan is concerned, we talked about William Pereira and his vision. And it was... his vision was to create something out of an idea, in his mind. I knew him. He was an extraordinary thinker and an extraordinary designer. He wanted to create a place that was... a city that was self governed, and was economically self sufficient. The primary businesses of the company in the early days, it's interesting at the beginning... in the 1960s, and even into the 1970s, the businesses were agriculture and farming. Was some small scale homebuilding going on in the periphery of the ranch. Since there was five, six incorporated cities around, on the periphery of the ranch, those cities took in the homebuilders and made the new tracks, the new homebuilding communities, a part of their city. I think this... what we have here, is the greatest opportunity in the world, for professional planners, Master Builders. It combines the disciplines of art, architecture, and all the disciplines that are necessary to bring about a new community. The master planning is comprehensive, and fundamental to the plan was a balance between, as far as Pereira was concerned, the balance between residential, industrial, office, retail, and open space. Pereira wanted to create a city that had a sense of place. A place where families could live, work, and play. He estimated the population for the city of Irvine to grow to over 300,000. It currently is around 230-235,000. Jobs were important. Were really important. To bring as part of the balance. And Pereira focused on that. Today, we have 230,000 residents and we have 300,000 jobs. So the balance isn't quite right, we're over balanced with jobs today. But that's okay. It'll balance out in the end. The master plan as Pereira envisioned it... given the scale of this land, he envisioned the plan to be alive and never stop. And that has been a significant undertaking for our planning group within the company, who works with outside consultants also. But our group of planners, landscape architects and architects, work daily with the Master Plan. And as I said, it's ever moving. It's alive. And maybe the most important part of the plan, at the end of the day here, is a village concept. The residential development, it's not tract housing, it's village housing. It's village living. And it includes the schools, which is a very important part of Irvine, the parks, and the shopping centers nearby, all connected by a path. You heard Ray Watson talk about a necklace. There are many necklaces here in this planning process. And many paths, walking paths, vehicular paths. And that was all part of William Pereira's idea. And in the end, he felt the most important part was that the residents, who live there, who work there, would have community pride. And I believe they do.
Stan Ross: That's just a wonderful, wonderful answer. And I know you focus on the plan and the design. As you know, I'm an accountant. Accountants, we look at numbers. We don't get overexcited with master plans and designs and architect... that's not what we do. We're scorekeepers. That's what I do in my line. So let me ask the hard question. So the real question in my mind is, Why has the Irvine company been so successful, and had such a great scorecard, when other large master plan communities have labored and or actually failed? What's the difference?
Donald Bren: Stan, as I said before, the success, a great deal of it has to do with the location, location, and location. And beyond that, as we heard earlier, the corporation, the Irvine Corporation, goes way back. In fact, it's had a... it was one of the five first incorporations in the state of California, in 1894. And the company has had an outside board of directors of corporate governance that meets on a regular basis. And that provides a discipline in the decision making. That brings a lot of comfort, that brings direction to the company, and brings a lot of comfort to financial institutions. It also... the board has been very careful to avoid any short-term decisions. Their decision in 1960 was to adopt the master plan, was to grant the land, the 1000 acres, to the University of California, Irvine, and create the the open space. For a person like yourself, and you call yourself a bean counter sometimes, for you, Stan, you understand this: there was no mortgage financing on the land. The land was free. It was clear. And time was our friend. It was not our enemy. We, with the time, we had the ability to understand, to research, and to create the plan to move the plan along. And that's a very important part of this. In the early days, and by the way, I'll just say, that the company has been a private company for all these years. There was one point that we took a segment or a group of the company, the apartment group, public for five years. That was an interesting opportunity, but I am convinced that community development, large scale community development, has to be done in a private environment. Meaning that there are no quarterly dividends required. The cash is reinvested. The cash is reinvested into the planning, into the infrastructure, into the asset portfolio of office retail, industrial, and apartment properties. The business strategy, Stan, in the early days, was very simple. The cash that was generated by the company, by the farming opportunities, the ranching opportunities, the Valencia orange groves, the company was the largest Valencia orange grower in the United States. It was a big business in those days. Good oranges. And that cash flow from farming and ranching supported the master planning, and it supported the operating costs and the taxes. So time was our friend. And beyond that, the early residential land sales to independent home builders on the periphery of the ranch created additional cash flow for expansion. Expansion meaning infrastructure expansion and creating the the new villages. You've asked me a question before. And that is: why haven't the other developers, the other builders of large size, Master Plan communities, why have they had problems? Some have been successful, many have not. I believe it all comes down to acquisition funding, land debt. And because of that, because of the interest requirement, interest payment, there was very little patience to do the planning properly and move the new community along at a proper pace. Some of the sponsors were public, and they did have quarterly earnings expectations. And that's tough. It's difficult when you're developing a large scale master plan. Many of them, in my opinion, and I've talked to many, and several of them are represented here today, like Columbia, Maryland. Columbia, Maryland did a... Columbia was a fantastic project by the Rouse Company. As time went on, my observation is that the shopping centers that Rouse created around the United States really carried the day for them, and it wasn't the the master plan community that added to their earnings. Reston, Virginia in the end, was an orderly liquidation. Newhall Land and Farm Company, you probably read the other day, they're still having trouble with their entitlement to use. And Redwood Shores in Northern California, San Francisco Bay Area, owned by Mobil Oil, they have stopped their development--I should say, their development was stopped by environmental process and has not moved forward. So there's more to learn from what's going on in America. But with community development, it's a business that requires a great deal of patience
Stan Ross: And capital, I presume.
Donald Bren: And capital. Yes, sir.
Stan Ross: Well, thank you for that. Thank you for that response. What are you really think? Can Irvine be duplicated elsewhere in the future?
Donald Bren: I've had that question many times, Stan. And I come back to: location, location, and location. It's that simple. How do you find 93,000 acres of land on the Pacific coast with a Mediterranean climate with the market forces of two metropolitan areas? I think that's very difficult to find. And second, and maybe this is even more important: The government, regulatory and environmental restrictions have become so overwhelming for large scale projects that they are not feasible going forward, in my opinion. There's little opportunity to problem-solve and get on with the business of new development. Government, regulatory, and environmental restrictions at the local, regional, state, and federal level are just overwhelming. Not to mention the numerous legal challenges that follow. There is not time to resolve those issues. That takes an extensive amount of time. And so I'm not sure that major community development, as we're talking about today, is a predictable business proposition. Stan, let me just share with you. We counted this up a year or so ago. The company had the pleasure of doing business with 143 different municipalities, different government agencies. The best one, maybe I need a drink for this one, was a small quasi-municipal agency. It was a Water and Sewer District, called the Santiago Water District, made up of old time landowners and some local politicians. They control the water and sewer for a portion of our ranch. It's interesting how they met. I went to one of the meetings. They met in back of a bar. And the meeting was about 20 minutes long. And they talked about their farming and ranching products, and then went back to the bar. So it was very difficult to get business done there. Beyond that, what we found over the years, we've dealt with kangaroo rats, the preservation of coastal sagebrush that cowboys and farmers, ranchers feel very strongly about, the government, the state of California, and the national government feel differently. And then there was the great bird, the bird that was protected by the national government, the Gnatcatcher. Well, the Gnatcatcher, they were they were concerned about preserving it. What we found after a number of studies, and they went on for several years, that the gnatcatcher is alive and well--particularly in the state of Mexico, in the country of Mexico. And there are literally 10s of millions of Gnatcatcher birds there. So they're not a unusual item. You're right, Stan. Capital is important. And there's only so much capital when you have these type of delays. Let me just, if I may, share another quick comment here with you. And that is: The state of California Coastal Commission, I'm sure there's somebody, I know there's some of you out there that have had the pleasure to work with them. Well, they liked our waterfront coastal property. We had already transferred, conveyed 3000 acres to a coastal park, state park, but they wanted more. So they kept coming up with more and more issues. As we started our planning, which was many years ago, in fact, it took 28 years to process with the Coastal Commission, the waterfront property. We were planning to build two Tom Fazio designed 18 hole golf courses overlooking the sea. The Coastal Commission said, Well, you're gonna have water runoff there, water runoff from that golf course into the sea. Okay, well, we'll deal with that. They said, Well, we want you to go further than that. We want you to devise an engineering plan that no one has ever seen before. Well, we did that. And we built two cisterns, reservoirs, underneath the two fairways on the golf course. And that water is now retained and used, reused, for irrigation. It was a $10-12 million dollar expense. It was an interesting study and construction process. And it did work. So we went to the Coastal Commission, we said we want our permit to build the new development, the new resort of Pelican Hill. Oh, but there's another problem. This is now 25 years into the process. They said the water runoff from the proposed resort, there's no solution for it. And we want you to find a solution. We said, Well, what is the problem? They said, It's the warm blooded animals, the sea animals mating one quarter mile off the shore of our coast. We said, You're kidding. No, not kidding. They said, there's an answer to that, perhaps you can pursue it. There are two, and only two university professors in America that we trust that can work to solve that problem. Otherwise, the water runoff from the from the resort, we believe will contaminate the warm blooded sea animal mating area. After two years of study, two years of study, we finally determined what it was. And interestingly enough, the water runoff wasn't from the golf course, the contamination wasn't from the golf course, it wasn't from the proposed resort, it was, in fact, the water runoff from the state highway owned by the state of California. It was the oil and water and solvents that ran off during the heavy rains that ran off into the sea. And that's what was contaminating the sea. Well, the Coastal Commission gave us our permit, reluctantly, after 28 years. And guess what? The coast highway has never been improved. So I share that with you: these are the types of stories that we've lived with for many, many years. And I wouldn't advise anyone to launch into that type of an environment.
Stan Ross: Well, thanks for sharing that with us. You are the only developer I know that has fond memories of dealing with agencies and the Coastal Commission. I'm glad you didn't import the Gnatcatcher into Orange County. So let's shift from... we only have a few minutes left. They want us to wrap up. I have a couple of questions real quick. You talked about location. And I I know you're not going to South Dakota, but there have been several articles written about the company expanding into new markets. Are you looking to expand out of Orange County?
Donald Bren: We have another 20 years, approximate, of final development of the ranch. So we're engaged there. And let me say, as far as broader development, we're just focused on California. Our people, our team, understands California very well. We, the company, has been here 147 years. We understand it quite well. Our current team has had 50 years of expertise in underwriting property in California, outside of Irvine, and within California, and we understand it well. I always say that we are provincial. I am provincial. The company is provincial. And we don't have a national focus. I believe there's enough here, California is large enough. There's enough here in California to satisfy our corporate needs.
Stan Ross: I have time for only one or two questions here. People in the audience have frequently asked that you've guided this company fantastically. How would you describe your leadership style to this group here? Could you take a minute as part of the wrap up to give us an indication?
Donald Bren: Stan, I learned this early on, in the Marine Corps. Spent three years there, and I was educated in a different way. Their motto, which I never forgot, was Mission first, then the team, then the self. It was about discipline, and organization. And as far as management style, I look for this in our senior people who work at the company, and I believe that I'm included in this, and that is that individually, you have to have curiosity, you have to be energetic, you have to be willing to focus for long periods of time, and you have to be forward thinking, and have the ability to think outside of the ordinary box. And that's something that we do every day. And there's an important part of this, Stan, and that is: We cannot predict, you and I can't predict, the future. But we can plan for it. And we do that. And at the Irvine company, I believe we're good at that.
Stan Ross: Could you wrap up with telling us what you want the legacy of the Irvine company to be?
Donald Bren: Well, do you want to talk about inspiration first, or do you want to go on to that?
Stan Ross: Well, you can wrap the two together. We have a couple of minutes left,
Donald Bren: Okay. As far as the company is concerned, what I'd like to say here is that real estate in California is special. And the Irvine Ranch is special. I would like the Irvine company to be remembered as a steward of the Irvine lands, as I said earlier, both lands that are built and lands that are unbuilt. And the lands that are unbuilt, the open space, I hope will provide freedom to all, forever.
Stan Ross: Want to leave us with a thought on inspiration, who do you most admire?
Donald Bren: Oh, Stan. You know it goes way back. I'm inspired by many historic persons such as the Marcus Vitruvius in the time of Christ, at the time of Christ. He was the... Marcus Vitruvius was an urban planner and architect. He was the first urban planner and architect for the city of Rome. And he wrote 10 books. Those books, I've read. And then along came, 1500 years later, came Andrea Palladio. And Andrea Palladio wrote four books about architecture and planning. And I believe he is the finest architect that's ever lived in modern times. He is an inspiration to me.
Stan Ross: Well, thank you for coming and sharing with the Urban Land. Join me in thanking Mr. Donald Bren.
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