CALIFORNIA - News from Aug. 12, 1987

BLOOMFIELD HILLS, Mich. — The Irvine Co.’s original plan to build hotels, high-rise office buildings and custom estates along its coastal property ultimately was revised because it was financially unsound, a top company executive testified Tuesday.

Irvine Co. Vice Chairman Raymond L. Watson, a key witness in a trial to determine how much heiress Joan Irvine Smith and her mother should receive for their stock, said the controversial coastal development plan was changed to provide a better return on the company’s investment.

Watson was asked to describe the development status of the company’s massive landholdings in Orange County, including 10,000 acres of prize coastal property stretching from Corona del Mar to Laguna Beach.

Watson’s testimony is expected to be a factor in the calculation of the company’s market value as of November, 1983, when Irvine Co. Chairman Donald L. Bren offered to buy the 11% stake held by Smith and her mother for $114 million. Smith is seeking $500 million, including interest and attorney fees.

Attorney Howard Friedman, who represents Smith, said that by late 1983, the Irvine Co. had obtained approval of its coastal development plan from both the Orange County Board of Supervisors and the California Coastal Commission.

Friedman also noted that the Irvine Co. had won a first round in court against a group called Friends of the Irvine Coast, which was trying to block the coastal development plan based on concerns about traffic and other environmental considerations.

When the company’s revised coastal plan was unanimously approved last month by the Orange County Planning Commission, attention was focused on changes that appeased environmentalists, such as increased open spaces and elimination of previously proposed office buildings.

In his testimony, however, Watson said Bren realized several years ago that a new coastal plan had to be drafted for financial reasons. Watson said he was hired as a consultant by Bren in July, 1984, to revise the plan to make it financially feasible.

Among other things, Watson said, he discovered that initial cost projections had been understated. For instance, he said, Pelican Hills Road, a vital development component, was budgeted at $23 million but would actually cost $40 million.

The original plan’s basic problem, Watson said, was that the proposed estate lots to be marketed in the hills above the ocean would have taken at least 20 years to sell, while the company would be obliged to pay huge development costs at an early stage in the project.

Watson said studies showed that the initial plan would have yielded the company a pretax profit of less than $40 million over a period of 20 years on an initial investment of about $250 million. He characterized that as an unacceptably low rate of return.

Another Irvine Co. executive who was a spectator at Tuesday’s hearing said the revised coastal plan, which still must be approved by the Orange County Board of Supervisors and Coastal Commission, will generate a much quicker profit for the company.

Monica Florian, the company’s vice president of resource entitlement, said that although the latest plan involves about the same intensity of development as the 1983 proposal, including an increase in the number of planned homes to 2,600 from 1,945, it offers a greater variety of housing products. The revised proposal envisions condominiums and less expensive detached housing as well as premium estate lots.

Also, Florian said, the hotels proposed in the revised plan are expected to be more attractive to potential guests and hotel management firms. With the addition of two 18-hole golf courses, they will provide more of a resort flavor, she said.

A company official said profitability projections for the current plan are not available.