"Oh, what a tangled web we weave...when first we practice to deceive."
Walter Scott, Marmion
Last week I got an email last week from a New York VC asking for advice about building a house in the California Coastal Zone. For six and a half years I served as a public official on the California Coastal Commission.
The call reminded me that it's been a year since I resigned, and it's time to tell a few stories of what I learned as a Coastal Commissioner. Each and every month I learned that not everything was how it seemed.
Here's Lesson 1: Farming for Developers.
The California coast is a panorama of open farm fields and hundreds of miles of undeveloped land. Highway 1 (the Pacific Coast Highway) follows the coast for almost the entire length of the state. The kind of road you see in car ads and movies, it looks like it was built to be driven in a sports car with the top down. The almost 400-mile coast drive from Los Angeles to San Francisco is one of the road trips you need to do before you die.
With 39 million people in the state, there's no rational reason there aren't condos, hotels, houses, shopping centers and freeways, wall-to-wall for most of the length of our state's coast (instead of just in Southern California).
The Coastal Act saved California from looking like the coast of New Jersey.
Almost 40 years ago the people of California passed Proposition 20 - the Coastal Initiative - and in 1976, the state legislature followed with the Coastal Act, which created the California Coastal Commission. Essentially the Coastal Commission acts as California's planning commission of last resort for all 1,100 miles of the California coast.
Thanks to the Coastal Act and the Coastal Commission, generations of Californians and our visitors enjoy the most pristine and undeveloped coast in the country, with recreation and access for all. It's an amazing accomplishment.
The downside is that the coastal zone has the strictest zoning and planning requirements in the country.
As a new commissioner I learned quickly what developers would do to bypass those requirements.
A Different Type of Developer
After 30 years in Silicon Valley I thought I knew what a developer was: a software programmer building a web site, app, game, firmware, etc. But as a Coastal Commissioner, I was dealing with a different type of developer - a real estate developer - someone who acquires land and builds housing and commercial buildings.
The business model for real estate developers isn't hard to understand: buy farms and/or ranches then build commercial buildings or houses and sell them off. Real estate developers make their money off the difference between the raw land and the net profit on the houses or the commercial buildings.
But a lot must happen before they can make money. If they're building homes, they need to get approvals to rezone and subdivide the property, bring in utilities (water, sewer, electricity, phone, internet); build infrastructure (roads, sidewalks, street lights, etc.), get approvals to build the units, etc. A lot of capital is at play. Naturally if you're a developer you want to maximize your return on invested capital. The easiest way to do that is to ensure that you can build as many units (apartments, condos, houses, etc.) as you can on the parcel you own.
Absent any zoning or regional planning, each developer will naturally maximize the development density of a parcel while leaving the impacts on traffic, views, water, wildlife, ecosystem, community character for others to worry about. The result is what's called the tragedy of the commons (individuals acting independently end up depleting shared resources). An example of this are the wall-to-wall housing developments on the Southern California coast and resulting gridlock on the freeways.
The Coastal Act has tried to protect the remaining parts of the California Coast. The opening section of the Act starts by stating, "...the permanent protection of the state's natural and scenic resources is a paramount concern to present and future residents of the state and nation." It follows with, "...it is necessary to protect the ecological balance of the coastal zone and prevent its deterioration and destruction." One of the ways it protects the coast is that you can't build on land that has been designated an Environmentally Sensitive Habitat Area (ESHA) or on lands that are Wetlands.
Part of my education as a commissioner was seeing how housing developers attempted to avoid these rules.
Farming for Developers
My first lesson was learning that developers love farmers.
In fact, developers think farms and farmers are the best thing to ever happen to the coast of California. Developers love buying farms. They buy-out family farms for prices that far exceed what the farmers could ever get from selling their crops. And often developers let the farmer stay on the farm, leasing them back the land so they can continue to farm it. Developers even help farmers optimize their output by making sure that they plant multiple crops each year and insisting that each time they plant they till each and every inch of their fields. And the farmers are told to make sure the fields are perfectly level so no water can collect or pond on the fields, regardless of how small.
When I first ran into this I thought, "Wow what a great deal. The developers are helping farmers maximize their yields by making all these improvements to California farming."
Boy was I dumb.
The developers knew that if the farm fields were to remain fallow, many of them would return to the native wetlands or sensitive habitats that are protected by the Coastal Act and when that happened, developers couldn't build on them. If enough of the farm would be found to have ESHA or Wetland, it would limit the number of houses that could be built (reducing the value of the project) or might even make the entire project economically unfeasible.
The reality was that the real estate developers could care less about farming or the crops. Tilling every inch of the farm and pouring pesticides on it meant nothing but a single crop could grow. Making it perfectly level meant that no water could pool and start a wetland. Developers were using the farmers to ensure the continued eradication of any Environmentally Sensitive Habitat Area (ESHA) or Wetland.
So the developers keep the farmers plowing the fields as the developers work on changing the zoning and getting approvals, and when they do, the bulldozers show up to start building the condos or houses that have buried Southern California. And the farmers retire.
That's why developers on the California coast love farming.Lessons Learned
- The Coastal Act prohibits development in Environmentally Sensitive Habitat Areas (ESHA) or Wetlands
- Existing farms have previously eradicated ESHA or Wetland
- Keeping the farming going while developers get approvals minimizes environmental objections
Steve Blank's blog: www.steveblank.com