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HomeMy WebLinkAbout; Coastal Zone Agricultural Studies (1980); Program Report; 1980-11-20ENKANCEMENT OF COASTAL AGRICULTURE DRAFT REPORT 11-20-80 A Report Prepared for The California the California BY Angus McDonald Coastal Commission Coastal Conservancy & Associates, Inc. Berkeley, California November 19 8 0 and . 79-684 .- DRAFT REPORT 12/12/80 TABLE OF CONTENTS I. INTRODUCTION AND CONCLUSIONS A. 'Introduction B. Conclusions 11. MIXED USE CASE STUDIES A. The Mendocino Pilot Study . 1, Summary of the Mendocino Pilot Study 2. Descrintion of the Pilot Study Site 3. Market Assessment of Supplemental Uses 4. Agricultural Uses 5. Farm Unit Analysis B. San Diego County -- Carlsbad 1, Study Area Descrintion 2. Market Assessment of Supplemental Uses 3. Agricultural Uses 4. Farm Unit Analysis 5. Mixed Use Programs 111. MIXED USE GUIDELINES A. Introduction to the Mi-ed Use Guidelines B. Application of Mixed Use Policy in the Local Coastal Programs 1. Model Policy for Mi-ed Use Imblementation 1-1 1-1 1-2 11-1 11-1 11-1 11-5 11-17 11-50 11-64 11-90 11-97 11-100 11-128 11-132 11-146 (a) 111-1 111-1 III-4 111-5 i " . . - -. . . . ._ "" .. - . " . . . .. DRAFT REPORT 12/12/80 TABLE OF CONTENTS (continued) 2. Guidelines for the Farm Unit Analysis 3. General Considerations for Application of Mi-ed Uses 4. Specific Project Application of the Farm Unit Analysis 5. Tax Considerations for the Farm and Mi-ed Use Operations . 111-13 111-35 111-48 111-52 IV. CONSERVANCY ACTION PROGRAM ic A. 8. C. D. Introduction Background and the Recommended Action Program 1. Summary of Present Powers and Resources 2. Summary of the Conservancy's Agricultural Program The Conservancy's Role in Imnlementing Mixed Use Programs 1. General Considerations 2. Conservancy Action Stens Toward Implementing Case Study Projects California Coastal Conservancy Agricultural Program Recommendations 1. 2. 3. 4. Resource Allocation Recommendations on Project Screening and Evaluation Pilot Project Develonment Recommended Legislative Changes IV-1 IV- 1 IV-4 IV- 5 IV-9 IV-11 IV-11 - - IV-14 IV-20 IV-21 -1v-22. - IV-4 0 IV-42 f-! " e. . -" ii Figures 11-1 Table 11-3 Figure 11-2 Table 11-4 Table 11-5 Table 11-6 Table 11-7 Table 11-8 Table 11-9 Table 11-10 Figure 11-11 Figure 11-12 Figure 11-13 Table 11-14 . Table 11-15 DRAFT REPORT 12/12/80 LIST OF TABLES AND FIGURES The Galletti Ranch 11-5 (a) Time and Distance to Major POnUlation Centers 11-20 Coastal Market Areas 11-21 Coastal Highway Visitor Volumes, Marin County to Westport, Mendocino County, 1978 11-22 Residential Lot Supply and Recent Growth Rates - 11-25 Inventory of Overnight Accommodations, 1979, Mendocino and Sonoma County Coast 11-36 Projected Demand for Overnight Accommodations, 1985 11-38 Demand for Eating and Drinking Places 11-43 Milk Production Trends - Mendocino County 11-52 Milk Marketing Cycle for Mendocino County 11-59 Economic Analysis of Farm Unit, Form 1: Operating Cost and Revenue Summary DescriDtion of the Operating Unit 11-71 Investment Cost Summary, Form 2 11-73 Economic Analysis of a Farm Unit, Form 3 11-78 Estimated Costs and Income for an On Dairy Cheese Plant Handling 3000 lbs. Milk Daily 11-85 Estimated Costs and Income for a Guest Ranch 11-89 " iii DRAFT REPORT 12/12/80 LIST OF TABLES AND FIGURES (continued) Figure 11-16 Regional Location Figure 11-17 Carlsbad Area and Case Study Sties Table 11-18 Estimated Room Nights - Carlsbad Table 11-19 Visitor Attendance Table 11-20 Visitor Expenditures - San Diego County Table 11-21 Table 11-22 Table 11-23 Table 11-24 Table 11-25 Table 11-26 Table 11-27 Figure 11-28 Figure 11-29 Figure 11-30 Figure 11-31 Figure 11-32 Table 11-33 Figure 11-34 Residential Units Within Study Area Estimated Industrial Land - Carlsbad Available Industrial Land - Carlsbad Manufacturing Employment Estimated Office Space Construction Residential Building Permits 'Planned Residential Projects - Carlsbad Economic Analysis of Farm Unit, Form 1 Investment Cost Summary of Farm Unit, Form 2 Economic Analysis of Farm Unit, Form 3 Commercial DeVelODment as a Supplemental Use Comparison of Estimated Value, Existing Parcel vs. the Mi-ed Use Pronosal for Commercial Use Planned Residential Community as a Supplemental Use Comparison of Estimated Value, Existing Parcel vs. the Mi-ed Use ProDosal for a Planned Community DeveloDment 11-92 11-93 11-105 11-107 11-109 11-115 11-117 - 11-118 (a) 11-119 11-120 11-124 11-126 11-137 11-138 11-141 11-155 11-156 11-160 11-161 iv DRAFT REPORT 12/12/80 LIST OF TABLES AND FIGURES (continued) Figure 111-2 Figure 111-3 Table 111-4 Figure 111-5 Figure 111-6 Figure 111-7 Table IV-1 Table IV-2 , ._ Economic Analysis of Farm Unit, Form 1 Economic Analysis of a Farm Unit, Form 2 and Column Descriptions of Investment Cost Summary Calculation of Minimum Size of Farm Units Economic Analysis of a Farm Unit, Form 3, and Data Sources Illustration of Tax Impact Analysis of a Farm Unit Oheration Illustration of Tax Impact of a Farm Unit Operation -- Hypothetical Example Conservancy Costs - Cash, Accrued and Projected as of December, 1979 Conservancy Agricultural Project List, 111-17 111-19 111-30 111-32 111-59 - e 111-60 (a) W Iv-a IV-10 i V DRAFT REPORT 12/12/80 .- 1 I. INTRODUCTION AND CONCLUSIONS A. Introduction This study presents a method for determining the economic feasibility of agriculture and suggests a way to enhance agriculture through mixed uses. Mixed uses, in the context of this report,means the combination of supplemental, non-agricultural uses to existing, ongoing agricultural oner- ations, where continued or renewed operations are no longer feasible. Non-agricultural supplemental uses must be com- patible with these continued agricultural operations, enhance their economic viability, and support long-term nroductivity. The California Coastal Commission and the California Coastal Conservancy have iointly sponsored this effort. The Cal- ifornia Coastal .Commission, in working with local coastal governments on the Local Coastal Program process,'is con- sidering regulatory approaches to permitting alternative uses on agricultural lands. The Coastal Conservancy is invest- igating what role it might play in this alternative use program as an agency with land acquisition and disposal responsi- bilities. The study will be used by the Conservancy and Commission to help themdetermine both the overall feasibility . and impacts of a mixed use program, and rrossible actions the agencies could take in supnort of the imnlementation of t specific nrojects if they are found to be warranted. 1-1 DRAFT REPORT 12/12/80 The study is composed of three major components which comprise the original objectives of the project: 0 Two mixed use case studies, one on a large non-prime land ranch in Mendocino County, and the other in South Carls- bad, a highly productive agricultural area in Northern San Diego County. 0 Mixed use guidelines which provide a methodology for determining the economic feasibility of agriculture in combination with other uses. 0 An action program directed at the Conservancy regarding how their unique powers can best be utilized to promote the mixed use concept. B. Conclusions During preparation of this report, several major issues were raised regarding the applicability of mixed uses within the coastal zone. Broader issues were also raised regarding agricultural viability in general and the present legislation regarding agriculture in both the Coastal Act and the Conservancy's enabling legislation. The following con- clusions summarize these issues and proivdethe basic findings and recommendations of the report. 1-2 DRAFT REPORT 12/12/80 1. A Mixed Use Program Can Be an Effective Plan- ning Tool for Supporting Agriculture within the Coastal Zone. A mixed use program requires the cooperative efforts of the Coastal Commission, the Coastal Conservancy and local governments. The Coastal Commission should develop the policy framework in which mixed uses can be developed. The Coastal Conservancy should serve the role of technical support, land banking, and in some cases, direct financial involvement. Local governments, who must ultimately imple- ment their local coastal plans, should include amended local zoning ordinances and plans to nermit mixed uses where appropriate. Mixed uses were shown to fall into two general categories: In rural reas, beyond the urban fringe, the emphasis of mixed use projects should be upon economic development. Supplemental uses should enhance local agriculture by providing activities or businesses which support ongoing production. Examples include direct marketing outlets, on-farm processing, and local energy production (wind- mills, biogas, etc.). Within urban fringe areas, the emnhases should be upon 1-3 f DRAFT REPORT 12/12/80 securing agricultural land in the context of creating stable urban boundaries and reducing potential conflicts between urban and agricultural uses. This objective may be accomplished in either of two methods. The first would restrict develonment potential on agricultural parcels and concentrate the development in other, more urban or urbanizing parcels. This method would require a transfer of develonment rights system, The second method involves the concentration of develonment on non-agricultural or less agriculturally productive por- tions of a single narcel (or group of coonerating Dar- cels). This method would conditionally permit com- patible urban development on a portion of the parcel or parcels in trade for a deed restriction on the remaining agricultural land. The mixed uses should be consistent with the model policy provided in Chapter I11 of this report. The principal goal of mi-ed uses is to enhance agri- cultural viability of the ma-imum amount of nroductive land and to imnrove local coastal agricultural econ- omies , DRAFT REPORT 12/12/80 2. Existinq Statutes Mask the Fact that the Con- cept of Mixed Uses is Equally Applicable to the Programs of the Commission nd the Con- servancy. The Coastal Conservancy's enabling legisla- tion (California Public Resources Code, Section 31000 - 31405), as a matter of policy, states that the Conservancy "... shall give the highest priority to urban fringe areas where the impact of urbanization on agricultural lands is greatest," * and further requires that "(a) The lands are snecifically identified in a certi- fied local coastal plan, or program, as agricul- tural lands; (b) There is no other reasonable means, including the police power, of assuring continuous use of such lands for agricultural pruposes." On the other hand, the Coastal Act of 1976 (California Public Resources Code, Sections 30000 - 30900) nolicies r.egarding agriculture (Section 30241, 30242, and 30243) have been 1-5 DRAFT REPORT 12/12/80 interpreted by the Commission to generally exclude any de- velopment on prime agricultural lands. Because urban fringe areas frequently contain prime soils, protected by the Coastal Act, Conservancy action in such situations may be viewed as unnecessary or low priority. At the same time, the Conservancy’s priority on urban fringe areas may inhibit it from supporting mixed uses projects in rural areas that are supported by Commission Dolicy. The anparent conflict re- sults in a situation where a cooperative mixed use nrogram cannot effectively be develoned. This is ironic, since both agencies are mandated to work together towards an effective coastal land use management nrogram. This nroblem is related to the definition of prime agri- cultural land in the Coastal Act. The definition in the act adopts the language of the Land Conservation Act of 1965 (Williamson act) : (c) “Prime agricultural land” means any of the follow- ing : (1) All land which qualifies for rating as Class I or Class I1 in the Soil Conservation Service land use canability classifications. (2) Land.which qualifies for rating 80 through 100 in the Storie Index Rating. (3) Land which supports livestock used for the pro- 1-6 DRAFT REPORT 12/12/80 duction of food and fiber and which has an annual carrying canacity equivalent to at least one animal unit per acre as defined by the United States Department of Agriculture. (4) Land planted with fruit- or nut-bearing trees, vines, bushes or crops which have a nonbearing period of less than five years and which will normally return during the commercial bearing per- iod on an annual basis from the production of unnrocessed agricultural plant production not less than two hundred dollars ($200) per acres. (5) Land which has returned from the production of unprocessed agricultural nlant nroducts an annual gross value of not less than two hundred dollars ($200)' per acre for three of the nrevious five years . This definition has two main problems. First, $200 does not buy what it did in 1965. More seriously, much highly producing land is within soil Class I11 and IV (this is Darticularly true within the coastal zone). This land is not considered nrime unless it has been .in production "for three of the previous five years". A simnle decision by a landowner not to plant a crop can remove the prime classification. 1-6 (a) The goal of the coastal agricultural preservation program should be to secure as much agricultural land as nossible for long-term agricultural use, regardless of its prime versus non-prime distinction. This process should involve land use regulation, selected purchase and innovative proposals, such as mixed uses, combined in the most effective manner. 3. The Role of the State Coastal Commission in Implementinq a Mixed Use Program is Primarily of a Policy Nature. The Coastal Commission should support the mixed use concept. A mixed use policy should be encouraged as a component to each local coastal program where mixed uses may be useful. The Commission should pursue an improved defintion of agr,icultural land, which would allow more gen- t 1-6 (b) DRAFT REPORT 11/20/80 era1 application of mixed use proposals. Finally, the com- mission should cooperate with the Coastal Consevancy in developing its mixed use program, its agricultural preser- vation program, generally, and specific mixed use projects. This may involve cooperation in identifying target sites and other technical assistance. 4. The Role of the Coastal Conservancy in Imple- menting a Mixed Use Program Includes Both Technical and Financial Involvement. A successful mixed use program would open a new dimension to the present Conservancy agricultural pre- servation program, which has, in the past, relied primarily upon purchase sell-back schemes. In mixed use projects, the Conservancy would, in most cases, be the repository for dedicated development rights. The Conservancy could also provide technical support to local governments interested in mixed use projects. The Conservancy itself may wish to develop mixed use projects, a means of maximizing return on invested capital. 5. The Mixed use Concept Has Immediate Applica- bility to the Local Coastal Program. Chapter I11 of this report, Mixed Use Guide- lines,'contains a model policy, which, after some specifica- I- 7 DRAFT REPORT 11/20/80 tion by local agencies, can be included in local coastal plans, The policy represents a performance standard/condi- tional use approach to regulating mixed use projects. Chap- ter I11 also includes a methodology, whereby the economics of specific farm units can be evaluated, This methodology can help local governments establish farm unit parcel size re- quirements consistent with local agricultural operations. I- 8 DRAFT REPORT 11/20/80 11. MIXED USE CASE STUDIES The basis of the present study is two mixed use pilot studies, one in Mendocino County and the other in San Diego County. The pilot studies represent application of mixed use programstoactualparcelsof land. The pilot studies contain mar'ket analyses and financial feasibility analyses. The two pilot studies represent contrasting areas of the coastal zone. Mendocino County pilot study focuses upon a large coastal ranch in an isolated portion of the south coast of Mendocino County. It is representative of large portions of California's coast which are rural and not directly subjected to urban pressures. The existing agricultural and timber resource base and visitors are the principal components of the local economy. . The San Diego pilot study, on the contrary, is located mostly with the city of Carlsbad, an urbanizing community in northern San Diego County. .The agricultural land use in Carlsbad is subject to pressure for conversion to urban uses .including residential and com- mercial uses. The San Diego pilot study area is typical of highly productive coastal agricultural areas which are sub- ject to urban pressure and conflicts. A. The Mendocino Pilot Study 1. Summary of the Mendocino Pilot Study The Mendocino Pilot Study is based on the ~ . c DRAFT REPORT 11/20/80 physical characteristics of one typical holding in the area- -the Galletti Ranch. The Pilot Study is not based on any other characteristic of the Galletti Ranch or its owners and operators. The Pilot Study does not, nor is it intended to, reflect the intentions or the financial circumstances of the owners and operators. The GallettiRanch.dairy contains land forms, resources,, biotic habitats, and environmental con- straints and opportunities which are representative of much of the Mendocino coastline. The market analysis for the Pilot Study evaluated both agricultural and non-agricultural uses. Demand for non- agricultural uses was evaluated for residential development, overnight accommodations, restaurants and visitor oriented retail. Although a residential supplemental use could work at the Pilot Study, demand for such a project might be low given the existing supply of building sites in the area. The relatively low per acre price for large land units such as the Pilot Study make it attractive to long term investment. The south coast of Mendocino is the least traveled portion of the Mendocino coast. However, a general rise in visitor demand along the Mendocino coast.is projected. The current trend for meeting this demand is new or enlarged public and private campgrounds or small inns near or within existing I1 - 2 . DRAFT REPORT 11/20/80 communities. The best market overnight development for a location such as the Pilot Study would be a guest ranch. A guest ranch would be relatively self-contained and utilize the abundant natural amenities of the Pilot Study. Eating and/or drinking establishments were indicated as a poor prospect for isolated areas such as the Pilot Study. New demand for such commercial use is likely to locate in existing communities and visitor facilities. . Visitor oriented retail is also a rather poor prospect, for similar reasons to eating and drinking establishments. The principal problem is the low existing and projected traffic volumes along Highway 1. A notable exception to this general conclusion is the possibility for a cheese plant associated with the dairy. A well marketed cheese factory with a small retail outlet and visitor facilities could attract visitors and help support the investment required for producing cheese. The market for milk and beef is presently strong. Milk prices are supported by government programs which give a price advantage to North Bay dairies. The current market for milk is the entire North Bay since raw milk is shipped to Sonoma County for processing. Reestablishment of local processing DRAFT REPORT 11/20/80 would substantially reduce costs and provide milk products directly to local Mendocino County markets. In balance, the coastal dairies in Mendocino County are in a healthy, competitive position for the foreseeable future. A key problem is transferring the dairies to the next gen- eration. If family members do not want to continue the operation, new owners must be sought. -The competitive advantage in the long term could be greatly enhanced for the coastal dairies, if local processing could be developed. The farm unit analysis indicates that the current agri- cultural use of the Pilot Study, a dairy-beef operation augmented by timber sales, is an economically viable oper- ation. The primary reason for this is the current mix of income sources and the low cost basis the current owner enjoys. A new owner would have a more difficult time, depending upon the capital investment made and financial status of the investor. The two supplemental uses which appear most compatible with the dairy-beef operation are a cheese processing facility and a guest ranch. Although a market appears to exist for these uses, the net profits from their operation appears to be I1 - 4 . ." " "_ .. _" " -__ "" _II.. . . " """ A. A. DRAFT REPORT 11/20/80 rather limited, at least initially. The complexity of managing the current ranch, which is presently a "mixed use" operation, would also make additional functions less attrac- tive. 2. Description of the Pilot Study Site The Pilot Study site is located along the Mendocino County Coast, approximately five (5) miles south of the community of Elk on State Highway 1. Its location is shown in Figure 11-2. The ranch is 2,100 acres in size, divided between cogstal terrace and forested uplands. The ranch is currently operated as a combined dairy, beef cattle, and timber operation. Figure XI-1 is a map of the Pilot Study site. The dairy is one of three dairies on the Mendocino Coast. It currently milks 150 cows and sells its raw milk to the Petaluma Cooperative Creamery. Production of the dairy is estimated to be 24,000 CWT of milk per year. Forage for the dairy is produced on the ranch, including both 150 acres of oat-vetch hay (which is green-chopped for silage), and 150 acres of dryland pasture. The beef cattle operation includes around 50 heifers and 100 to 150 steer calves produced by the dairy cows. The beef is I1 - 5 - FIGURE 11-1 THE PILOT STUDY PROPERTY , .: /i ""-7" - DRAFT REPORT DRAFT REPORT 11/ 20/ 80 also fed on the ranch's forage production and graze in the uplands. Each year, the yearling calves are marketed. The timber operation is a sustained yield operation which harvests a total of 1,200 acres. The merchantable timber includes 60% Douglas fir and 40% redwood. The understory is primarily tanbark oak. On a sustainedyield basis, 1,000,000 to 2,000,000 board feet of stumpage can be harvested each year. The timber is sold as stumpage to local mills, a. Land Form, Habitats and Resources The Pilot Study site transects the geo- morphic unit which commonly runs parallel to the Mendocino coastline consisting of seacli-ffs, a broad terrace, and the first ridge of the coast range. Many ofthewildlife habitats common to the coast of Mendocino County are located on the Ranch. Resources include fisheries along the coast and streams, agricultural potential on the coastal terrace and timber in the uplands. The Pilot Study land is located'primarily upon the first ridge of the coastal uplands, A relatively narrow strip extends to the coastline. The ridge is very steep sided with slopes mostly above 30%. The coastal terrace has an average cross I1 - 6 " " DRAFT REPORT 11/20/80 scope of approximately 9%. The seacliff is virtually all a sheer cliff with an average cross slope of 100%. The coastal geomorphic unit includes the Littoral Zone, the rocky intertidal area at the base of the seacliff, the seacliff itself, the coastal terrace prairie, the coastal uplands, and the Riparian Zone along a coastal stream. . The wildlife habitats include the rocky intertidal area, the coastal prairie grassland, chapparal woodland, and the Rip- arian areas along streams. The intertidal area of the Pilot Study is occupied by the species common to the Mendocino coastline, rockfish, cabazoni, lingcod, crabs, abalone, and other marine invertebrates. Because access to this portion of coast is difficult, this marine life is abundant. The seacliff is a sheer, rocky wall that rises 200 feet directly out of the sea. The cliffs provide r-oosting and rookery areas for seabirds. The coastal prairie has been subjected to substantial human modification. Native'grasses and grazing animals have been mostly replaced by annual grasses, culti- vated crops; roads- and buildings, windrows, and livestock. Chapparal, a mixture of low growing shrubs and trees, occu- pies the steepzTRatward slopes of the uplands. The chapparal provides food and cover for numerous birds and small mammals. Near the crest of the first ridge, the chapparal merges with I -" - "& I I1 - 7 _- DRAFT REPORT 11/20/80 coastalwoodland, which is mostly comprised of second growth Douglas fir trees and redwoods. The woodland understory, which is very dense in the recently logged areas, is primarily tanbark oak and low growing shrubs. The woodland covered ridge descends into a canyon where Elk Creek flows. The creek is bounded by riparian vegetation common to coastal streams; red alder, willow, and other phreatophytes. The stream itself is occupied by trout, anadromous fish (steelhead and salmon), and provides water for the many mammals which occupy the woodland. b. Environmental Constraints The land forms, habitats and resources combine in nature to define environmental amenities and constraints. Natural factors create opportunities, as well as constrained human use. Natural factors create opportun- I ities when a resource can be extracted or utilized. Natural factors constrain development either because of a need to protect or manage a resource or because they create hazardous conditions. The environmental constraints of the Pilot Study site are similar to many areas along the coast of Northern California. Although several potentially serious constraints exist, most 11 - 8 \ DRAFT REPORT 11/20/80 /&an be mitigated by responsive project siting, size, en- gineering, and design. (1) Seismicity The Pilot Study is located six miles north of Alder Creek, the land terminal of the San Andreas Fault Zone, which extends north, undersea, toCapeMendocino. During the 1906 earthquake, the horizontal offset recorded near Alder Creek was 16 feet. The fault is capable, at any time, of producing another earthquake of the intensity pro- duced in 1906. The results of such a quake include seismic shaking, liquefaction, landsliding, and tsunamis. The land- form and geology of the Pilot Study site indicate that seismic shaking and landslides could be expected on the ranch if a severe earthquake occurred. This hazard can be mitigated by avoiding construction on steep slope areas and ensuring that buildings are engineered to withstand expected earthquake intensity. (2) Landsliding and Erosion Landslides are a common occurrence in the north coast of Cblifornia, due to an abundance of loose or weekly consolidated rock, steep slopes, high rainfall, and continual geologic movement, including earthquakes, creep and general uplift of the coastal range. I1 - 9 DRAFT REPORT 11/20/80 The steep seacliffs and slopes of the upland on the Pilot Study site are susceptible to landslides and should not be used as construction sites. Erosion is often associated with land-slides but specifically relates to the movement of soil or rock by wind or water action. Erosion is a natural process, which has largely defined the existing landform. However, poor land use practices such as overgrazing, impro- perly constructed roads, or poor logging practices can sev- erely accelerate natural erosion and cause damage to the soil resource. The Pilot Study includes soils which are fairly resistant to erosion: for example, the coastal terrace soils, and those which are highly erodable, such as those steeply sloping upland forest soils. Proper management can avoid a serious erosion problem. (3) Fire Hazard The moist condition of the coastal grassland and forest preclude fire danger much of the year. However, during late summer and fall, when the grasslands and forests dry out, fire hazard can be very high. The high fuel content of the upland forests, especially the logged areas where dense hardwood growth has replaced the Climax Conifer Forest, will inevitably burn. Any development should have I1 - 10 DRAFT REPORT 11/20/80 adequate clearing, good fire equipment access and a fire protection water storage. (4) Water Supply and Disposal The coastal terraces and upland ar- eas are underlayed by bedrock associated with the Franciscan formation, a melange of various rock types of marine origin, Jurassic to cretaceous in age (190 to 65 million years); the Franciscan formation is characteristically a very poor aqui- fer (ground water reservoir). Water supplies along the coastal terraces are mostly from springs and surface runoff. Intensive residential development on the Pilot Study site, or an expanded irrigation operation, would be limited by limited existing water supplies. Test wells have been very pook producers. One a-lternative supply which would be developed is a small summer dam on Elk Creek. Although expensive (it would require a 1,000 foot lift of the water), a water supply would be created which wouldgreatly increase irrigatedland. # Disposal of domestic wastewater in most rural areas along the coast requires a septic tank system. Soils vary greatly in their suitability for septic systems. Verydeepporous soils are typically good for septage disposal, while shallow, clay soils perform poorly. Soils on the Pilot Study site include bottomland soils on the coastal terrace and forest soils. I1 - 11 DRAFT REPORT 11/20/80 Soil surv,y li exists for the bottomland soils in Mendocino County but good soils data is lacking for the forestlands. The bottomland soils on the Pilot Study site are primarily Noyo clay loams and kneeland clay loams, moderately fertile, shallow soils. These soils are rated as severely limited for septage disposal. While septic system constraints exist, the problem can usually be solved by various engineering tech- niques. Depending upon the severity of the soil limitation and the intensity of development, the cost of engineering can be very high. c. Land Use Policy Coastal dairies are subject to the land use regulations of Mendocino County and the California Coas- tal Commission. The Pilot Study is divided into two Mendocino County zoning districts, an agricultural preserve zone (A- C) , and a timber preserve zone (TPZ) . Both of these districts were the result of state legislation. The agricultural preserve zone is a requirement of the Williamson Act (the California Land Conservation Act of 1965) , which was intended to preserve agricultural lands throughout the state by allowing landowners to enter con- tracts with the county. Under the contract, the county . I1 - 12 - "" . _" " - "" ""_ . "" - .. ." "__ _" .". . - . " DRAFT REPORT 11/20/80 receives a continuing, 10-year commitment for agricultural use of the parcel and the landowner receives a lower tax bill. The lower tax bill occurs because the land is valued at an agricultural use value, rather than fair market value. The timber preserve zone was the creation of the Forest Reform Act of 1976, which changed the manner in which timber and timberland could be taxed by counties. The purpose of the legislationwas toencourage better forest management. Under the law, a county can add a timber preserve zone to its zoning ordinance. Land which has timber resources and is used for growing and harvesting timber can be included in the TPZ. Similar to the Williamson Act, the county receives a con- tinuing 10-year commitment from the participating landowner to remain in timber production. The landowner receives a lower tax bill, based upon the permitted uses but the standing timber is not taxed until it is harvested. The portion of the Pilot Study used for the dairy operation, about 700 acres, is with the agricultural preserve zone. The remaining 1,200 acres are within the TPZ. The timber preserve zone requires a minimum parcel size of 160 acres. Permitted land uses include: timber production, watershed management, wilderness recreation, agriculture, I1 - 13 DPAFT REPORT 11/20/80 and one single family dwelling unit per parcel. Uses re- quiring a use permit include: oil, gas, or geothermal wall drilling, mining, airstrips, shooting ranges, additional single family dwellings, additional buildings for non-resi- dential purposes, campgrounds. The agricultural preserve zone requires a minimum parcel size of 160 acres. Permitted uses include agricultural uses, Sale of food products, agricultural services, one single family residence per parcel, open space recreation. Uses requiring a use permit include: mining , shooting ranges, airports, golf courses, agricultural processing, aquaculture, and ad- ditional buildings for non-residential purposes, Camp- grounds. It appears that the proposed supplemental uses might require a Mendocino County use permit application, as well as ap- proval by the California Coastal Commission. The actual procedure for approval of future supplemental use proposals will depend upon the local coastal plan and other policies which may be adopted by the California Coastal Commission as a part of the present study. The Mendocino Coast is within the Northcoast Regional Com- mission which includes Del Norte, Humbolt and Mendocino I1 - 14 t DRAFT REPORT 11/20/80 Counties. Approximately 90% of the Pilot Study lies within the coastal zone. The coastal zone is a geographic area running inland from the shoreline along the entire coast of California. The width of the zone varies but is often defined by the first major rise. The coastal zone was created by the people of California when, in 1972, the coastal initiative (Proposition 20) was approved, Proposition 20 established regional coastal commissions which were to administer land use controls in the coastal zone and also prepare a coastal plan. The coastal plan was completed in 1975. It led to the passage of the Coastal Act of 1976 by the State Legislature. The Coastal Act of 1976 in turn provided for the return of land use authority within the coastal zone to the coastal cities and counties, Each city and county with jurisdiction in the coastal zone is currently preparing local coastal programs (LCP). These local coastal programs will meet the policies of the Coastal Act and eventually be integrated with the local agencies' general plans.. Until the LCP's are completed, the regional commissions retain land use con- trols. The regional commissions will be phased out when the LCP's are complete. The administration of Proposition 20 and the subsequent Coastal Act over the past eight years has resulted in a reduction of building and land speculation activity within I1 - 15 DRAFT REPORT 11/20/80 the coastal zone. Although building has been permitted, the pre-Proposition 20 level of subdivision activity was greatly curtailed. Most construction has occurred on lots or pro- jects created or approved prior to 1972. While the regional commissions do not impose zoning controls, in addition to those of the local agency, virtually any building activity requires a permit issued by the commission. Permits are issued, conditioned or refused based upon the policies of Proposition 20, the Coastal Act of 1976, and the findings of the regional commissions. The local coastal program for Mendocino County has not been adopted by the county at this time. It is nearing completion and can be expected to be adopted in 1981. The LCP has provided a series of "sketch plans" which detail the alter- natives for future land use in the coastal zone. These plans will be the basis for the county's adopted LCP. No specific policies regarding supplemental uses have been developed by the LCP at this time. It is expected that supplemental uses which can be shown to enhance agriculture without creating conflicts will be permitted. In addition to the LCP, Mendocino County is also engaged in preparing a revised general plan. Since this process is occurring at the same time as the LCP, it is expected that the two plans will conform to one another. I1 - 16 DRAFT REPORT 11/20/80 3. Market Assessment of Supplemental Uses The market assessment for the Mendocino coast was intended to estimate the size and characteristics of the market for the individual land uses that may be combined with existing agricultural operations. The uses th.at were ident- if ied included: , . Residential development . Overnight accommodations . Restaurants Visitor oriented retail. (including camping) The market area with which the Mendocino coastal project would compete. includes the California coast from Tamales Bay in Marin County to Rockport in Mendocino County. This area was e e e divided into geographic subareas as follows: Marin County Sonoma County - North Coast - South Coast Mendocino County - North Coast - Fort Br agg - Mendocino - South Coast I1 - 17 DRAFT 11/20 Figure 11-2 is a map which shows the boundaries within the market area. / REPORT 80 A key variable in the market assessment is automobile traffic volume on Highway 1. There is a strong correlation between traffic volume and the market potential for various com- mercial purposes. The San Francisco Bay Area and, to some extent, the urban areas in the Sacramento Valley are the principal sources of demand for commercial uses along the Mendocino coast, (R-lB)* Table 11-2 shows distance and travel times from San Francisco to the coastal market sub- areas. Traffic volume on Highway 1 along the north coast of Cal- ifornia increased. by over 10 percent average compound growth throughout the 1970's.. (R-4B) The only year which showed a decline was 1974, the year of the first gas shortage. Along the Mendocino coast, the rate of growth appears to be leveling off. In fact, between 1977 and 1978, there was nearly a 20 percent decline in traffic in the south coast portion of Mendocino County. Traffic volumes in Marin and Sonoma Counties continued to increase. * Numbers refer to the numbered references at the end of this report. I1 - 18 t DRAFT REPORT 11/20/80 The portion of the traffic volume which is associated with visitors is important, because most ofthe "enhancement" uses cater to visitors. Table 11-3 shows current traffic volumes in the market area and the portion of traffic attributed to visitors. These visitor numbers are the basis for the demand estimates for the various enhancement uses. (R-3B, R-5B) DRAFT REPORT 11-.20-80 Table 11 - 3 TIME AND DISTANCE TO MAJOR POPULATION CENTERS Coastal Subarea mNDOcIN0 COUNTY south Coast Mendocino Fort Br aqg North Coast SONOMA COUNTY south coast . North Coast From San Francisco Distance (Miles) Travel Time 131 - 165 180 190 208 43 123 ~~~~~~ ~~ ~~ Source: Bechtcl Transportation Survey (R-6B) I1 - 20 3 hrs to 3 hrs 40 min 4 hrs 4 hrs 20 min 3 hrs 45 min 1 hr 10 min 2 hrs 45 min Figure I I - 2 COASTAL "ARKE? AREAS DRAFT REPORT 11-20-80 Table I1 - 4 COASTAL HIGHWAY VISITOR VOLUMES MARIN COUNTY TO WESTPORT, MENpocI~ COUNm, 1978 DRAFT REPORT 11-20-80 Total Travel Visitor Travel Estimated Estimated Daily Daily Visitors Visitors Peak Month Average ADT ADT Visitors as Percent of21 Total Travel Peak Annual Month ADT(l) " Coastal Subarea MARIN COUNTY Pe taluma- Vally Ford Rd. (South) Point Reyes- Pctaluma Rd. (North ) SONOMA COUNTY Highway 1 at Bodega Bay (North & South) Highway 1 at Jenner (North & South) Highway 1 at Fort Ross (North & South) mmccnuo COUNTY Highway 1 at Gualala (North & South) 1,550 990 65% 65% 1,000 640 2,850 1,800 1,850 1,170 2,040 1,290 1,900 1 , 200 1,650 1,050 50% 50% 70% 3,800 2,400 2,350 1,500 4,150 2,800 50% 80% 2,080 1,400 1,720 1,160 Highway 1 at Elk (North & South) 2,150 1,450 Lansing St., Mendoc in0 (Nor th ) 6,800 4,500 Cypress St., Ft. Btagg (South) 24,500 20,000 Highway 20, Ft. Bragg (North ) 21,800 17,300 Highway 1 at Westport (North ) 2,750 1,750 50% 30% 3,400 2,250 7,350 6,000 40% 80% 8,700 7,120 f , 2,200 1,400 (R") Source: California Department of Transportation (1) Annual average daily traffic (one-way) (2) McDonald & Associates estimates DRAFT REPORT 11-20-80 a. Residential Development Residential development is a common use of coastal land. The scenic and recreational value of the setting make it a desirable location in which to live. While Mendocino has an abundance of coastal land where residential development could possibly locate, it is far from major employment centers and, therefore, impractical for major primary residential development. Recent residential de- velopment along the coast of Northern California has largely been for second homes and retirement homes for the affluent. The analysis of demand for coastal second homes is difficult for several reasons. Demand is unrelated to the economic characteristics of the local community. It is related to the -economic . .' characteristics of the entire market area within a rea- - %- - - sonable travel distance; .. - . *"" - __ . Demand depends on the real estate cycle and competes with other investment opportunities: ; I . Demand has been declining because of high interest rates and high gas-o'line prices. The long-term- trends for ." " - - - interest ram and fuel costs are unfavorable and their I . ""- a I1 - 25 DRAFT REPORT 11-20-80 impacts on demand for second homes are unknown. In spite of these problems, the market can be assessed by making certain assumptions and looking at historical de- mand-supply relationships. When the Coastal Act was passed in 1972, development along the coast was at an all time high. In fact, it was Californians' perception that a unique and precious public resource was systematically being eliminated that led to the passage of Proposition 20. By 1972, many coastal residential lots in Mendocino County had already been created. While building activity, especially subdivisions, was slowed by the Coastal Commission, building did continue. Residential lots and historical average absorption rates for these lots along the Mendocino County coast are shown in Table 11-5. The demand for second homes can be measured by actuai con- struction rates rather than by sales of lots. So long as there is an inventory of lots to be sold and resold, and so long as the price of lots is not increasing faster than that of real estate in general, the demand for an investment rather than for a structure may be considered satisfied. Considering the existing inventory of lots and turnover rates, lot availability is more than adequate along the coast to meet this demand. .. DRAFT REPORT 11/20/80 Table 11-5 RESIDENTIAL LOT SUPPLY AND RECENT GROWTH RATES Annual Average Units Constructed 1978-1971 Current Duration of1 Vacant With Without Existing Supply Mendocino County Residential Building Building Of Residential Subarea Parcels Permits Permits Parcels North Coast 204 4 10 15 years Fort Braqg 1,143 -128 6 9 years Mendocino 669 75 23 7 years South Coast 1,565 ' 66 19 18 ytars t IDuration of supply assunes no new lot formation and no construction on %on-residential" parcels. Actual supply with these factors would be much greater. Source: (R-2B, R-8,.and R-6) I1 - 25 DRAFT =PORT 11-20-80 The relationship between vehicle trips on Highway 1 and second homes indicates that after a certain point, the number of visitors per second home tends to increase with the distance from the major population centers. This rela- tionship revives the notion of the optimum travel time for a second home investment. This optimum time may include a requirement that the distance be great enough to escape the urban landscape but not so great as to make regular visits a hardship. The latter factor may become a far more important one as the relative cost and difficulty of travel increases. The coast is unique in that the travel time is more reasonable than getting to Lake Tahoe or Palm Springs. Beyond the areas within the competitive travel time, themarketwould probably dictate a smaller proportion of second home supply. Irish Beach is the major second home project in Mendocino County. At present there are about 85 houses constructed on a total of 350 available lots. Under the Coastal Commission jurisdiction, lot owners in the project have received building permits for 17 homes over the last three years. This project was started in 1967 and subdivision into the existing 350 lots was .completed in 1974. The sales rate for lots has averaged 20 per year. The building rate has been about eight units per year. The developer still owns 70 lots. Between twelve and fifteen were sold out of his inventory in 1979. He I1 - 26 There is no page 27. DRAFT REPORT 11-20-80 has Coastal Commission approval for 70 more lots in the existing subdivision and is working on a plan to develop an additional 800 acre ranch to the south of Irish Beach into 500 additional home sites, with about three acres for commercial uses. Environmental impacts, particularly traffic around a deep gulch separating the two properties, will be major obstacles to Coastal Commission approval. His plan, however, includes zero lot lines, or walled houses, and generally smaller lots, in order to retain more open space. Lot prices range from a high of over $100,000 to a typical $25-45,000 and a low of $18-25,000. It appears that resales have cut into the market for the developer's inventory, which is a common problem in second home lot sales. At present building rates, build-out of the 265 remaining lots and 70 potential lots will require over 40 years. (1-7B) Sea Ranch, the largest project along the entire coast, is located in Sonoma County, south of Gualala. The property was purchased for subdivision in 1962, and sales commenced in 1965. About 1,750 lots were completed by the time the Coastal Commission legislation was passed in 1972, and most of the lots had already been sold. At present, the developer holds 80 lots, of which 65 were put on the market in February 1980. Within six weeks, sales contracts had been signed for twelve of these, at 10 percent down and 10 percent interest, with the i I1 - 28 DRAFT REPORT 11-20-80 developer carrying the remainder. The developer has per- mission to develop 260 additional lots. (I-6B) About 530 houses have been built at Sea Ranch. About 25 homes a year have been built over the last four years. Prior to that, construction had been about 40 homes per year. This recent reduction is primarily due to Coastal Commission regulation. Resales have ranged from a low of 32 lots per year to a high 02 94 lots in 1977. At 70 lots per year, resales would completely turn over the vacant lots within 17 years. At a build-out rate of 60 lots per year, the 1,220 existing and 260 potential lots would be developed in 25 years. Prices for lots range from $18,000 to over $100,000, but most often fall between $30,000 and $40,000. (I-6B) Bodega Harbor, south of Bodega Bay, is the third major residential project on the coast. It is located along the south coast of Sonoma County. This property is so close to the Bay Area that the'distinction between second homes and primary housing becomes blurred. This project was started in 1970. At present, 625 lots have been sold at an average rate of 62 per year, and 150 homes have been built at an average rate of 15 per year. The developer retains 50 lots. Resales have been running 60 per year the last several years, which would completely turn over the inventory in about ten years. f. f I1 - 29 f DRAFT REPORT 11/20/80 Prices range from $39,900 to $140,000, with good view lots generally priced between $50,000 and $60,000. (I-4B) The Woods is a retirement mobile home park in Little River, just south of the town of Mendocino. There are 132 spaces, of which 65 have been filled in five years. The owners are doing their own building, which has limited the absorption rate. Rents are from $150 to $160 per month. All central utilities and one-quarter acre lots make this a very ex- pensive project. Units are requiredtohavewoodexterior and shake roof. The Whiskey Shoals subdivision is located on 100 acres, three miles south of Point Arena and about ten miles north of Gualala. Planned for 72 lots, the subdivision was partially completed in 1972 when the Coastal Act was passed. Sub- sequently, the Coastal Commission would not give approval for construction of any houses in the subdivision. The Cal- ifornia Coastal Conservancy is negotiating to buy the lots, replat the land into 50 condominiums, and resell the property 5 to a different developer, with the hope of recouping land and administrative costs. The Conservancy has not completed all of these transactions, so actual redevelopment maybe several .. .. years away. The new developer, according to the Conservancy Staff, plans to offer some innovative mar- i r - I1 - 30 . DRAFT REPORT 11-20-80 keting programs, including timesharing on 10 to 20 percent of the units. (I-3B) In order to minimize risk through the various stages of t'he real estate cycle, development sites need to offer particular amenities or be able to tap the secondary housing market. For example, the majority of available lots in the Fort Bragg/Mendocino area are on timbered land west of HIghway 1. Sea Ranch offers golf courses, pools, tennis and other recreational facilities. Bodega Harbor is close to the San Francisco Bay Area. Timbered land can also be found in the Salt Point area of Sonoma County. The market in the south coast area of Mendocino County is small compared to the number of lots available, and requires considerable staying power, as illustrated by the Irish Beach project. This is not to say that there will be no demand. Someone will always buy property in California if financing is available. Selling off small lots from larger holdings is certainly an alternative method of supplementing income. The policy choices available to local government for re- sidential development along the coast vary from a standard, minimum lot size regulation, such as 40 acres, to no sub- divisions, except clustered, small lots limited to the for- i I1 - 31 DRAFT REPORT 11/20/80 ested upland areas accompanied b suitable dedications or deed restrictions on other The former choice would limit marketability and the price per acre would be low to the present owner. It would probably also remove more land from agricultural uses in the long run. It would also increase service costs to the County. The second alternative seems more consistent with the goals for the Coast. It accommodates the greatest number of people on the smallest acreage and has the least visual impact. If located near existing urban areas or near the various access points on Highway 1, cluster development would reduce County service costs aswellastriplengths, limit the number of through trips along Highway 1 and distribute traffic along the coast rather than being concentrated in certain heavily used areas. Development costs would be a factor that would influence the return to the property owner. Standard streets from Highway 1 to upland lots would probably not be economically viable, and would, in any case, be visually unacceptable. Utility systems would depend on the size and number of lots. Small lots would require central well and treatment facilities, so that a project would probably become economically'unfeasible above a minimum number of lots. The coast could likely accommodate I1 - 32 DRAFT REPORT 11-20-80 a number of these small 15-20 lot subdivisions if located correctly with proper consideration of views, agriculture, and County services. Lots of this type on the South Coast of Mendocino County are currently priced between $15,000 and $25,000, according to local listings. The low price and slow sales rates of this kind of project would also require some kind of phasing in providing the infrastructure such as the roads and utilities in accordance with the number of lots sold -- so that the property owner would not incur a negative cash flow. The dangers of such a program are that the County may have a difficult time 'limiting such subdivisions if some are per- mitted, and could incur serious public service problems, as well as creating conflicts with existing agricultural and timber operat'ions, even though the individual projects were well planned. The Mendocino Local Coastal Program report, "Existing and Potential Development" (R-6), mentions the retirement home segment of the second home market. It reports a growing number of persons 65 and older who are retiring to less expensive areas in order to stretch their capital and fixed incomes. The choice of location for this age group seems to be a quiet location within a short distance of Fort Bragg 11 - 33 DRAFT REPORT 11-20-80 where shopping and medical facilities are available. The developer of Irish Beach has this group in mind for his clustered houses, but without some additional local ser- vices, the Irish Beach buyers will probably continue to be middle-aged. Because of high costs of purchasing and maintaining second homes, there appears to be a trend towards visitors using overnight accommodations. The distance to major employment centers, and the lack of urban amenities tend to support this trend. b. Overnight Accommodations The coast of Northern California is a popular recreation area. Weekend and vacation trips are common. Visitors are drawn by the coastal landscape, des- tination resorts, fishing and diving, and other recreational opportunities. Overnight accommodations along the Mendocino coast presently include hotels, motels, and public and private campgrounds. The current inventory of these accommodations is shown in Table IS-6. It should be noted that occupancy rates are annual averages. Substantial variation exists between week- end and week day occupancy rates. An annual cycle also exists I1 - 34 DRAFT REPORT 11-20-80 which shows delayed demand during winter months. Future demand for overnight accommodations may be projected by using projected peak month average daily traffic counts. A relationship exists between the currently available over- night accommodations and visitors. This ratio can be applied to projected visitor growth to yield demand for new ac- commodations. Table 11-7 shows the demand for new overnight accommodations by 1985. Table 11-7 shows that if traffic continues to grow at the historical trend rate, and if visitors' current use patterns continue, an additional 17,130 overnight stops could be expected along Hendocino's south coast by 1985. This number could be accommodated in existing hotels, if they occurred during non-peak periods. Since this is unlikely, and since many of the accommodations (hotels and motels) are sub- standard, the additional overnight stays will probably re- quire new facilities. If all the stays were at hotels and motels, with a year-round occupancy of 50 percent;about 90 new rooms could be justified. In campgrounds with average annual occupancy of 35 percent, about 130 spaces could be justified. The choice of points where traffic is measured can change the I1 - 35 I' k Coastal Subarea MENDOCIN0 COUNTY Table 11-6 INVENTORY OF OVERNIGHT ACCOMMODATIONS, 1979 MENDOCIN0 AND SONOMA COUNTY COAST Campsites Hotels and Motels Pu bl ic Private Total Total Occupancy Occupancy Occupancy Number of Overnight pant i ty - Rate Quantity Rate Quanti ty - Rate Acconunoda t ions Stays North Coast 12 60% 0 " 300 15% Fort Bragg 569 60% 143 47% 441 30% Mendoc i no South Coast SONOMA COUNTY 2 27 50% 104 51% 122 46% 169 40% 47 24% 295 3 2% North Coast 19 1 65% 49 79% 97 34% South Coast 77 65% 305 4 1% 0 " Source: McDonald 6 Associates, based upon survey of existing facilities. (R-11B) 312 31 , 600 337 71,000 382 1 63,000 DRAFT REPORT 11-2 0-8 0 results of this analysis. For instance, just north of the Westport traffic trend line used for the north coast section are located two very large open campgrounds which have few faiilities. It seems likely that most travelers are going through Westport specifically to reach these overflow accom- modations, which would therefore be the source of additional traffic flow through Westport. It should be noted khat the highest overnight stay factor compared to peak month tourist ADT is in northern Sonoma County. One might reason that northern Sonoma County is the farthest point that many people intend to travel to spend the weekend. Those visitors that stay in more northerly lo- cations are less destination oriented, probably driving the coast road, and therefore stopping either when they find an appealing spot or at the appropriate hour. The number of overnight stays by the type of accommodation -- hotel, motel, private and public camps -- varies greatly from area to area. Generally, more overnight camp stays are in more rural areas, and more hotel stays are in more urban locations.- - However, the greatest absolute number of stays for both hotels and motels and public and private campgrounds is in Fort Bragg, the most developed area, which also carries the highest level of visitor traffic. Private and public I1 - 37 DRAFT REPORT 11-20-80 Table I1 - 7 PROJECTED DEMAND FOR OVERNIGHT ACCOMMODATIONS, 1985 Aver age Projected Monthly Total Visitor Annual Annual Demand (Visitor) Stays Overnight In ADT (Overnight ADT Overnight Trips Per Increase 1985 Coastal Subarea Component) (Annual) Stay 1978-1979 Stays) North Coast 31,600 16 12% 24 , 090 Fort Bragg Mendocino South Coast 1 r 400 6,000 2,250 1 400 195,000 11 7% 78 500 80 000 10 3% 12,740 62,000 8 5% 17,130 SONOMA COUNTY North Coast 1,050 71,000 5 5% 19,620 South coast 2,250 63 000 13 4% 13,650 Source: California Department of Trdnsportation (R-LB) and McDonald & Associates I1 - 38 ,. .. ~ .. ,~. . .. ." . I . . . "_ "_ " ." ". . . .- " . " - DRAFT REPORT 11-20-80 campgrounds seem largely interchangeable, except that public camps are running consistently higher occupancy levels re- cently -- nearly 50% above private campgrounds -- probably because of the difference in price. I Hotels and Motels. There are some relatively new hotel and motel developments along thecoast. Proprietors of converted farmhouses and bed and breakfast places seem pleased with their winter weekend and summer trade. This development has been most prevalent in the Mendocino portion of the coast, which seems suitable for this kind of development. It has a kind of Camel ambiance, with craggy coast, trees, and nearby Mendocino Village. These small inns are often not econ- omically self-sufficient and supplement the owner's other income. One of the prerequisites for a small inn is the existance of an attractive structure in pleasant surround- ings that can be converted at reasonable cost. -. Other hotels along the Mendocino coast and in northern Sonoma County function as full resorts, offering recreation, lodg- ing, and complete dining facilities. Along the south coast of Mendocino County there are several scattered American plan hotels: two in Elk, Whale Watch (four condos) in Anchor Bay: St. Off's south of Anchor Bay: and the I1 - 39 /- , -.. DRAFT REPORT 11-20-80 Old Milano in Gualala. The best maintained and most pro- fessional appears to be the Harbor House in Elk. It offers immediate access to the beach, a very pleasant structure, rooms with sun decks and fireplaces, and the American plan. Except for being very close to the water, the views are no more extraordinary than in many locations on the coast. A major factor is the existence of a lovely structure which was converted into an appealing overnight facility. There are no guest ranches anywhere along the south coast of Mendocino County. Highland Ranch in Philo accommodates up to 30 people and is generally half full on winter weekends and about 90 percent full for three months during the summer. Rates are about $30 per day per adult, with discounts for children. Winter 'rates are lower. The ranch offers cabins,----- - riding, two ponds, a tennis court, and all meals. z Campgrounds. There are no campgrounds between Manchester Beach and Albion. Most campgrounds have a fairly low occu- pancy of around'30 percent, except the few that cater specif- ically to fishermen, such as those in Albion and Anchor Bay. Most private campgrounds, with the exceptionofthose serving fishermen, claim they suffered during 1979 from the gas crunch. Rates in private campgrounds with trailer utility hook-ups are $7 to $8 per night. I1 - 40 DRAFT REPORT 11-20-80 Public campgrounds experienced no reduction of patrons dur- ing 1979. All of the Mendocino parks except Manchester had increased numbers of campers during 1978-79 as compared to 1977-78. Total figures for the calendar year 1979 were a bit behind 1978-79, however. The Russian Gulch, Van Dame and MacKerriccher Parks had turn aways during calendar 1979 of about 14,000 vehicles. It is likely that this overflow was largely accommodated farther north, at Westport. Day vis- itors were also up significantly at these three campgrounds during 1979, for both the fiscal and calendar year. Manchester Beach Park in Mendocino County and the coastal parks operated by Sonoma County experienced a significant decline in attendance in 1979, in both the day visitor and camper categories. However, the state parks in Sonoma County turned away vehicles. The reduction of visitors at the county operated parks may be attributed to overcrowding during past seasons and higher utilization of other, less crowded areas. The reduction of visitors to Manchester Beach, on the other hand, appears -to be rather a function of the reduction in traffic levels along the south coast of Mendocino County that occurred in 1979. To summarize, at present the south coast of Mendocino County is one of the least traveled areas, so that additional private I1 - 41 DRAFT REPORT 11-20-80 campin iwithout fishing or some other unique attraction would probably not be viable. However, some additional demand for bl overnight accommodations is likely. A public campground, with its stronger public recognition, would probably take some of the overflow from the Mendocino and Fort Bragg areas, if it were located between Navarro River and Eik. Farther south, between Elk and Sea Ranch, an additional public campground would probably not be practical. A guest ranch, on the other hand, with sufficient acreagae and attractive existing structures, which offered a number of recreational opportunities and complete food service, couid be expected to achieve adequate occupancy levels. A guest ranch with such attractions could locate in a relatively isolated place such as the pilot study ranch. c. Eatinq and Drinkinq Presently, eating and drinking places along the coast are located in urban areas, in small com- munities, or inassociation withdestination resortsor other ._ -. . - -. lodging. Table 11-8 shows a brief analysis of demand for restaurant space based on eating and drinking sales .. in . California adjusted for personal income and population in the four sectors of the Mendocino Coast. At $100 annual sales per t square foot .CR-9B), the permanent population would support. 3 nearly 26,000 square feet of space in and around Fort Bragg.. 11 - 42 I' 0 Table 11-8 DEMAND FOR EATING AND DRINKING PLACES :I I 'i i ! Average visi tor Current Current Monthly AD" Eating and Floorspace Demand Floorspace Demand Total Component Expenditures Per Square Foot Population Demand visitor Drinking At $100 Sales From Permanent Floorspace Coastal Subarea MENDOCIN0 COUNTY Nor th Coast 1,400 $ 420,000 Mendoc i no 2,250 675,000 South Coast 1,400 420,000 Source: McDonald & Associates. (R-1B) 4,200 6,750 4,200 2,300 9,200 10,250 6,500 15,950 14,450 . . ___ ". .. "._I "- . _II_ ~. "_ ". "_ ..... "" . -_ 4 DRAFT REPORT 11-20-80 Sales in the City of Fort Bragg, which contains more than half the restaurant square footage on the Mendocino Cost, totalled about $3,200,000 during a recent four quarter period. (R-7B) , (R-1OB) , (R-1B) . Assuming $5,000,000 total visitor associated annual sales for the Fort Bragg area, tourist expenditures would average about $300 per peak month visitor. ,e.- \- : Present demand indicates that any restaurant space added on the Mendocino coast should probably be located in the area of Mendocino, rather than further south. Demand north of Fort Bragg is probably exaggerated, because about 400 of visitor peak month ADT in that area appears to be overflow from Fort Bragg. This adjustment would reduce supportable square footage on the north coast to about 7,500 square feet. If some of the camping overflow in that area were diverted south of the Navarro River toward Elk, additional space would probably be justified there. Also, increased traffic into Gualala from Sea Ranch should generate demand for additional space in Gualala, which is already seeing some effect from permanent and part-time residents of Sea Ranch. There are 'three commercial buildings under construction in the com- munity that appear to be intended for retail or office .us.e.. Assuming a five percent increase in visitor peak month ADT over the next five years, the south coast of Mendocino County 11 - 44 .. . ~. /- t I DRAFT REPORT 11-20-80 could support ly an additional 1500 square feet of Space, probably in larger communities or in association with lodg- ing. Q A restaurant is a very difficult business to operate only for supplemental income in any location. It requires long hours, administrative skill, marketing, and an attractive setting. It also requires visitor traffic. The south coast of Mendo- cino County presently has about as much restaurant space as the vicinity of the town of Mendocino, and about the same permanent population spread over a much longer coastline. The south coast also has far less visitor traffic than Mendocino. The only restaurant space that could possibly be recommended anywhere along the south coast in the near future would be in association with new lodging or, to a lesser extent, new camping spaces. d. Visitor Oriented Retail Visitor oriented retail is an important source of employment and tax base in the communities along the MendQcino coast. A number of factors limit the potential for -new visitor oriented retail, especially beyond the bound- aries of the established communities. These factors include: -. The relatively low number of hotel and motel stays; - Low traffic volumes: -- . z I I1 - 45 . . . . .- . " \ \. DRAFT REPORT 11-20-80 Size and disposable income of the permanent population; Destination of visitors and purpose of visits (which may not include large retail expenditures). If visitor oriented retail succeeds anywhere on the coast, it is likely to be in the communities of Mendocino and Fort Bragg, and in Gualala, which serves Sea Ranch. These are the locations where the size of the population, the income level, and/or the number of visitors could justify additional tourist retail space, Variations on general visitor oriented retail whose poten- tial may not be so limited include cheese factories, redwood burl and carving sales, native pldnt nurseries, environ- mental demonstrations, fish farms, or horse breeding and riding stables. The following paragraphs discuss these uses along the coast, The only cheese factory in the three county area that does substantial retail business is located just outside of No- vato, on Point Reyes Road. It offers picnicking and sale -of - - other foods in a deli atmosphere, as well as the lead product. . The retail store and the factory are located to serve the population of Marin County as well as visitors traveling-to the coast. The factory also markets its cheese throughout " " . DRAFT REPORT 11-20-80 California. The fact that the pilot study site is a dairy suggests this type of use. However, the very large capital / investment -- and the factors limiting general retail sales discussed above -- favor a site within an existing community. An outlet for redwood burls would only seem appropriate for an outlying location if redwood products were available from an adjacent lumbering operation. There are 140 acres of nurseries in Fort Bragg. (R-2B) Mendocino has one nursery on fifteen acres. A number of the Fort Bragg nurseries are located along Highway 1 or Highway 20 and are signed to appeal to visitors. They specialize in rhododendrons or fuschias, which do well in the cool moist climate along the coast. One nursery owner indicated that 75 percent of local nursery business was from visitors. The nurseries intend to increase the visitor part of sales by improving signing and methods of showing prize plants. The Mendocino Coast Botanical Gardens, with 47 acres, is the largest example of this use as a tourist attraction. The gardens had 16,000 visitors during 1979, of which 95 percent were tourists; (They also hold a concert deries which attracted -4,500 people in 1979, of which 35 percent were tourists. 1 11 - 47 i DRAFT REPORT 11-20-80 Growth of the nursery market would undoubtedly be captured by the existing operators who have made the necessary capital investments and are located in well known, highly traveled areas. There are two facilities in Fort Bragg which can be called environmental demonstrations. One is the Georgia Pacific seedling nursery, which has a small museum and offers guided tours during the summer. (I-11B) The guest book logged a total of 2700 groups that came to the museum and 1500 groups which took the tours from April 1979 to March 1980. There is no charge. The other environmental demonstration is the Jug Handle Creek Environmental Staircase Preserve. It is oper- ated by a private non-prof it corporation and use of the preserve is free. There. is a trout farm at Fort Bragg wh.ich supplies fingerlings to local stock lakes and lab fish for environmental testing. (I-9B) They once had public fishing from their twelve acres of ponds and also supplied fresh and frozen trout for re-st- aurants. . The stocking and lab fish business proved suf- ficient to drop both restaurant supply and public fishing. Their main reason for dropping these activities was not lack .. o.f demand but rather the amount. of management required. - Public fishing required taking care of children, baiting i K" 5 I1 - 48 DRAFT REPORT 11-20-80 lines, and dealing with the demand for large fish. The owners felt they couldn't charge more than a dollar per fish, since the public considers fishing an inexpensive form of re- creation, regardless of the price of fish in the market. Supplying restaurants meant picking fish for uniform size and sometimes cleaning or filleting them. The owners mentioned that the Bodega Bay Trout Farm had closed last year because of declining use. Presently, the only horse breeding or riding stables along the coast are associated with the Sea Ranch development. The potential for new stables appears limited to large devel- opments like Sea Ranch or to other large destination resorts that provide this facility as a part of visitor trade. The most practical visitor oriented retail use along the coast and beyond the existing community boundaries may be a des- tination resort which combines several of the market attrac- tions analyzed. For example, a guest ranch could be developed which features horseback riding, trout fishing, nature tours or environmental demonstrations, as well as providing food and lodging. The best site for such a development would be . a location where the various resources required for the . * various uses could be developed or enhanced. I1 - 49 DRAFT REPORT 11/20/80 4. Aqricultural Uses In addition to the non-agriculture supple- mental uses, the Pilot Study's potential for continued agri- cultural uses was also evaluated. The physical characteris- tics of the Pilot Study, previously described, are very suitable for the existing dairy/beef operation. The future of dairy operations depends largely upon how well remote dairies, such as the Pilot Study, compete with closer in or larger dairy operations in Sonoma County, or the San Joaquin Valley. The following paragraphs describe the milk production indus- try in Mendocino County, and the potential of local milk processing. a. History of Milk Production in Mendocino County At the turn of the century, dairying was a principal agricultural land use in Mendocino County. Dairy products exported by boat to San Francisco were an important source of income for family-owned dairies. Fluid milk was. sold locally to the timber, fishing, and farming communi-ti-es, which were the centers of the coastal economy. During the twenties and thirties, there were hundreds of dairies in " .Mendocin0 County, typically composed of 20 or 30 cows -each-.- .~ . I1 - 50 DRAFT REPORT 11-20-80 Today there are only four dairies in the county, and 95% of the milk produced is hauled out of the County for processing. Three of the four remaining dairies in this county are traditional, family operations, located in the Point Arena Area, which have expanded, modernized, mechanized, and func- tion with the use of hired labor. They are: Owner/Operator Location Size (Milking Cows) Galletti Dairy South of Elk 150 . Biaggi Dairy Manchester 200 Stornetta Dairy Point Arena 250 The fourth dairy, Ridgewood Ranch, is located on the old Howard thoroughbred racing farm (between Ukiah and Willits, just off U.S. 1011, acquired in 1962 by the Church of the GoldenRule. Thisoperationconsists of 38 cows, and includes bottling and distribution of raw milk. It is not included in county or state figures on dairy production. Table 11-9 shows milk production in Mendocino County over a 20-year period. A major decline in dairy production is shown between 1960 and 1970. This decline was due, primarily, to closing of numerous small dairies, and relocation of larger operations to other production areas. During the 1970's, production rose " I1 - 51 DRAFT REPORT 11-20-80 Table 11-9 Milk Production Trends - Mendocino County In CWT 1961 1971 197 2 1973 1974 1975 1976 1977 1978 Source: Agricultural Report, Class A 788,000 114 000 113,000 96 000 115,000 135 I 000 145 , 000 104 , 000 108, ooo County of Class B 115 I 000 17 17 9 13 6 18 * I I I I ? 18,200 Mendoc ino 300 600 300 700 900 500 I1 - 52 " . f- DRAFT REPORT 11/20/80 slightly and, during the past two years, declined. Until 1978, Class A milk from the Pilot Study was processed by a small local processor in Fort Bragg. They went out of business, and the Pilot Study dairy joined the other two dairies in shipping their raw milk to the Petaluma Coopera- tive in Sonoma County. Cheesemaking was carried on extensively in coastal dairying areas from the time of early settlement until 1954. Jack and cheddar were the principal types. Until the longshoremen's strike of 1935, and the opening of the Golden Gate Bridge a year later, transportation to San Francisco was mainly by boat. Since then, trucks have hecome the dominant form of transportation. In Point Arena, cheese was made at the south edge of town by Western Dairies until 1948, and there was a larger plant at Manchester purchased by the Petaluma Co-op in 1954, which subsequently closed. There has been no local commercial cheesemaking since that time. b. Government Regulation A major factor influencing dairies in Mendocino County, as well as the rest of the United States is government regulation. Following the Depression Era's milk f I1 - 53 DWT REPORT 11-20-80 The amount of milk allowed to be sold to wholesalers is adjusted according to demand. Prices are set to cover the cost of production plus a reasonable profit. In California, the price of milk is regulated at the retail level under the Gonzales Milk Control Act of 1969. Milk within the state is sold to processors according to a price formula which is constantly updated. Each producer holds a contract for providing a certain amount of milk. Seventy percent of the milk is Class I, fluid market milk; 20% is Class I1 for processed products, such as cream, cottage I cheese, yogurt, etc; and 10% for Class IV, used for butter and cheese. The greatest return is from Class I, because of its higher price. As the milk demand increases with population growth, 20% of new demand is allocated to new producers. Aspiring dairymen are required to have established a milk producing history, which they do by producing Class IV milk. Over a period of time, a dairy is able to build a Class I quota. An operator may sell his quota and continue to produce milk and sell it as Class I1 or IV. Nationally, the federal government also supportsthe price of milk by buying the surplus. In California, the effect of the federal purchases is to underwrite the price of grade B milk. The federal government classifies milk by its production I1 - 54 DRAFT REPORT 11-20-80 standards and quality. Grade A milk may be used for any purpose. Grade B may only be used for processing. In the Redwood marketing area, one out of 14 gallons of milk was purchased by the federal government in January 1980. The surplus milk is processed into butter and powdered milk, which, in turn, is disposed of through concessionary foreign sales (P.L. 480). Because of the strong government assist- ance, the price differential between Class A and Class B milk has narrowed. In fact; last year the volume of Class B milk increased for the first time in 15 years. Because of the large amount of regulation and price support, the dairy industry is acknowledged as a quasi-public utility. State and federal lobbying is very important for the indus- try. The result has been that dairy farmers receive an average 52% of the final consumers' dollar, compared to an average of 37% for other agricultural commodities. c. Market Structure for Milk Mendocino County is within the North Coastal Production District with Del Norte and Humboldt Counties, but is in the Redwood marketing area, comprised of Mendocino, Lake; Solano, Napa, Sonoma, and Marin Counties. The Redwood marketing area has traditionally been the San Francisco Bay Area milkshed. As the freeway system between I1 - 55 . ". . DRAFT REPORT 11-20-80 the Central Valley and the Bay Area developed, the Central Valley has captured Bay Area markets at the expense of the Redwood area. However, because of some more favorable cost-price relationships, coastal dairies have continued to compete. The Redwood Marketing Area accounts for three tenths of one percent of California's Class A milk pro- duction. The major local outlet in the Redwood area is the California Cooperative Creamery, followed by Safeway and Lucky Stores. Statewide production milk has risen 6% in 1979, while per capita consumption increased 1.3%. This is rapidly leading to a surplus situation. In the short term this surplus can be offset by increased government purchases and subsidies. However, in the long term, it is generally agreed that the current favorable price will be reduced and the milk surplus will taper off to more nearly approximate consumer demand. Until a few years ago, some locally produced milk was pro- cessed in.Fort Bragg for local consumption. Management problems forced the closing of the processing facility. Presently,mostmilk consumed in Mendocino County is imported from the Bay Area. d. Market Structure for Cheese . " DRAFT REPORT 11-20-80 There is a two-tiered cheese market op- erating in the United States. The first one consists of large volume, popular cheese, which are nearly universally con- sumed, and handled as standardized commodities. These in- clude cheddar, colby, jack, swiss, muenster, cream, blue, mozzarella and Teleme. The smaller volume, imported or foreign style domestic, and specialty cheeses, represents the second tier of the cheese market -- specialty and gourmet cheeses. Only 5% of cheese consumed in the United States is imported, of which most are specialty varieties. These are such cheeses as Gouda, Edam, Brie, Camembert, Harvarti, etc. Both popular and specialty cheeses are increasing in per capita use. American cheeses increased an average 1.5% per year between 1950 and 1970; Italian types, 3%; Swiss, 2%; Blue, 2%; and Edam and Gouda, 2%. Part of the reason cheese consumption is rising is the result of substitutionof alower priced protein source as Americans are forced to economize. --~ -.-"..--Mass produced cheese shares the market alternatives to meat products: fish, beans, lentels, tomato paste, pasta, and those ingredients of low-cost casseroles of which American.s ---"are eating more. On the contrary, Americans are also changing their diet -to include more fine wines and cheeses, such as Brie and Gouda, and Port Salut, which are associated with entertainment. The Bay Area's demand for cheese has led this - .- f: L.. I1 - 57 A DRAFT REPORT 11-20-80 national pattern. In milk-producing states, such as Oregon, Idaho, and Minne- sota, dairies or dairy cooperatives have succeeded in cheesemaking ventures, producing specialty cheese. This alternative is a possible strategy for the south coast of Mendocino County. Locally produced cheese could be marketed locally and ex- ported as in the past. There is every reason to be optimistic about single commodity food outlets. On-farm sales are an important visitor attraction in Sonoma County. Studies in direct farm cheese sales in Minnesota (R-31) indicate that travelers will pay a premium for locally produced products. In the Minnesota case, over a quarter of cheese production is sold on the farm. Cheese export from the coastal area has been the dominant market of cheese produced in the past, and could become reestablished with proper marketing, preferably with a specialtyproduct, such as Rouge etNoir Brie, produced in Mar in County.. -~ .. . ." -e. Market Opportunities From a marketing standpoint, two oppor- tunities exist for dairies in Mendocino County. First, t production - of specialty cheese for the visitor and export I1 - 58 DRAFT REPORT 12/12/80 Table 11-10 Milk Marketing Cycle for Mendocino County Initiating dairy - Gross return to producer Haul to Petaluma California Cooperative Creamery Standardize for butterfat 61 solids Haul to Sonoma Crystal-Stornetta Plant Pasteurized and bottled Haul to Santa Rosa Crystal-Stornetta Warehouse Broken into truckloads Haul to Fort Bragg Bolton's Dairy Warehoused & broken into truckloads Haul to Point Arena Re tail Store Displayed and sold Cost (Cents) Per 1/2 Gallon Cumulative Item Cost Cost 54 . 16 2.1 1.13 57.4 1.22 10.99 69.6 1.0 9.2 79.8 2.5 11.79 94.1 2.21 Source: Richard Strong & Associates f 35.7 1.32 I1 - 59 market and second, the processing of milk for local con- sumption. Local processing is the historic response to transportation proble&. Cheesemaking can substantially increase the economic return to a remotedairy. This strategy has been accomplished in other remote areas. For example, Minnesota and the south coast of Oregon have successfully launched cheese processing ventures. Cooperatives in these areas produce cheese from locally produced milk. The cheese is then marketed nationwide. In Mendocino County there would also be the opportunity to market specialty cheese to visitors. Because of high visitor volume on Highway 1, the coastal dairies have a unique opportunity for on-farm sales. 3 If local dairies along Mendocino's coast cooperatively pro- cessed milk for local consumption, the additional hauling cost, which is presumably absorbed by the dairyman, could be converted to income. This can be demonstrated by examining the costs associated with the current milk marketing cycle shown in Table 11-10. - I1 - 60 ~. DRAFT REPORT 11-20-80 The cost of hauling represents nearly 7% of the retail cost and more is taken in handling than is the case where milk is consumed locally. At issue is the need for an intensification of efforts by local agriculture to compensate for a long-term trend in which the industry has been increasingly centralized. Large central processing plants and distribution centers create a system whose transportation burden falls most heavily on pr'oducers (and consumers) at the outer periphery of the marketing area. f, Competitive Advantages/Disadvantaqes of Mendocino Dairies Coastal dairies have some important advantages: Temperature is lower due to summer fog which increases milk production, The average is 600 versus 850 for the area around Sonoma/Santa Rose, - -. Isolation from population centers and other dairies reduces problems from disease. I1 - 61 DRAFT REPORT 11-20-80 The critical green feed period in the spring is extended near the coast, further reducing feed costs below the average for the area. Coastal dairies were formed at a time of reduced land costs, have greater pasture resources for incidental income, raising replacements, and producing hay silage and green chop. Coastal dairies often have access to fertile terraces, stream bottoms, and irrigation water. Labor costs are approximately 17% below those of the interior because of the general absence of unions. Isolation is the major problem. Everything costs more to haul to the coast and to ship out. Services are hard to come by and more expensive due to the distance. . During the tourist season congestion increases trans- portation problems. I1 - 62 DRAFT REPORT 11-20-80 The attractive coastal environment simulates demand for non-agricultural land uses including second home devel- opment and visitor serving uses. Farm ownership splits over several generations have resulted in management problems. This, and the lack of interest among the younger generation, threatens dairies on the Coast of Mendocino. The same conditions that led to the oepration of cheese manufacturing in Point Arena and Manchester in the late 19th century still pertain. With a doubling, or tripling of transportation costs in the next decade, conditions will trend back to times when local food production was more important. Local cheesemaking has all the local advantages of local milk production and processing plus: Higher fat content of locally produced milk would pro- duce excellent cheese. More secure market via cheese, versus dependence on a -larger,.remote marketing program dependent upon govern- ment programs. Potential labor availability for manufacturing and I1 - 63 i sales. DRAFT REPORT 11/20/80 Means of avoiding high'cost of transportation for milk. Improved local economy. Disadvantages of cheese production, if it proves feasible, are few, but at least initially include a weakening of the current milk marketing relationships. A small plant on the Pilot Study, which utilized fifty percent of the dairy's production would have little impact. If the plant was enlarged or !the other dairies began cheese production with their Class I milk, the unit cost of transporting the remain- ing milk would increase. Also, the contractual relationship with the cooperative could be weakened. 5. Farm Unit Analysis The farm unit analysis begins with the defin- ition of an actual farm unit. The farm unit analysis is dependent upon the specific characteristics of a given farm. Generalized farm cost/income data must be fitted to the actual capacities and characteristics of an actual farm, and characteristics ofanowner/operator. The farm unit analysis utilizes the Pilot Study as this farm unit. Three "financial . "- I1 - 64 DRAFT REPORT 11/20/80 prototype" individuals are compared as owners of the ranch. The purpose of the financial prototypes is to reveal a range of financial performance, based upon the financial status Of an owner. The farm unit analysis consists of three main steps: Compilation of farm unit operational cost data; Compilation of capital investments required for the farm unit including land, machinery, equipment and livestock: Projection of farm unit cash flow. Although management varia.tions may yield different gross operating margins, it is assumed that each owner prototype would achieve the same performance. However, the capital investments analysis and subsequent cash flow analysis are subject to the specific financial characteristics of each owner prototype. The Pilot Study area is a good case study because the ranch is typical of many ranches along the Mendocino Coast. The - ranch could be operated for production of dairy products, beef or sheep. Curr.ently, it is used as a combined dairy-beef I1 - 65 .. DRAFT REPORT 11/20/80 opera.tion. Similar to many coastal ranches, the Pilot Study currently enjoys an existing supplemental use, timber. Tim- ber is especially advantageous to beef operations where variations in beef.prices lead to a cycle of profitable and unprofitable years. Timber can be sold during the un- profitable beef years. The Pilot Study is an integrated farm unit operation. Unlike dairies in more close-in areas, such as Sonoma County or the San Joaquin Valley, the Pilot Study tends to be more self- -contained. For example, while the Sonoma dairies import most of their forage, the Pilot Study is able to produce most of its forage on-farm. Also, large dairies in San Joaquin Valley typically purchase replacement heifers, while the Pilot Study raises its own. These advantages are due to the availability of good land and the mild coastal climate. However, these advantages are offset by several disadvant- ages, such as high transportation costs and lack of close-by support services. a. Description of the Farm Unit The farm unit analysis is based upon the existing Pilot Study. Presently, the ranch is a "mixed use" operation which includes the following components: 11 - 66 DRAFT REPORT 11/20/80 COMPONENT QUANTITY 1, Pasture Irrigated 150 acres Non-Irrigated 150 acres Rangeland (partially timber) 1000 acres Cultivated crops . Oatflatch Silage 130 acres Livestock Dairy . Beef Cattle . Timber 150 milking cows 100 steers 50 heifers 800,000 board feet average annual harvest from approximately 1000 acres mixed Douglas fir / and redwood. The integration of these components on the Pilot Study permits numerous economics that would be lacking from single component operations. However, the integration of various farm operations requires a working knowledge of each com- ponent and ‘a continual high level of management. The resource base of the Pilot Study area is best utilized under this integrated framework. Other agricultural opera- tions are possible. The ranch could operate as a cattle . . " .. ." . "" ." "" . .. _" . ..... -" " . . . - DRAFT REPORT 11/20/80 ranch or raise sheep. Although the terrace soilslack aprime soil classification, row crops have been grown in the south coast area and could be grown again. At the present time, however, the best return on the investment in the Pilot Study area can be realized by an operation similar to the existing operation. This is because milk is currently a profitable commodity. The current price/cost relationship for milk is favorable. . There are possibilities for even further integration at the Pilot Study; if the milk, which is currently exported in its raw form, was processed on site for local or visitor con- sumption. This possibility is considered as a supplemental use in the following mixed use program discussion. b. Owner Prototypes The owner prototypes for the Pilot Study include the existing operator, a young rancher seeking an agricultural investment, and a wealthy investor seeking a good land investment with tax advantages. For purposes of comparison,.. each operator is assumed to operate identical farm units, the same acreage, same number of livestock, similar machinery and equipment and, in general, achieve similar operational costs. Each of the owner prototypes is purely hypothetical. While the actual current owner serves 7 DRAFT REPORT 11/20/80 as a basis of the existing owner prototype, financial assump- tions do not reflect the actual finances of the Pilot Study. The purpose of the owner prototypes is simply to illustrate the impact of a range of owner types on the economics of the Pilot Study area. The differences between the owner prototypes are expressed in the mechanics of the farm unit analysis. Assumptions are made concerning each prototype owner's investments, cost of own- ership, tax advantages, etc.. In general, the existing owner has a large financial advantage in that his cost basis is low, relative to the cost required to "buy in" at the present time. A wealthy investor can withstand low economic returns which may accompany a new investment in I agriculture because of various tax advantages and the fact that the agricultural operation is not the sole source of income. The most demanding owner prototype is the farmer, without major cap- ital reserves, seeking an agricultural investment. This person must finance the investment commercially. With the present high cost of borrowing, the capital loan debt service can cut deeply into operational profits. c. Farm Unit Costs and Income An estimate of farm unit costs and income for the Pilot Study is shown on Table 11-11. It is recognized t DRAFT REPORT 11/20/80 that actual costs and income will vary considerably from year to year to year. The assumptions made concerning these values are representative of current farm operations but are not intended to reflect the existing operation. The purpose of the cost and income summary is to reveal the potential economics of the Pilot Study under a variety of ownership prototypes, and to assess the impact of supplemental uses. The cost and income summary includes only farm commodity income and direct operational costs. Other costs, such as debt service, taxes, insurance, etc., are included in the subsequent steps of the analysis. The gross operating margin of the Ranch from dairy and cattle operations is shown to be $119,595. This margin is considered constant, regardless of owner prototype.. The timber opreation, which is on a sustained yield basis, permits the harvest of 800,000 board feet of timber annually. This timber is sold to local mills as stumpage. The assumed unit price is $300 per thousand board feet. This results in a total income of $240,000. It is assumed that approximately 25% of this income must be returned to the land in the form of management, road maintenance, erosion control, clearing, and reforestation. The gross operating margin for the timber operation is therefore $180,000. I1 - 70 - .. ~ ~. "- .. - ." . - ". DRAFT REPORT Figure 11-11 12/12/80 Economic Analysis of Farm Unit, Form 1 Operational Cost and Revenue Summary Description of the Operating Unit: Crop/Livestock: DairY/Beef Size : 150 Cows I GROSS PRODUCTION INCOME Milk @ 13,000 lbs./COw Annually Calves, Steer @ 475 lbs. Calves, Heifer @ 425 lbs. e Cull COWS @ 950 lbs. 0 Cull Bulls @ 1,500 lbs. 1. TOTAL PRODUCTION INCOME PRODUCTION COSTS Feed ( Import ) - Alfalfa Hay Grain Concentrate - Feed (Forage Produced On-Farm) Pasture (Partially Irrigated, Silage Average AUM = 6) - Pre-Harvest - Harvest - Labor (Milker &I Full-Time Man) General Expenses Vererinarian h Medicine Artificial Insemination Dairy Supplies Utilities Milk Hauling Tests, Dues, etc. Machinery L Equipment Operation (Not including silage production) 2. !l'OTAL OPERATIONAL COSTS 3. GROSS OPERATION MARGIN ani t m. CWT. m. CWT. m. TON TON ACRE ACRE ACRE MAN/- cow COW COW COW CWT MILK COW DOLLAFG Price or Cost/Uni t $ i2.76 90.00 80.00 50.00 55.00 _____~ $120.00 150.00 50.00 85.00 55.00 15,000.00 10.00 13.00 18.00 25.00 .65 16.00 - Quantity 19,500 100 20 30 2 ~ 300 450 300 130 13 0 *. 150 150 15 0 150 19,500 150 - + " " " , 'c- Value or Cost $248,820 42,750 6,800 14,250 1,650 $314,270 $ 36,000 67,500 15,000 11,050 7,150 30,000 1,500 1,950 2,700 12,675 2,400 3,750 3,000 $194,675 $119 , 595 I: I1 - 71 DRAFT REPORT 11/20/80 d.. Investment Costs "" Investment costs for the land, machin- ery, equipment and livestock necessary to operate the Pilot Study vary directly with the owner prototypes. The existing operator has relativelylowinvestmentcosts because the land is assumed to be owned free and clear of debt. Machinery, equipmentand livestock are typically purchased when needed, as they wear down and require replacement, The existing operator might buy some new machinery or equipment each year, but would never be required to buy a full complement in any year as a new investor might. The new investor faces a major capital investment. It is estimated that the purchase price in 1980 of the land, machinery, equipment, and livestock for the Pilot Study would equal $2,925,700, The new owner prototypes repre'sent two extremes of the possible spectrum. The first must finance a large portion of the capital invest- ment. The second, who has access to substantial capital is able to purchase the required investments with cash. The investment cost summaries for the three owner prototypes are shown on Table 11-12. It is assumed that each owner would I1 - 72 Flqure 11-12 Cconomlc Analysls of a Farm Unit, Form 2 Investment Cost Summary " Fort Hew investor, Galletti Ranch lConventlons1 ?lnar)&lg) Investment 1. e 3. Forest 2. Arable 4. Other 5. Total a. Tractor 75HI 1. Machinery 0. Plckup 1/2 1 9. Tractor 45HI 2. Front End 1. Plckup 4 x Loader 13. 20. Auger Wagon Pump Irrigation Dlsc 12 It. Float Sprayer Plow 118 Graln Drill HDY 4-16 tqulpent lrrlgatlon shop Tools Harvent Mcl spr lng Toot1 "__ Total Amua I Btralghl Line - 115 150 515 1,200 200 60 456 120 133 113 66 567 261 5,000 240 6,661 11,249 on- 6 Replace. rent Reserve " 601 490 691 1,105 101 50 478 193 117 59 100 491 234 4,130 251 5,860 "- 15,025 2,000,000 ____ *o,ooo " a lnteres Rate 121 Ter YI.. - 30 B lei PKlnClW! " !9,661 - " Y 11 1 Interest 240,000 " 0.000 13 5 lnteresl 235,241 _" __ " 7.7oa I4 YCi 'rlncl& ". 22.981 *lgure 11-12, contlnued ~onmlc Analysle of a Farm unlt, Form 2 Investment Cost S-ary For: New Investor, Galletti Ranch [Convcntlonal Flnanclng) r- lnvcstment t 26. Hllklnq Bar 2s. Egulpment 21. Feed Barn 29. MIlklng 21. Other Bldgs 30. Hausea 31. rencea 12. Corrals, 33. Bllage Cqulp. Getea cqlllpellt 4. E: 7. E 1. Llvcetock 9. Mtlk Covs 0. Bulla 1. 3 2. 1. 5. 6. 1 Quantll unl t Invc 2 coat (1) (1) (1) 200, 000 (1) (1) f 1) 12,500 12,500 120,000 126,000 6,000 , 92SI 700 (1) Included In purchase prlce o€ ranch. r Useful L1 te 5 Annual Stralght Line 5,000 625 5,625 L2.171 MI 6 men t Replace Reserve I, 380 8,904 524 L3.929 1 hunt Borrowed 1.750 a8 ,200 296.950 n Interen Rate 15 15 -" 0 Ye - Pr In- 1,297 13.081 57.32R Y " 11 1 Interes 1,313 3,230 w b' 13 5 Interes 310 3,432 .. " t .lgure 11-12. mntlnued Cconalc Analysln at a rarm Unit, ror. 2 Xnventment Cost Sumary Cot: New Investor. Gallettl Ranch L~ll c-~ Invenhcnt n 6 Replace mnt Renerve 15,025 8,904 E- - Eves il Percen Ellglb 100 LOO I on ._ - " "" Xnve 2 cost 500,000 287,200 12.500 126.060 ,925,700 ecvlce ___. 8 lntcrca Rate 1 Quantity, Unl t 2100 ncren All All All 4 Omeful Llfe 5 Annual Stralght Llne 17,249 5,625 i2,(7( 7 Munt Borrowed Term Yrs - 0 Ye Prlnclpa " 12 PClnclpa Yf 14 YC Prlnclpc "" - Land nilchincry Cqulpmnt See Detalla on nev Investor worksheets. . Flgure It-12, continued acOmnlc Analyela of a Farm Unit, Form 2 Investrnt Cost Sulrsry rot: Cxlstlng Operatlon, Land Fully Omad Investment Llvestock Rll All All Inve - 1 Unit cost Quantity/ 2 2100 Acres 500,000 200,000 zoo ,000 900,000 I Uacful Llte Annual Btralght Llne 10,000 3.000 13.000 ?EL"- 6 wn t Replace- Reserve ~ 15,025 1.900 "- 7 hunt br rowed 1 Year I Prlnclpal Interesl 11 Y . DRAFT REPORT 11-20-80 have a similar complement of machinery, equipment, and live- stock. It is also assumed thzt much of the equipment required for the Ranch, such as barns, fences, houses, etc., would be included in the purchase price. e. Farm Unit Cash Flow Pro forma An accurate estimate of farm unit econ- omics requires that the income and costs are projected over time and that the tax implications of the farm unit are revealed. Table 11-13 shows a per year cash flow proforma for each of the owner prototypes. Dollar values are expressed in 1980 constant dollars. The primary conclusion drawn from this analysis is what might be expected. The existing operator,.with substantial equity in the ranch, is in a very comfortable posit'ion. The new investors do not do so well. The investor with a cash purchase can realize a return to investment comparable with other secure investments. The new inves.tor, who must borrow substantial portions of the cash required, shows a substantial loss for at least the first few years of operation. It is important to note once again that these numbers are hypothetical, and in actuality would tend to vary somewhat from year to year because of changing commodity prices, production decisions or new capital in- vestments. Figure 11-13 Economic Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return Summary Existing Operator (Land Fully Owned) YEARS Year 1 Year 5 Cash Tax Cash Tax Cash Tax . CAPITAL INVESTMENT Flow Flow Flow Flow Flow Flow 1. Land 180,000 180,000 180,000~180,000 180,000 180,000 8. Timber Operation 119,595 119,595 119,595 119,595 119,595 119,595 7. Dairy/Beef Operations GROSS OPERATING MARGINS 6. Total Investment 1,026,000 5. 126 , 000 4. 200 , 000 3. Equipnent 200 I 000 2. Machinery 500,000 10. 11. Total Gross Operating Margins 299,595 299 , 595 299,595 299 I 595 299 , 595 299,595 FIXED AND CASH COSTS - " - 9. ,= - I 12. Lana Rent 13. Property Tax 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan - - - - - - I 2,9201 2,920 2,9201 2,920 2,920 2,920 27. ECONOMIC =TURNS I 237,015 228,090 228,0901 237,015 228,0901 237,015 30. Adjusted Annual Residual Margin 24,000 24,000 24,000 24,000 24,0001 24,000 29. Return to Operator Is Labor 261,015 252,090 261,015 252,090 252,090 261,015 28. Net Economic Return - Figure II-Ur continued Economic Analysis of a Farm Unitr Form 3 Cash Flow and Economic Return Sumaty I P;. I I = I I I I IU . 11. Total Gross Ooeratinq EIarqins FIXED AND CASH COSTS 299,595 299.595 299.595 299,595 299,595 299,595 12. Land Rent 13. Property Tax 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan 20. Legal and Accounting I 29. Return to Operator's Labor I 30. Annual Residual Economic Margin I (739,532) I157,399)1 16,9191 73.900 /130364!140.279 1 Figure 11-13, continued Economic Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return Summary For : New Investor, All Cash Purchase YEARS Year 1 I Year I Year Cash I Tax I Cash I Tax I Cash I Tax 2. mcninery - - I 9:. I I I I I I I I 11. Total Gross Operating Margins 299,595 299,595 299,5951299,595 299,5951299,595 FIXED AND CASH COSTS 12. Land Rent 13. Property Tax 14. Insurance 15. Depreciation 16.. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan 20. Legal and Accounting " I "* I I - * 2,920 2,920 1,000 1,000 1,000 2,920 2,920 2,920 2,920 1,000 1,000 1,000 - I I I I I 1 LL. 23. Tctal Fixed and Cash Costs OTHER RETURNS 251,144 250,151 251,144 250,151 251,144 (2,675,611) 24. Return From Farm Operations 48,451 49,506 48,451 49,506 48,451 2,975,206 - - - - - - 25. Sale of Assets r .\ I 26. " I I c I I I I Lf. I . ECONOMIC ReTuRNS I 28. Net Economic Return 29. Return to Operator's Labor 251,144 250,151 251,144 251,144 250,151 . (2,675,611) 277.144 227,144 h6.151 226.151 227.144 (2.699.6111 30. Annual Residual Economic Margin 24,000 24,0001 24,000 24,000 24,000 24,000 DRAFT REPORT 11/20/80 (1) The Existing Owner Barring major changes in dairy ec- onomics, the prototypical existing owner should continue to enjoy a good return on invested capital. The $1,026,000 investment produces annually a residual economic margin of $228,090 or 22% of the total investment. The key problem with any existing owner, especially one who is approaching re- tirement age, is transfer of the property to the new gene- ration. If no heirs willing to continue the operation exist, the ranch will have to be sold. Problems associated with purchasing a dairy are explored in the next two owner proto- types. (2) New Investor, Conventional Financ- ing Investing in a dairy is extremely costly. The new investor, who must rely on conventional financing, must secure loans for over $2,000,000 for the ranch. Nearly $700,000 cash would be needed for down payments in today's tight money market. Such an investment might be difficult or impossible. For such a deal to work, the existing owner might have to carry the mortgage or otherwise participate in innovative financing for the new owner. Over time the financial status would improve. The first few years of operation would result in cash losses in addition to I1 - 81 DRAFT REPORT 11/20/80 required investments. By the fifth year of operation, the ranch should show amodest return, as thevalue of commodities sold (milk, beef, timber) increase in proportion to the base investment over time. (3). New Investor, All Cash Purchase with Additional Income to Protect The owner prototype who had the means to make an all cash purchase would face a similar investment as the conventionally financed new investor. However, the reduced cash flow requirements due to lack of debt service and the investment credits available to protect other income would make the dairy a profitable venture beyond the first year's initial investment. The annual residual economic margin is shown to equal 9.2%. 6. Mixed Use Programs The mixed use programs are two hypothetical combinations of the existing operation of the Pilot Study with supplemental uses that have been shown to be possible. The intention of the mixed use programs is to show how these supplemental uses may effect farm unit operation and econ- omics. The market analysis indicated two markets for supple- mental uses along the south coast of Mendocino County, visitor serving uses and cheese production. I1 - 82 DRAFT REPORT 11/20/80 These findings led to the development of the two mixed use programs, a guest ranch and an on-site cheese production plant. It must be noted that the Pilot Study at present is a highly integrated, mixed use operation which combines dairy-beef cattle and timber operations. The mixed use programs, while developed for the Pilot Study, could be developed elsewhere along the south coast of Mendocino if similar site character- istics were available. a. On-Farm Cheese Production The addition of on-farm cheese produc- tion to the Pilot Study would add another level of integration to the existing operation. This would be consistent with the strategyof attempting tocompete more effectivelywith dairy products imported to the country. The cheese production facility proposed is relatively small, processing approxi- mately fifty percent of the present milk produced annually by the dairy. The remaining production would continue being sold as it is at present to the Petaluma Cooperative. 3 The actual cheese processing plant would be small, requiring a single, new building on the ranch adjacent to the existing I1 - 83 DRAFT REPORT 11-20-80 . milking barn. Total investment in the building and required cheesemaking equipment would be approximately $58,000. La- bor requirements would equal approximately 3,000 hours per year based upon a five-day per week production schedule. The estimated costs and income associated with on-farm cheese production are shown on Table 11-14. Table 11-14 shows a favorable economic return from the cheese plant. The return is shown to vary depending upon how the initial capital investment is financed. The impact of the on-farmcheese production plant on the dairy would include greater management responBibility, additional capital and operating expenses, and marketing costs. The economic return from the cheese production would add to the Ranch's other income and make the Ranch more profitable. A key advantage to the dairy is reduced dependence upon fresh milk sales to the Petaluma Cooperative. Income coult! be substantially increased if on-farm sales of the cheese could be promoted. A small retail outlet could be developed on the Ranch to facilitate sales to passing visitors. Cheese 2roduction produces whey as a by-product, which is a valuable food for livestock. It is commonly used to feed pigs. The potential for commercial pig production is yet another ad- vantage of the cheese plant. Table IX-14 Estimated Costs and Income for an On Dairy Cheese Plant Handling 3000 lbs. Milk Dailx (January 1980 Dollars) DRAFT REPORT 11-20-80 1. Annual Operatins Expenses Item Cost Milk at Estimated Production Cost ($9 Per Starter Rennet Fuel and Electricity Maintenance Miscellaneous Packaging Hired Labor CWT) $ 98,550 3,395 694 2,606 1,283 5 20 5,475 20,000 TOTAL $ 132,523 2. Annual Operating Income Cheese at 10% Yield, 109,500 lbs. @ $1.50 lb. =$ 164,250 3. Gross Operating Margin = $ 31,727 4. Investment Costs Capital Investments - Building, 1400 Square Feet $ 28,000 - Miscellaneous Equipment 30,000 TOTAL 58,000 Fixed Costs - Depreciation - Taxes - Insurance TOTAL 5. Net Operating Margin With Cash Investment With Mortgaged Investment ($58,000 @ 12%, 30 Years) 1,500 580 500 2,580 = 29,147 = - 7,159 $ 21,988 I1 - 85 .. . . .. - DRAFT REPORT 11/20/80 The Pilot St .udy t qas shown in the faib unit analysis to be an economically sound operation for either the existing owner or a new investor with substantial cash. For these owner prototypes, the cheese plant would simply improve economic returns. The owner prototype must rely upon conventional financing to purchase the Ranch and required equipment, was shown not feasible at least for the first few years of operation. The cheese plant would not improve the cash flow of this owner prototype to the point where the total operation would break even during this initial crucial period of the new business. b. Guest Ranch The market analysis indicated that a guest ranch could. be successful along the south coast of Mendocino County. The Pilot Study site has the features that would be conducive to such a guest ranch, including coastal access, stream access, existence of anoperating farm, scenic quality, and land that may be physically suitable for devel- opment. Capital costs would be high. The risk, given limited projected growth in recreation demand along Mendocino's south coast, would also be high. The most secure investment would be in a rustic but diverse guest ranch resort, which served several visitor markets, including fishermen, divers, overnight travelers, vacationing families and other groups. I1 - 86 DRAFT REPORT 11-20-80 The proposed guest ranch would be composed of the following facilities: A central building containing the dining room, camp store, and administrative office. A small Summer dam on Elk Creek for water supply, fishing and swimming. Sites for 30 recreational vehicles or tents, and neces- sary facilities. 20 cabin lodgings. Necessary access roads and trails. Activities at the ranch would include fishing in both the stream and ocean, riding, ranch tours, and swimming. The guest ranch would require much more labor and management than the cheese plant, in addition to the much greater capital investment. Because the guest ranch is so much a departure from the ranch operation, it would be likely that it would be leased to another operator/manager. Food service co~ld. ais0 be leased out as a concession. The estimated costs and income for the guest ranch are shown on Table 11-15. The guest ranch 4 DRAFT REPORT 11-20-80 is assuned to operate 9 months of the year. Total investment, required is estimated to be approximately $500,000. Occu- pancy rates shown represent an average of weekend and weekday occupancy. These rates were derived from comparable re- creation facilities in Mendocino County. If the occupancy rates are higher, profits would increase proportionately. The annual debt service would become less a factor over time if inflation continues- The guest ranch would have a much different operational impact upon the existing operation than the cheese plant. The financial impact, at least initially, would be less positive. Operationally, the guest ranch would probably require more management and conflict to some degree, with both the dairy/beef cattle operation and the timber operation. The range presently used by cattle would be reduced slightly by the development. The timber operation would probably lose some timberland, depending upon the exact location of the resort. Also, cutting practices would have to be improved to reduce visual impact of logging in the areas surrounding the resort. The impact of the guest ranch on the owner prototypes is similar to the cheese plant, but the profit potential is probably lower. The existing owner and the new investor with DRAFT REPORT 11-20-80 Table 11-15 Estimated Costs and Income for a Guest Ranch (January 1980 Dollars) h ITEM COST 1. ANNUAL OPERATING EXPENSES Hired . Labor Utilities/Fuel Supplies/Repairs Advertising Legal and Accounting $ 53,500 5,000 2,500 1,000 3,000 2. ANNUAL INCOME (275 DAY SEASON) 20 Cabin Lodgings @ $3O/Day, 62% Occupancy f 102,180 30 RV Sites @ $8/Day, 62% Occupancy = 40,872 Dining Roam and STore Margin, 10% Gross Sales = 13,900 . TOTAL $ 156,952 3. GROSS OPERATING MARGIN - 91,952 4. INVESTMENT COSTS Capital Investments Dining Hall/Administration Building = $150,000 Cabins, 20 @ $8,000 Each 160,000 RV Pads, 30 @ $800 Each 24,000 Water and Septic Systems 40,000 Road Improvements 100,000 Smar Dam 25,000 TQTAL $ 499,000 Fixed Costs - Depreciation - Taxes - Insurance TOTAL 20,000 5,000 2,500 $ 32,500 5. NET OPERATING MARGIN With Cash Investment $ 59,452 With Mortgaged Investment - 49,400 80% of $499,000 @ 12%, 30 Years (First Year) ($ 10,052) I1 - 89 " ". . "_ "_ ~ ~ "_ . ." . - . " ." ". .. ,I DRAFT REPORT 12/12/80 substantial cash are shown to profit from the dairy/beef cattle and timber operation alone. The new investor who must rely upon conventional financing is not substantially aided by the addition of the guest ranch, although initial cash losses would be reduced. B. San Diego County -- Carlsbad The Carlsbad Pilot Study Area is not a single parcel, as in the case of the Mendocino-County Pilot Study area. It is an area, roughly 4,000 acres in size between Aqua Hedionda Lagoon and Batiquitos Lagoon in San Diego County as shown on Figure IV-16. The area contains several hundred narcels ranging from large agricultural parcels to small residential parcels and subdivisions. The area is nre- dominately within the City of Carlsbad, and is surrounded and interspersed with urban development. Because of past devel- opment nractices, agricultural lands are under e!*treme pres- sure for urban develonment. As such, this area nrovides a good test for innovative agriculture preservation tech- niques. The market analysis for the Carlsbad Area indicated that a reasonably high level of demand exists, within the market area within which the study area lies, for the full range or urban land uses, including residential, commercial and in- dustrial. The nroximity of the study area to both trans- I1 - 90 ". . DRAFT REPORT 11/20/80 portation (1-5, Paloma Airport Road, etc. ) and the ocean, as well as its remaining large amount of open land, in com- bination with a growing regional economy, supports this demand. In spite of conflicts with urban uses and high land values, agricultural production in the study area has continued. Agriculture is still the dominant land use and the area remains a major producing area in San Diego County. The area has a climatic condition which is ideal for pole tomatoes and certain flower crops'. A key premise of the supplemental use concept in this urban fringe area is that a coordinated planning effort, in co- operation with landowners and developers, can result in a compatible mix. of urban and agricultural uses and insure the long term preservation of key lands for agricultural use. A distinction must be drawn between the application of supple- mental uses in rural areas such as Mendocino County and urban fringe areas, such as South Carlsbad. In the rural areas, supplemental uses are essentially an economic development program, where the Coastal Conservancy or the local govern- merit support improvements to existing farm operations. In rural areas, land use regulation is viewed as the main .. - "_ . . . . - - -. " . . . . . - .. 4 " component of the agricultural preservation program. Supple- I1 - 91 . Figure 11-16 Regional Locator DRAFT REPORT 11-20-80 I1 - 92 . .” . ” Figure 11-17 Carlsbad Study Area and Case Study Sites I1 - 93 ~. ~ .. . 1" - DRAFT REPORT 12/12/80 mental uses are intended to mitigate hardship situations and hopefully improve local agricultural economics. a The situation is entirely different in a developed urban area. High land values and conflicts with urban uses and a general decay of the business infrastructure necessary for agriculture typically lead to a continual decline of agri- cultural operations. This Drocess occurs in many cases in spite of land use regulations which attempt to hold the agricultural use. In these urbanized areas, supplemental uses must be combined with innovative types of land use regulations such as density transfer or planned unit devel- opments. Under such an approach, the value of the agri- cultural land for urban uses is used to preserve a portion of the land for agricultural use. By providing an ongoing source of revenue or a one time cash payment, this approach may not always be appropriate. Also, there will be numerous problems to be solved regarding the inherent conflicts between agri- cultural and urban uses such as operational conflicts, spraying, dust, noise, crop damage, etc. The conditions for the appropriate application of supplemental uses to preserve agricultural land on the urban fringe occur when an agricul- tural resource exists, or when the agriculture is a component of the urban open space system or contributes to stable urban boundaries. I1 - 94 DRAFT REPORT 12/12/80 The supplemental use concept for the urbanized and urban fringe areas is essentially two-fold. For urbanized areas where roads and urban services are already available, and agricultural use is already adversely affected by adjacent urban development, a density transfer approach could be effective in preserving agricultural land in single owner- ships or in groups of cooperating ownerships. Density transfer in this case means the shift of division on a specific parcel or group of parcels. The test as to the type of density required in relation to the entire ownership would have to be negotiated on a case-by-case basis, but general guidelines can beestablished for agivenarea. Oneessential rule is that the owner's expectation about the total market value of the land -- with the development concentrated upon a portion, plus. the residual agricultural value -- must be high enough to induce the landowner to participate in the project. Another rule is that both the landowner and the potential developer must not be under the impression that land use controls are transitory. Also, development should be concentrated on the non-agricultural or otherwise non-viable portion of the parcel. Another key difference between the density transfer concept recommended for urban fringe areas, and the supplemental use concept, as applied in the more rural areas, is that there I1 - 95 . ." DRAFT REPORT 12/12/80 would not necessarily be an ongoing relationship between the new 'supplemental' use and the remaininq aqricultural use, which would generally be the case in rural areas. In fact, an existing landowner, who may wish to sell off land, could put a project together in concert with the local government, sell the supplemental use portion of the land to one buyer and the agricultural portion to another buyer. Land divisions will nearly always be involved. For urban fringe areas where the direct impacts of urban uses are absent or are not so severe as to make continued agri- culture impossible a different approach should be used. The LCP being prepared for the City of Carlsbad recommends an "Agricultural Subsidy Credit" Program, which in its affect is similar to a system of transferable development credits. In the Carlsbad case, incentives are created for developers in a "receiving" area to contribute to a fund which will be used to compensate owners of land in an "agricultural preser- vation" area. In this way a new measure of equity is created for owners, who, acting upon previous governmental action, bought 1and"'at prices reflecting a potential for urban development. The following sections describe the study area, provide a market analysis, a farm unit analysis, and a technical description of the mixed use proposals for the Carlsbad Study Area. 11 - 96 .. . ~" 1. Study Area Description a. Land Form, Habitat, and Resources The South Carlsbad Study Area encompass- es thegeomorphic unit which commonly runs parallel to the San Diego County coastline, consisting of beach, seacliff, and sea terraces. The natural landscape and habitats have been greatly modified by human actions, including urban devel- opment, transportation systems, and agriculture. The re- maining natural areas include the steep, coastal scrub/chapparal areas, and the salt marshes surrounding the lagoons, The littoral zone is primarily occupied by Carlsbad State Beach, developed for recreation and overnight camping. The grasslands occur upon fallow agricultural land, Coastal scrub/chapparal.occupies the steep slopes and the arroyos and in interspersed among the agricultural operations, which occupy the terraces and lower slopes. b. Environmental Constraints The land forms, habitats, and resources combine in nature to define environmental amenities and constraints. Natural factors create opportunities for, as I1 - 97 ... . - .. - "" . ". . "- ~ - . . . - . __ . .. .. . A DR4FT REPORT 11/20/80 well as constrain, human use. Natural factors create an opportunity when a resource can be extracted or utilized. Natural factors constrain development, either because of a need to protect or manage a resource or because they create hazardous conditions. Environmental constraints in the South Carlsbad Study Area include both resources and hazards. Major resources include the unique agricultural potential of much of the area, the biological resources surrounding the lagoons, and the state beach along the ocean which is a valuable recreation resource. No major environmental hazards exist within the study area, however, the area is subject to erosion problems. Sewer and water problems are mitigated by existing public utilities. The barrancas (steep, narrow canyons), in addition to having erosion problems, are subject to landslides and fire hazards. These environmental hazards can be mitigated by appropriate project siting, size, engineering design. c. Land Use Regulation The study area is subject to the land use regulations Of Sari Diego County, the City of Carlsbad, and the California Coastal Commission. The largest portion of the I1 - 98 DRAFT REPORT 11-20-80 study area is within the city limits of the City of Carlsbad. County of San Diego lands include a band along Batiquitos Lagoon, and two large "islands" in the center of the study area, surrounded by the City of Carlsbad. The portion of the study area under the jurisdiction of Carlsbad is primarily zoned for residential or commercial uses. The large parcels north of Palomar Airport Road are zoned for agriculture and include an agricultural preserve. Carlsbad's general plan is generally consistent with this zoning. The county lands are presently zoned for agricultural use with permitted densities ranging from one acre to ten acre minimum lot sizes. The San Diego Community Plan shows the county "islands" mostly in a low density residential cate- gory. The land along Batiquitos Lagoon remains in an agri- cultural classification. Over the past eight years,. the major influence on land use within the study area has been the State Coastal Commission. This regulatory effort has emphasized preservation of coast- al resources, including recreation, scenic quality, nattiral resources and agriculture. This state regulatory effort is in the process of being transferred back to the local agencies TT - 99 DRAFT REPORT 11-20-80 via adoption of Local Coastal Programs (LCP's) . These pians, mandated by the 1976 Coastal Act, are currently being com- pleted by the County of San Diego and for the City of Car lsbad. The Carlsbad LCP recommends a new method for preserving agricultural land. The method, called "Agriculture Subsidy Credits" is essentially a variation of transfer of devel- opment rights. In general, the LCP recommends that lands west of the r'reeway receive development crcdits from agricultural lands east of the freeway. 2. Market Assessment of Supplemental Uses The market assessment of the Carlsbad area was intended to identify the size and characteristics of the market agriculture and non-agriculture uses potentially suited for combination with agricultural operations. Be- cause of its location, the size of its market and the strength of demand, .it was clear from the start that the area was economically capable of supporting almost any type of urban use. As a result, the market assessment concentrates on evaluating supplemental land uses within the coastal legis- lation's guidelines for maintaining an agricultural economy in the area. The uses to be considered include: " t I1 - 100 - " - .. DRAFT REPORT ll-20-.80 a Visitor-Oriented Uses Hotei/motel - convention facilities Recreation and retail Marinas and boat launching facilities . Agriculturally Oriented Uses Produce market Flower markets and shows 0 Urban Uses Industrial Commercial Off ice Residential In analyzing these supplemental land uses, it is also im- portant to consider the variety of organizational struc- tures under which these land uses can be arranged - from those on small and scattered individual parcels, to major concentrations on the most marketable locations. Each approach will result in varying degrees of disruption to the area, both social and environmental, as well as signi- ficantly different levels of cost, revenue and taxation. The market assessment intends to identify and analyze all of these effects. The subject area is located between Palomar Airport Road to I1 - 101 DRAFT REPORT 11/20/80 the north and the Batiquitos Lagoon to the south, and is bounded by the Camino Real to the east and the Pacific Ocean on the west. (Figure 11-17) It is an area divided along its north-south axis by both Interstate 5 (I-5), and the tracks of the Santa Fe Railroad further to the west, and is bordered by Carlsbad Blvd. , running parallel to Carlsbad State Beach. The area east of 1-5 consists of low rolling hills, with the Birtcher Business Park at the far northeast corner, and a condominium project immediately to its south. Additional development has already been approved for the adjoining properties to the south, and will extend to the Spinnaker Hillsingle-family development in the southeast corner. The remaining open land lies primarily in two areas: . in the southern half of the property bordering 1-5, and a portion in the northwest section which maintains considerable agri- cultural activity. Another area of particular interest is the land along the Batiguitos Lagoon. Originally planned for a county or regional park, it has more recently been rezoned for agri- cultural cropland by the San Diequito Community Plan. The lagoon with its wooded perimeter is visually attractive, though, to the east lie portions of the La Costa development, I1 - 102 .. ". and, to the south, the Regional Coast Commission has approved two residential projects for the near future. A number of the study area's features detract from its value for residential, as well as, in some cases, commercial and off ice use. These include: 0 0 0 0 0 For the The tracts of the Santa Fe Railroad. Two existing mobile home parks. The industrial uses to the north, including a sewer treatment plant, and PG&E's visually obtrusive tower. The low elevation, which precludes a satisfying view of the ocean from all but a few locations. The lack of parking facilities available for users of the South Carlsbad State Beach. the purpose of this study, the market area will include Cities of Carlsbad, Oceanside, Vista and San Marcos. a. Hotel/Motel - Convention Facilities The demand for overnight accommodations in the four city area consists of tourism, business/commer- cia1 users, conventions and temporary housing for Camp Pen- dfeton assignees. For the Oceanside market, studies indicate I1 - 103 DRAFT REPORT 11-20-80 that 20% of the business is military, 20% business/commer- cial, with the remaining 60% representing tourists. Carls- bad, on the other hand, has a far heavier amount of tourist use. Of significance to the area is the La Costa resort hotel. Unlike the area's remaining facilities, which are not full-service and cater primarily to tourists, La Costa ' s visitors are about 30% convention-related, with the re- mainder consisting of long-term recreational users. In * addition, while the remaining facilities have an occupancy rate near SO%, La Costa's is quoted at 93%. With the exception of La Costa's enviable success, growth for the area's hotels and motels has been relatively moderate over the pakt 6 years. In fact, although growth in room nights was strong between 1975-1977, it fell to 3.1% in 197%, and experienced a significant decline in 1979 (Table 11-18). In analyzing the potential for developing additional hotel/motel accommodations in the area, a number of signi- ficant facts arise. First, as La Costa has proven, the northern San Diego area is well accepted as a destination resort, as well as a convention facility location. However, the San Diego Convention and Visitor's Bureau notes that, t . Table If - 18 Estimated Room Nights1 Carlsbad & Vicinity/1972-79 CARLSBAD OCEANSIDE VISTA 1972-73 56,000 102,000 8,000 1973-74 77,000 72,000 12,000 1974-75 76',000 78,000 15,000 1975-76 96,000 93,000 17,000 1976-77 129,000 102,000 17,000 1977-78 121,000 116,000 18,000 1978-79 116,000 108,000 17,000 SAN MARCOS 800 800 800 800 800 1,600 1,300 TOTAL 166,800 161,800 169,800 209,800 248,800 256,600 242 , 300 SAN % CHANGE DIEGO CO. - 3,004,000 (3.0) 3,498,000 4.9 3,767,000 23.6 4,218,000 18.6 4,795,000 3.1 5,165,000 (5.6) 5,289,000 Estimates based on growth in room tax collections and adjusted by the San Diego Consumer Price Index; with information from the City and County Treasurer ' s Off ice. I1 - 105 DRAFT REPORT 11-20-80 though business and touring groups accept the North Coast as a stopping point, it is seldom regarded as a destination area. In addition, the increasing cost and decreasing availability of gasoline has encouraged the formation of group tours organized around destination resorts. The area has the advantage of being situated on a major thoroughfare. There- fore, it seems clear that if the right incentives were provided -- hotels, restaurants, recreation, ocean access -- the area could recapture and more than likely expand its share of overnight visitors. At present, movement towards the development of additional overnight accommodations is limited, although Oceanside has included a major facility in its redevelopment plans. The Pea Soup Anderson Company has leased land at the corner of Palomar Airport Road and Interstate 5, and in spite of its excellent location, the project is unlikely to incorporate the range of visitor attractions best suited for the area's development. b. Recreation and Retail In the north county area, the most under- t developed potential lies in the recreation market, with the Carlsbad and South Carlsbad State Beaches being the principal attractions both for local residents and outside visitors. As present, the Carlsbad State Beach attracts nearly one I1 - 106 ." . . . ."". - . " "" . ."._ - " . - " - DRAFT REPORT 11-20-80 Table 11-19 Visitor Attendance South Carlsbad State Beach 1970-79 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979 Year Day Drive-In 41,420 42,385 N/A N/A 39,828 30 , 379 28 I 358 36 , 354 25 I 999 21,843 Walk-In 75,532 57,323 N/A N/A 107,752 147,450 179 I 205 551,501 556,080 513,122 Total 116,952 99,708 N/A N/A 147,580 177,829 207,563 587,855 582,079 534,965 Source: California Department of Parks and Monthly Totals. (R-48) Campinp 155,757 160 , 050 N/A N/A 169,175 337,827 199,006 181,858 182 I 150 203,606 Total Persons 272,709 259,758 311 I 804 287,350 316,755 515,656 406,569 769,713 764 I 229 738,571 Camping Turn-Aways N/A 15,313 25,016 20,098 14 I 476 20,055 10,408 Recreation, Visitor Attendance f I1 - 107 DRAFT REPORT 11-20-80 million visitors annually, while South Carlsbad, despite being reserved primarily for campers, attracts well over 700,000. (Table 11-19 presents the growth in visitor attendance over the past decade.) While these figures represent an already substantia: market, forecasts predict considerable additional growth in the demand for recreational faciiities for the area's beaches. The Caiifornia State Parks and Recreation's $MIS model, used by the Comprehensive Planning Agency, assumes an annual growth rate equal to the growth rate in local population plus a one percent growth in per capita participation. This, by itself, represents a 10% annual increase in demand, yet it is a figure considered low because is does not include outside visitor participation. The San Diego Regional Coastal Access Study indicated that over 40% of north coast beach patrons were from outside the north coast communities. Using these figures, in conjunction with historical records, conservation estimates would place demand levels at 2.5 million visitor days per year by 1985, with the reasonable possibility of seeing this level reach 3 million visitor days per year to the Carlsbad beaches. With the help of surveys made by the San Dieso Convention and .." ~ "" ". """ . ." ." . _"." . _-__- .. ". ". - _- DRAFT REPORT 11/20/80 Table 11 - 20 VISITOR EXPENDITURES, SAN DIEGO COUNTY (1979) Food, Liquor & Miscellaneous Retail Entertainment Hote l/Mote Resident ' s Guests Campers Day Visitors $ 17.39 6.59 6.59 8.70 $ 1.86 1.47 .73 2.70 ~~~ ~ ~ ~ Source : PACE Research 3 I1 - 109 DRAFT REPORT '41-20-80 Visitors Bureau, one can go a step further and estimate the levels of visitor expenditures to be expected in the future (Table 11-20]. Because local residents are such a large component of the total beach users, $5.00 was determined to be the average daily expenditure. With this figure, visitors to the beach would be spending between $12.5 and $15 million annually by 1985. The South Carlsbad State Beach, were it to retain its share of the total visitor load, would be responsible for $5-6 million in total sales. Using a conversion fac.tor of $100 of sales per square foot area, presently common to retail facilities, beach visitors alone could support as much as 50,000-60,000 square feet of recreational/retail space by 1985. Unfortunately, besides the beaches, the area offers few other recreational attractions. Only the San Luis Rey Mission in Oceanside, and the Carlsbad Raceway have the potential to attract substantial numbers of visitors. However, Carlsbad has made considerable efforts to enhance and 2romote its downtown shopping facilities, and Oceanside, because it provides the only berthing location between San Diego and Dana Point, a distance of over 50 miles, has tho capability for expansion. I1 - 110 - .. . , - ,I DRAFT REP( 11-20-80 Clearly, however, the beaches are the area's principal re- creational asset, and the promotion of economic development will necessarily revolve around them. At present, however, there are a number of obstacles. ... to development of South Carlsbad State Beach to its full potential -- most important among them are the lack of parking and accessibility, as well as the beach's present use as a primarily camping facility. The San Diego Regional Coastal Access Study regards the parking problem at the South Carlsbad State Beach as severe. There are only 226 off-street parking spaces with roughly 960 more along Highway 101. The result is that the vast majority of day users must walk onto the beach from the parking along the highway (Table 11-19]. Further complicating the sit- uation is the existence of only two access points -- one at the north end, the other at the southerly tip. The incon- venience €rom both the lack of parking and accessibility inevitably curtails the area's development. Added to this is . the thick shrubbery which hides the entire length of beach, which restricts the visual connection between beach-goers and potential sites for hotel, retail or entertainment ac- AS one of only two major camping locations along the North I1 " 111 .~ LJKICFT El? 11-20-80 i L coast, the So th Carlsbad State Beach's campins facilities are important to the area's development (see figures in Table 11-19), On t.he one hand, it is apparent from data collected by the California Department of PaX.ks and Recreation that the numbers of potential campers in the area could easily support an additional thirty camping spaces, thereby increasing visitor flow. On the other hand, it is equally clear that were the area not primarily a camping area, the number of day visitors would increase substantially. ti c. Marina and Boat Launching Facilities The Oceanside Marina is the only berthing facility between San Diego and Dana Point. Its 800 berths are presently filled to capacity with a waiting list of over 400 people, and a minimum one and a half year waft. Clearly, additional berthing facilities would be well received along the North Coast. With this in mind, the Harbor Office is presectly negotiating with Camp Pendleton for the acquisition of land on which to construct an addit'ional 400 to 500 berths. However, nego- tiations are complex, and actual construction will require numerous agancy npprovalr, aB wall 4s Financing. For these reasons, it is unlikely that capacity will increase in the I very near future. TI - DRAFT REPORT 11-20-80 On a lesser scale, boat launching facilities are also in demand. Snug Harbor is a small, privately owned launching facility on Aqua Hedionda Lagoon, which is extremely busy during good weather. The property was recently sold. Aside from their boat handling capacity, these facilities provide the focus for other economic activity -- supplies, repairs, parking, storage, restaurants, and even some retail and hotgl units. d. Agriculturally Oriented Outlets -- Flower Markets and Shows The principal agricultural products in Carlsbad are cut flowers and bulbs, while the adjoining San Diequito area has extensive greenhouse facilities for flower and house plant cultivation. There seems, however, to have been little effort to either organize a flower market cater- ing to visitors, or locally market the avocados and citrus produce from Escondido. It would seem that efforts to organize markets, shows or fairs, would prove not only economically viable, but also promotionally valuable to the area. The flower and garden markst could provide the focus for a number of other visitor-serving facilities. e. Produce Market I1 - 113 " DRAFT REPORT 11-20-80 I! At present there are two natural food centers operating in the market area, providing specialty foods, bakery goods, fresh produce, meats, deli items and ethnic foods. These centers provide a marketing focus serving both local residents and visitors. The Hadley Orchard outlet, at the corner of Palomar Airport Road and 1-5, is a large facility offering a wide selection of edible goods in a comfortable, interesting environment. A similar center has begun operating in San Marcos under individual shop ownership. Here, again, an attractivemarketing concept such as direct marketing of local flowers and produce couid serve as the focus for other visitor-serving facilities. f. Commercial Uses Curr,ently, the total number of house- holds within the study area is too small to sustain a shopping center or' any size. Centers planned for surrounding commun- ities will serve them sufficiently. However, if planned residential units are added to the existing total, the 2,500 units and 5,000 to 5,000 people, will be, by themselves, nearly sufficient to support a neighborhood center of about . ten acres. (Table 11-21] If the area were to be developed further into residential use, the demand for retail space would become even more pro- XI - 114 DRAFT REPORT 11-20-80 Table I1 - 21 Residential Units within Study Area Exis tin9 Alta Mita Townhomes Spinnaker Subdivision Mobile Home Park Planned Covington Subdivision Standard Pacific Pacesetter Homes Shell Oil To tal Population Total 700 300 300 300 400 300 20 0 2,500 units x 2.2 people/houshold = 5,500 . 11 - 115 DRAFT REPORT 11/20/80 nounced. Given the potential of developing the remaining 1,700 acres within the coastal zone, and assuming a density of three to five units per acre, would result in an additional 11,000 to 19,000 residential units. This translates into retail demand for a community center with an additional 200,000 to 300,000 square feet of space. However, though this center would be large enough to attract shoppers from surrounding communities, it would also exper- ience strong competition from nearby regional centers. The Plaza Camino Real Regional Shopping Center recently expanded to include five major retailers, while a second center with three major stores is planned on Highway 78 near El Camino Real. g. Industrial Uses Construction for industrial use has averaged between 500,000 and 600,000 square feet a year for the four city market area over the past six years (Table 11-22). Most of the new development took place in San Marcos where land was readily and cheaply available, and where 678 acres still remain available. Oceanside also has large industrial areas near Palomar Airport and along Oceanside Boulevard. I1 - 116 DRAFT REPORT 11-20-80 Table I1 - 22 Estimated Industrial Construction (square feet) Carlsbad and Vicinity / 1974-1979 Car Is bad 1974 163,000 1975 154,000 1976 200,000 1977 56,000 1978 98,000 1979 SO, 000 San Oceanside Vista Marcos Total - 48,000 - 78,000 289,000 24,000 - 148,000 326,000 11,000 - 142,000 353,000 66,000 27,000 295,000 444,000 308,000 - 800,000 1,206,000 23,000 11,000 772,000 856,000 San Diego County 3,491,000 1,875,000 1,653,000 2,809,000 4,963,000 3,300,000 I1 - 117 .. ". .. . DRAFT REPORT 11/20/80 Altogether, the area has nearly 3,700 acres planned, or available, for industrial development. Table 11-23 presents a breakdown of the area’s land available for industrial use. Using a 25% coverage rate, the available 3,700 acres converts into 40 million square feet of industrial space. If con- struction took place at the presently estimated 800,000 square feet per year , the land would be absorbed over the next fifty years. The positive impact of industrial use is primarily on employ- ment. In fact, within the subject area, manufacturing employment accounts for nearly half of total employment, and has more than doubled between 1972 and 1978 -- on average, an annual growth rate of over 14%. (Table 11-24) 7 The area, in general, has considerable potential for in- dustrial use, primarily light industry and warehousing, with, perhaps, the best locations along Interstate 5. With the proper environmental protections, industrial use could prove beneficial in efforts to maintain and subsidize agri- cultural production, primarily because of the higher land values generated and the reduced potential for conflicts with agricultural operations. I1 - 118 Table 11-23 Available Industrial Land Carlsbad and Vicinity - May 1980 Name Carlsbad Palmar Airport Avenida Encinas Carlsbad Oak Koll Property Oceanside Oceanside Blvd. Oceanside Airport Vista Imed - San Marcos San Marcos Indus- Unnamed Unnamed trial Area TOTAL Location Palmar Airport Road Coastal Zone Northeast of El Camino Real & Palmar Road West of El Camino and north of Palomar Road Highway 5 to Vista Mission Avenue Sycamore, east of 78 San Marcos Blvd. 7 8 and Bingham Dr. Barham and Hill Dr. Size Stage (Acres) Under development 1,200 Under developnent 75 Planned 400 Planned 300 Under development 800 Under development 100 Planned Under development Planned Planned 100 600 18 60 - San Diego Regional Industrial Data Book (1977), by the Comprehensive Planning Organization. Updated by interviews with City Planning Departments. . . .. . - ”. ”” . - Table I1 - 24 Manufacturing Employment Carlsbad and Vicinity - 1972-78 DRAFT =PORT 11-20-80 San San Diego Car lsbad Oceans ide Vista Marcos Total County - 19 72 489 1975 1,301 1978 2,431 1,413 1,765 1,999 58 1,283 3 421 1,836 5 4 26 2,153 7 Source: Comprehensive Planning Organization 243 3 23 000 65,672 7f ,080 87,768 I1 - 119 DRAFT REPORT 11-20-80 Table 11 - 25 Estimated Office Space Construction Carlsbad and Vicinity 1974-79 (square feet) San San Diego Car lsbad Oceans ide - Vista Marcos - Tot a1 County 1974 71,000 20,000 6,000 7,000 105,000 1,532,000 1975 11,700 - 13,000 23,000 48,000 734,000 1976 30,000 - 9,000 21,000 60,000 1,045,000 1977 30,000 98,000 61,000 15,000 204,000 1,046,000 1978 134,000 13,000 87,000 31,000 266,000 879 , 000 1979 - 19,000 45,000 13,000 77,000 3,414,000 I1 - 120 DPAFT REPORT 11/20/80 h. Off ice Uses Over the past 6 years, the market area has constructed off ice space at an average of 127,000 square feet per year. Most of the expansion has been used to serve medical and dental facilities, as well as bank branches. (Table 11-25) However, the area's expansion in office construction, rep- resenting only 7% of the county total, compares very neg- atively with the area's 21% share of the county's industrial valuations, 21% of the population growth, and 11% of the employment growth. In addition, and further emphasizing the area's "soft" market for office space, is the fact that even this level of development is not being fully absorbed. Rents typically averaging $.80 to $.85 gross per square foot, including taxes, insurance, utilities and maintenance. The occupancy rate for new buildings is about 80.%, with very little pre- -leasing. The soft condition of the market seems to prevail as far south along Interstate 5 as Lomas Santa Fe Drive in the San Diequito I1 - 121 ." . .. - .- ... -. " - "I . . "- ". . 1 - DRAFT REPORT 11-20-80 section of the county. Below this intersection, however, market conditions are markedly different, with industrial land being rapidly converted into high quality and high price office use. In fact, there are roughly 155 acres of planned office expansion located between the highly developed San Diego market and the four city Carlsbad area -- 100 acres at * the intersection of Del Mar Heights and 1-5, 25 acres. at Carmel Valley Road and 1-5, and 30 acres at the northwest intersection of Santa Fe Drive and 1-5. Given existing community plan guideiines for the area, this converts into between two and three million square feet of office space -- an area that could be absorbed, at present estimated rates, within six to eight years. Because of the high demand, escalating costs and rapid absorption in this southern section, the Carlsbad area should begin to capture an increasing portion of the county's office construction. Aided also by its growing resident and employ- ment base, it is likely that by the mid-eighties the four city area will account for 12 to 15% of the county's office construction -- 175,000 to 200,000 square feet per year. * The likely locations for office development are the existing industrial areas, and the downtown sections of Carlsbad and Oceanside. While, at present, there are no locations within I1 - 122 I DRAFT REPORT 11-20-80 the area to compare with existing and planned office parks to the south, and while such a development would be infeasible over the next few years, an active program could certainly be possible mid-decade. j. Residential Uses Both the number of building permits issued for residential construction and the Comprehensive , Planning Office's estimntes for housing inventory indicate that the four city area has added an average of 3,500 homes annually over the past 6 years. This amounts to 15% of the county's permits and 18% of its change in inventory. However, despite these seemingly healthy figures, residen- tial construction has been significantly limited by the Encino Water Pollution Control Facility's April 1977 mora- torium on sewer permits -- a situation under which permits are available only when an allocation is available. Because the facility serves Carlsbad, San Marcos and Vista, but is not responsible for Oceanside, there is a dramatic difference between the construction patterns of Oceanside and the other three cities (Table 11-26). In 1977, the four cities issued an inordinately high total of 7,997 permits, of which Ocean- side accounted for 42%. By 1978, with the moratorium fully in effect, the number of permits fell to a more normal total I1 - 123 Table If - 26 Residential Building Permits Carlsbad and Vicinity / 1974-79 1974 1975 1976 1977 1978 1979 Total Oceans ide 2,O 36 691 1,038 3,331 1,707 1,472 10,275 Carlsbad 6 19 335 1,799 2,762 146 174 5,835 Vista 290 162 912 1,195 736 503 3,798 San LNarcos 149 198 553 709 368 101 2,078 San Diego County 16,124 14,705 29,410 36,493 28,054 19,038 143,824 I1 - I24 DRAF'T REPORT 11-20-80 of 2,957, and Oceanside now accounted for 58% of them. By 1979, its share was a full 65%. Even more illustrative of the problem is the situation in Czrlsbad. While in 1977, the city issued 2,762 permits, the average for 1978 and 1979 was a mere 160. At least in the short run, the moratorium imposed by the Encino Water Pollution Control Facility will continue to limit residential development in the three affected cities. The plant has recently been allowed 9,000 new residential sewer connections to be distributed in the following way. Czr 1 sbad 2,246 Vista 2,646 San Marcos 1,571 Other Districts 3,537 TOTAL 9,000 unit connections Unless these cities are able to purchase additional con- nections from other districts, rates of growth, presently estimated at between 4,000 and 4,800 units per year, would exhaust these unit connections within two years. However, new plant improvements to be completed by 1983 will allow for another 8,000 anits. It is expected that, beyond that point, long-run growth will be accommodated through marginal addi- I1 - 125 DRAFT REPORT 11-20-80 Table 11-27 Planned Residential Projects Carlsbad and Vicinity May 1980 Potential Stage Rousing Car lsbad La Costa (new sections of 2,500 acres) Covington Bros. (part of subject area) Standard Pacific (part of subject area) Pacesetter Bmes (part of subject area) Lake Colevena Carville Ranch Shell Oil Option (200 acres in subject area) Applications Sub-Total Oceanside Applications Southridge Trails Leisure Village Collins Development Co. Ivey Ranch Sub-Total Vista - Shadow Ridge by Doon South Melrose 422 San Marcos Approved Projects Grand Total Master Plan Coastal Cammis- sion Case Get sewer, then Coastal Com- mission Sewer & Coastal Commission Approval Have Regional COm- mission Approval Approved In-Process Pending Newly Filed Newly Filed Master Plan Approved Specific Plan Processing Waiting for sewer 10,669 300 400 300 3,500 450 210 1,300 600 17,729 - 10 776 1,467 1,084 3,670 3 907 20 854 4,000 4 000 700 47,283 - Source: Consultants Estimate, R-9, R-29, 1-31, 1-32, 1-33 and 1-34. I1 - 126 tions to the plant. DRAFT REPORT 11-20-80 As mentioned above, growth rates for residential construc- tion, as estimated by the Comprehensive Pianning Agency, amount to an average of 4,500 units per year through 1995. These projections, based primarily on expected levels of employment growth, compare with the number of developments either already plrtnned or with pending applications. The four city area presently sets these projections at 47,000 units, which, over the next ten years, would almost exactly cover the estimated demand. (Table 11-27) Projec'ting the proportion of the various types of residential construction is a difficult problem, since it involves the prediction of changing consumer preferences in both owner- ship and design characteristics. Nevertheless, historical data does provide the basis for an analysis of trends. Over the past 6 years, permits for single family units accounted for 65% of the four city total, with the remaining 35% in multi-family units. For the county, the breakdown was closer to SO/SO. Included in these totals were both town- houses and condominiums, but their actual share is difficult to assess. While Security Pacific indicated that condo- miniums accounted for between 2% and 4% of total construction for the four city area for over the past 6 years, Recorded Facts Magazine showed that residential sales of condominiums amounted to 19% of the total in 1979. Despite the disparity, the figures show a steadily rising demand for attached housing. In fact, planned projects for the area indicated that between 50% and 70% of new units are to be attached housing. Construction of apartments, on the other hand, continues to be constrained by low rents. Added to this is the fact that apartment demand is in many cases filled by the rental of condominiums. The North Coast Viilage project in Oceanside -- recently converted to condominiums -- showed sales of 70% to owner/investors. The investment in ownership typically involves short-term cash flow losses, which will be more than recaptured by the long-term appreciation in property value when the property is sold. 3 Agr icul tur a1 Uses Crops grown in the Carlsbad Study Area -^include tomatoes, field flowers, miscellaneous vegetables, and nur- sery products. Greenhouse floriculture is also present. Although the study area is subject to urban impacts, . " .- it remains a major producing region of San Diego County. I1 - 128 .. - "_ . .. - _" DRAFT REPORT 11-20-80 Agriculture in San Diego County has been the subject of extensive research over the last few years. The County commissioned a major study, an economic analysis of aqri- culture in San Dieqo County (R-20) in 1978. More recently, the County has completed a further analysis of coastai agriculture as a part of their LCP (R-23). A specific analysis of agriculture within the study area was completed as a part of the Carlsbad LCP. In addition to these public agency commissioned studies, several analyses have been prepared for specific parcels within the study area such as the Sea Bluff properties (R-21). The purpose of the supple- mental use study is not to repeat these prior effects. Data has been drawn from these works that was useful in completing the farm unit analyses, and other components of this study. The major conclusions of the various agricultural studies with regard to the study area are quite clear. First, it is difficult, in the long term, to expect agriculture to con- tinue on land which has a market value substantially above its value €or agricultural production. Second, in addition to land values often in excess of $25,000 per acre, the area's agriculture also suffers operational conflicts with the surrounding urban uses, and other problems such as poor accessibility and high water costs. DRAFT REPORT 11-20-80 Fresh market tomatoes are the principal crop. Of a total 3,300 acres of land under production in 1978, 2,600 acres were devoted to tomato production. Other crops include field flowers, strawberries, andvegetables such as snap beans, and squash (R-19). Tomatoes grown in the Carlsbad area comprise 47 persent of the County's tomato production and 8 percent of national consumption. Although there are production con- straints, such as sloping lands, soil limitations and expen- sive imported water, production is very high for tomatoes, averaging 30 tons per acre year, in comparison with 11 tons 0 per acre for the state as a whole (R-19). Many field flower varieties are also uniquely suited to growing conditions found in the area. The primary factor is the maritime climate which provides a continuously moderate, frost-free environ- ment. The advantages of the coastal agricultural production is both a function of the optimum plant-climate for certain crops, such as field flowers, strawberries, etc. , and an ability to produce crops at an advantageous time in the crops' annual market cycle as, for example, tomatoes. Winter tomatoes bring a very high premium, making coastal agricultural areas competititve with foreign (Mexican) markets. The competi- tive advantage of coastal agriculture can also be expressed in terms of energyconsumption. The mild, moist climate leads operators. Agriculture is viewed by many of the landowners as an interim use which reduces the cost of carrying the investment. Landowners, including farmers who have ex- perienced this cycle in other areas such as in Orange County, are simply waiting for eventual conversion to urban use. The cost of the land leases are very favorable, averaging around $200 per acre per year. This is a very low rent in comparison to other similarly productive agricultural regions. For example, in the Pajaro region of Santa Cruz County, land which " 3. DRAFT REPORT 11-20-80 to lower evapotranspiration rates, and, hence, lower water demand as compared with hot inland areas (this advantage, however, is more than offset by the high cost of irrigation water in the study area). Also, cooling and heating re- quirements for greenhouses are much lower in coastal areas. The continued availability of agricultural land is obviously the key to preserving agriculture in the study area in addition to long-term water supplies. From a market stand- point, the competitive advantage of agriculture within the study area will only improve as energy and foreign trade constraints become more dominate because of operating econ- omies and high production. The greatestprobiem is the value of land for other, non-agricultural uses. At present, most of the acreage under production is leased to agricultural TT - 171 produces similar income producing lettuce, cole crops or strawberries leases for over $500 per acre per year. The value of the crops produced in the study area could probably support somewhat higher rents and by extension, agricultural land values. However, this would reduce income to the growers. What is occurring presently is that landowners are subsidizing agricultural operations with relatively inex- pensive leases. Landowners are relying upon land value appreciation as a primary source of economic return. 4. Farm Unit Analysis The farm unit analysis for the Carlsbad Study Area differs from that of Mendocino County, because in the latter example, the basic agricultural activity was assumed to continue basically as is -- a dairy/beef cattle operation. The supplemental uses proposed would simply augment the operation directly or provide an add.itiona1 use which would have limited effect upon the actual operation's existing ranch (while providing a new source of income). The Carlsbad Study Area case studies, on the contrary, involve land divisions which allow a "supplemental" use on one parcel or' parcels and agricultural use on the other larger parcel or parcels. Another major difference relates to the manner in which existing agricdtural land is farmed. Existing oper- ators typically farm several units which may be in different I1 - 132 -. .. . . . . I ". 4 DRAFT REPORT 11-20-80 locations. The minimum economic size for a tomato farm unit was recently estimated to be 13 cares, based on the past five (5) years of price experience (R-1) . For purposes of this study, a larger combined unit size is utilized. This is because existing operators tend not to farm "minimum economic units", and a more representative unit was desired. For purposes of this analysis, the farm unit size under con- sideration contains 90 acres of cropland. This is a size which reflects a current average operating unit. The des- cription of this farm unit applies to all of the subsequent parcel case studies. Am important distinction must be drawn between the present farm unit analysis and other analyses, such as those con- tained in the more comprehensive "An Economic Analysis of Agriculture in San Dieqo County" (R-20). The present farm unit analysis is intended todemonstrate the actual economics of three hypothetical farm units, each representing a unique owner prototype. The farm unit analysis is essentially a cash flow pro forma analysis. Past efforts at preparing economic analyses of farm units typically are based on statistically derived information and are shown only for a single year (usually the first year). Although these economic analyses are often useful, they fail to demonstrate the broader implications of farm unit operations over time, including tax DRAFT REPORT 11-20-80 advantages, the impact of inflation, and appreciation of assets. They also fail to show the implications of farm unit economics on owner/operators with various economic circum- stances. a. Description of the Farm Unit For purposes of the Carlsbad Study Area case studies, the farm unit is a 90-acre unit composed of several non-contiguous parcels. The actual land leased or owned may be greater than the 90 acres which are in production and may include access roads, storage areas, non-arable land, such as barrancas or other, steeply sloping land. The principal crop of the farm is pole tomatoes. Supplemental crops are grown on land which is rotated out of tomato production every third year. In any given year , GO acres are in tomatoes, and the remaining 30 acres in a legume, squash or green manure crop (such as alfalfa or clover). The practice of rotating crops, while not done by all current operators, is considered a management practice which will promote long-term productivity of the land, since tomatoes deplete soil nutrients more rapidly than many other crops. b. Owner Prototypes 11 - 134 h DRFLFT REPORT 11-20-80 The owner prototypes for the Carlsbad farm unit anaiysis include an existinq owner, a new owner, and a leasehoider. The leaseholder is added to the "owner prototypes" because of the large proportion of iand which is farmed by leaseholders in the Carlsbad area. For purposes of comparison, each operator is assumed to operate identical farm units as described above: the same acreage, same crop2ing pattern, similar machinery and equipment and, in general, achieve similar operational costs. Each of the owner types is purely hypothetical in the sense that the financial assumptions regarding the existing owner prototype do not reflect the actual finances of any particular current owner or operator; they were derived arbitrarily. The purpose of the prototypes is simply to illustrate the impact of a ranch of possible owner types on the economics of a typical farm unit. The differences between the owner prototypes are expressed in the results of the farm unit analysis. Assumptions are made concerning each owr-er prototype's investments, costs of 5 ownership, tax advantages, etc. (see Tables 11-30). In general, the existing owner has a large financial advantage in that his cost basis is low, relative to the cost required to "buy in" at the present time. A new owner must face DRAFT REPORT 11-20-80 substantial investments and debt service, and may e Serience losses, especiiilly during the first few years of operation. The leaseholder, typically does not carry the total cost of the land but at the same time does not enjoy bene5its associated with ownership such as tax advantages, appre- ciation, etc. 4 c. Farm Unit Costs and Income Summary An estimate of the operational costs and income for the Carlsbad Farm Unit prototype is shown on Table 11-28, It is recognized that actual costs and income will vary considerably from year to year. The assumptions made concerning these variables are simply representative of current farm operations in the Carlsbad area. One key assumption relates to the cropping pzttern. The primary crop, pole tomatoes, are rather hard on soil fertility. Because of this, best management practices dictate that crops be rotated or part of the operation regularly lie fallow. It is assumed that two-thirds of the farm unit, or 60 acres, be the basis of production in any given year. The remaining land can either lie fallow or produce a supplemental crop such as beans. No economic return is assumed for this thirty-acre portion. Figures used are derived from current sources and represent . I1 - 136 . " - DRAFT REPORT 12/12/80 Figure 11-28 . Economic Analysis of Farm Unit, Form 1 Operational Cost and Income Summary .Description of the Operating Unit: Crop/Livestock: Tomatoes Size : 60 Acres I tern GROSS PRODUCTION RECEIPTS Fresh Market Tomatoes 1. TOTAL PRODUCTION RECEIPTS Production Cost Per Acre Pre-Harvest Set Stakes Plants Fertilizer Thin, Prune, Set & String Stake Twine & Gloves Pesticide Applications Pull Stakes - Labor Machinery - Labor Irrigation - Water - Labor Total Pre-Harvest Cost Harvest Cost, Pick and Haul Packing Selling Total Harvest Cost Total Production Cost Per Acre Total Production Cost Per Crate Gross Operating Margin Per Acre - Supervision - Fuel, Lube, Repair Unit 30 Lb. Crate 20 Lb. Crate Lbs . Plant Acre Hour Acre Acre Hour Hour Hour Acre Acre Foot Hour - Lbs . Crate Acre Price or Cost/Uni t 5.00 5.00 ~~~~ ~~ 1.35 .04 350.00 5.00 145.00 500.00 5.00 7.50 6.50 140.00 200.00 5.00 - .05 1.70 945.00 Quantity 560 2240 100 5000 1 129 1 1 30 6 17 1 1.75 40 - 61600 2800 1 2. -TOTAL OPERATIONAL COSTS, 60 ACRES 3. GROSS OPERATION MARGIN, 60 ACRES Value or Cost $ 2,800 $11,200 $14,000 $ 135 200 350 645 14 5 500 150 45 110 140 350 200 $ 2,970 3 , 080 4 , 760 945 $ 8,785 $11,755 $ 4.20 $ 2,245 $705,300 $134,700 I1 - 137 ! I I i i I I I I ! 'I I ! I - Tera YKS. - & 7 mun Deprcci 8 5 Useful Annual Llfe Stralgh " Line 11s 870 333 173 160 113 267 1,713 300 25 950 150 250 10.000 75 24.4e1 " 24,4e1 Investaent ~ 1 hunt Borroved Debt n 60t 60t 60t 608 601 608 608 608 608 608 608 608 608 608 60t 608 ?9,260 79,260 ~~~ ~. I Rate Interel red .14t I4t I4t 141 I4t 14t I48 148 141 I48 148 14t 148 14t 148 14t DW.t. 6 arcent Ilglble "_ 9 nsur- nce lOn 6 (11 mnt Replace, Reserve - 683 729 293 152 141 252 100 264 234 1,621 14 126 172 63 e75 11,ele 23,561 23,561 I nve 2 Cost 250,000 16,300 17.400 5,000 2,600 2.400 4,300 1,100 4,000 4,500 9,500 200 10,000 3,000 36,000 1,500 13,lao 132,100 ____ 382.100 1 Ulll t Qual8 t It y, I8 Propert1 ?axes 5 3 mteresl 2,135 1.1135 I Yea rlnclml li 1 Interest 11,096 11,096 0 Yea PI lncipa! 11,991 " 11,991 - 20 20 IS 15 IS 1s 15 15 15 1 10 20 40 20 2 e " Land Maclllnery L EqulwenJ Tractor 60 IIP Trdctot 75 IIP S~b~~~ller Cultivator Offset olsc Roller Par xuw Spr IngLoollh Fertllirer Appl SCakes Stake nrlver Plckup (4 x 4) Hlsc. Tools Shop Drlp lrrlgatlou eqtllpellt rra11 syoiem $2,500 1.321 z&!" 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 - - ! " Subtotal Asauminy 108 inflatlon rate and 128 return on reserved capltal (expressed in cnnatant dollars) Y Flgure 11-29. conChued monmlc A~~alysls of 4 Farm Unit, hum 2 Investment Cost S- fora Ca_rlsbad Farm Unlt Case Stu~lles~Operator/Wsec " " - "_ ment I 7 6 (1) 5 3 14 Depreclatlon - - Debt " Annual rent Stralght hunt Replace- Reserve Llne Borrowed 384,000 " " 9 nsur- nce - t lwestment nveat. Credit 6 lllglble Awun hrcent 17 - " %vice (then Currc lnve 1 Quaat1 ty/ Unl t Cost 2 ____ - 100 Acres 480,000 17,400 16.300 5,000 2,600 4,300 2,400 1,100 4,000 4,500 13,100 9,500 200 10,000 3,000 36,000 I, 500 132,100 " ~. " 0 Rate Intereal 9 Term Yrs. - 30 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 .8 'roper t ! 'axes 4,800 I, 321 - 6,121 Year Useful Ll le - 1980 - 19eo 15 1980 20 19ao 20 1980 15 1980 1s 1980 1s 1980 1s 1980 40 1980 20 1980 LO 1980 I 1980 15 1980 15 1990 20 1980 e two 2 "" I 11 Interesl 46,080 11,096 " b Ye Prlnclpa 1,591 11,991 " 13,582 rea 2 'rlnclp.1 2,503 20.252 22,755 1.4 4 'rlnolpal 4,412 0 4.412 - 10 IS [nteresi 43,259 0 l3& 5 13 Intereel _I 45.16s 2,835 48,003 .- . " - - I& El!!*!* llakcttlnery b Tractor 60 HP tractor 75 IJP Subsolle: Cultlvator Offset Dlsc Roller Farrow Springtmttl fertlllrer Appl Stakes Stake Orlver Plckup (4 n 4) Equlplent pail wise. TOOIS stwp nrlp Irrlyatlon System - 815 070 333 173 160 113 20 300 1,113 25 950 150 250 75 281 a, ooo 4,481 128 I48 148 148 148 148 148 148 148 148 148 I48 148 148 148 148 148 683 129 293 152 141 252 100 234 1.621 264 815 24 126 172 17,838 63 23,567 608 608 608 608 608 608 60t 608 608 608 608 608 608 608 608 608 79,260 608 608 608 608 608 608 60t 608 608 608 608 608 608 608 608 608 79,260 Suhtotal -t " 4 Asstlminy 108 Inflation rate and 128 return on reserved capltal. Y Flgure 11-29, contlnwd momlc Allalysla of a Farm Unlt, Form 2 Investment Cost Suum For: CarlshadParm Unit Case StudiQ&-se Holder -~- " I nvI 2 coe t 16,300 17,400 5,000 2,600 2,400 4,300 1,700 4,000 1 % 700 4,500 200 9,500 10,000 3.000 1,500 36,000 132.100 " 132.100_ Investment _- 1 Quantity) Unl t aeat 9 Term xre. - 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 - - Ion 6 ill Replace- ment -, Reserve 683 729 152 293 141 100 264 1,621 875 24 I26 172 63 17.838 251 a34 t3,567 t3.567 - At0 nteres - 148 148 148 148 148 148 I48 148 14t 148 148 148 148 148 14t I48 Wce (then Cum f mount br rowed 16 Beercent illglbh 18 Proper t Taxes .¶ 'nsur- lnce Annual Stralqll~ Llne 815 810 173 333 160 287 111 267 300 4,713 950 25 150 250 'I5 0,000 4,481 I, 481 12 vs Prlnclp. 20,252 ziEzE ntereml - Interen 11,096 nZ9E Interes 2,835 IziE2L I00 &rea 1 1 1 I 1 I 1 1 1 I 1 1 I NA I .___ Tractor 60 IIP Tractor 75 IIY Subsuller CUI t lvator Offset DISC Roller Farrw SprIngtooLh Fer t 1 I iter Awl Stake6 Stake orlver Plckup (4 x 4) Bquipcnt Trall, ShP nlsc. TCWI~ Drlp lrrlgatlon Syster 1980 20 1980 20 1980 15 1900 15 1980 15 1980 15 1980 15 1980 15 1980 15 1980 0 1980 0 1980 10 1980 20 1980 40 1980 2 1980 ao 608 608 608 608 608 608 608 608 608 60 8 608 608 608 608 608 608 '9,260 9,260 Subtotal 0 1,321 nr- ' Asaumlng 108 inflatlon rate and 128 return on reserved capital. Y ! DRAFT REPORT 12/12/80 Figure 11-30 Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return Summary For: Carlsbad Farm Unit Case Studies New Leasehold Operator "- 2. Machinery 1 3. Equipment 1 - - * 13. Property Tax @ 1% 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan 20. (.15 X .10 X 705,300) - * * Expressed in constant 1980 dollars. I1 - 141 DRAFT REPORT 12/12/80 Figure 11-30, continued Economic Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return Summary For: Carlsbad Farm Unit Case Studies, EXiStincl Owner/ODeratqr YEARS Year 1 Year 10 Year 5 Cash Tax Cash Tax Cash Tax CAPITAL INVESTMENT -, 3. Equipaent ) 132,100 2. Machinery ) 250,000 1. Land Flow Flow Flow Flow Flow Flow 4. 5. 6. Total Investment $382;100 ..lm.c..o I GROSS OPERATING MAnurna 7. Fresh Market Tomatoes I- - 13. Property Tax 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan I I 3 I1 - 142 DRAFT REPORT 12/12/80 Figure 11-30, continued Economic Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return SUHtmarY For: Carlsbad Farm Unit Analysis New Owner/Operator CAPITAL INVESTMENT 480 000 Machinery 1 2,000 13: I- I 3. Equipment ) I I 49 I Fresh Market Tomatoes 8. 9. 11. Total Gross Operating Margins FIXED AND CASH COSTS 12. Land Rent @ 250 Per Acre 13. Property Tax @ 1% 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment i9. Interest on Operating Loan 20. (.15 X .10 X 705,300) 21. 23. Total Fixed and Cash Costs 24. Return From Farm Operations OTHER RETURNS 25. Sale of Assets 26. 27. ECONOMIC RETURNS 28. Net Economic Return 29. Return to Operator's Labor 30. Return to Investment $ 31. Return to Investment % YEARS Year 1 Year 5 I Year 10 Cash I Tax I Cash I Tax I Cash I Tax I I I I I 134 , 7001 134 , 7001 134 , 7001 134 , 7001 134 , 700 I 134 I 700 I I I I I I I I - I I I I I I 700 I 134.700 134,7001 134,7001 134,7001 134.7001 134 - 1 I I f I I I I I I I I I 1 I 88,2331 87,556 66,244 57,3511 53,2951 47,452 46.4671 47.144 68.456 83,3491 81,4051 87,248 I I I I I I I 46 467 68,456 81,405 24,000 24 ?OOO 24,000 22 467 44,456 1 57,405 1.8% 3.6% I 4.7% I1 - 143 DRAFT REPORT 11-20-80. the expenses and income of an actual farm unit. The cost and income summary includes only farm commodity income and direct operational costs. Other costs such as debt service, taxes, insurance, etc., are included in the subsequent steps of the analysis. The gross operating margin or' the Carlsbad farm unit site is shown to be $134,700, which is considered a long run average of income, expressed in 1980 dollars, or the more and less successful years. d. Investment Cost Analysis Investment costs associated with the farm unit for each owner Frototype are shown on Table 11-29. The basic components of machinery, equipment, and land are the same in each case, but the cost basis and method of financing varies. Hence, three distinct cost estimates result. The existing operator is in the best position because the land is fully owned. The analysis shows this owner purchasing new equipment when, in fact, he would most likely have purchased machinery some time ago. In this case, the overall machinery cost would also be lower. The leasehold operator has lower investment cost that the new owner operator because land is leased rather than owned. 4 I1 - 148 DRAFT REPORT 11-20-80 The new owner operator is assumed to be able to purchase the land at its agricultural value, and is deed restricted to agricultural use. It is estimated that this value is $4,800 per acre. e. Farm Unit Cash Flow Pro Forma The farm unit gross operating margin and investment cost estimates are combined on Table 11-30 in a cash flow pro forma analysis which is intended to demonstrate farm unit costs and income over time and project net economic return. The results of this analysis for the Carlsbad farm unit prototype are not surprising. Each of the prototype owners is shown to achieve a profitable operation. The largest profit is achieved by the existing owner prototype, followed by the leaseholder and the new owner operator. The figures included on the pro forma analysis are expressed in constant 1980 dollars. The annual inflation assumption for the 10-year period shown is 10%. Some costs and revenues are expected to keep pace with inflation while other costs will diminish. The costs which will diminish with inflation are those associated with long-term loans. .For example, a land payment in 1960 dollars of $47,671 would equal $28,149 t DRAFT REPORT 12/12/80 in 1985 if inflation continues at its current pace. Inflation is advantageous to an operator, because major fixed cost investments such as land mortgages decline constant dollar terms, while gross operating margin tends to rise relative to the general rate of inflation. 6. Miwed Use Programs The potential mixed use approaches for the Carlsbad Study Area are illustrated in three case studies, one for each of three general classes of property found in the study area suitable for agricultural use, which include the following: Small individual ownerships off main roads, less than 40 acres in size. Individual or corporate ownerships adjacent to main roads or the freeway, which have market potential for commercial use. Large individual or corporate ownerships greater than 40 acres in size. Each case study involves adifferentmixof useswhich relates I1 - 146- to the marketpotentialwithineachproperty class. The first case study consists of mix low density sinsle family resi- dences together with agricultural uses; the second, a mix of commercial and agricultural uses; and the third, a mix of planned residential community and agricultural uses. No specific farm unit is developed for each case study property. Rather, it is assumed that the residual agriculturai use for each case study would consist of a larger operation as described in the farm unit analysis. This assumption re- flects current operations. It does not imply that units smaller than the 90-acre unit described in the farm unit analysis would not be economically feasible. A mixed use proposal on a smaller parcel could involve a single farm operation under the right circumstances. The case studies are presently as examples of what could be done. They do not represent detailed project proposals, and do not have a?- proval or consent of the landowners, the City of Carlsbad, the County of San Diego, or the California Coastal Commission. a . I1 - 147 DRAFT REPORT 12/12/80 a. Small Individual Ownerships The first case study is directed at the rela- tively small (less than 30 acres) ownerships not adjacent to major roads. The main concentration of these small parcels is located in the central part of the study area, in a large county "island" within Carlsbad's city limits. This area is surrounded by undeveloped portions of the City of Carlsbad. It has no developed city or county rpads. The area is currently divided into small parcels ranging from less than one acre to 80 acres in size. The island area contains land of both high agricultural potential and very low potential (due to steep slopes, shallow soils, etc.). This agricultural area does not have significant urban interface impacts. The main problem for continu.ed agricul- tural operations is that land costs, and hence, operating costs, reflect the value of the land for development rather than for agriculture. Currently, there are examples of operators who have tried to enter agricultural operations by paying for non-agricultural land values. While this may work for some under the best conditions, over time, it will lead to financial difficulties or the conversion of the land to other uses. This is because high land prices are often paid in anticipation of eventual sale for non-agricultural use. Other problems include the present pattern of small owner- I1 - 148 A DRAFT REPORT 12/12/80 ships, access, and lack of an assured long term water supply at a cost affordable by agriculture. The ideal approach to insuring the long term productivity of these lands must involve reduction of economic pressure to convert to urban uses and include specific solutions to other operational problems. In this regard, the agricultural subsidy credit program suggested by the LCP is probably superior to a parcel based density transfer system. The Coastal Commission strongly supports this type of program. The agricultural .subsidy credit program allows developers of partly urbanized lands to gain increases in density by purchasing "subsidy credits" from the local agency. The proceeds from these sales are used to compensate landowners in agricultural preservation areas who are restricted from further urban development. A similar effect could be achieved by a system of direct transfer of development credits. Owners could be allocated development credits on the basis of the size of their parcel. Taking the existing zoning of One unit per 10 acres as an example, an owner of a parcel of 80 acres would qualify for eight development credits. Because the Coastal Act would in this case require preservation of the agricultural land, I1 - 149 development would not be allowed on site. However, these credits could be sold to developers in areas where some development is suitable, and would allow construction of an additional eight units above the base density in that area. The concept is essentially similar to a cluster development plan in a PUD, but operates at a larger scale, and involves more than one ownership. The proceeds from the sale of the development credits represent the "supplemental uses" for the agricultural landowner. In return for the receipt of subsidy credits or the sale of development credits, deed restrictions, easements or other restrictive mechanisms would be applied to the agricultural land to both restrict the potential for urban development and to help maintain land prices at a value commensurate with continued agriculture. This approach to the area seeks to simultaneously preserve the agricultural uses and reduce or eliminate the economic pressures for urban development in the area. It would preserve the area for agricultural use by transferring de- velopment rights to partially urbanized areas or areas where existing urban/agricultural conflicts are greater and pro- vide a source of capital for making desirable improvements which enhance agriculture. The parcel based density transfer system for the small I1 - 150 . DRAFT REPORT 12/12/80 parcels in the area would not be as e,ffective as the agri- culture subsidy credits concept but has the advantage of being easier to implement. The basic concept would be to restrict overall densities to reflect existing zoning (presently 10 acre minimum), while allowing the creation of smaller lots, down to one-half acre in size. Density bonuses would be offered for dedicating the residual agricultural parcel for permanent agricultural use (where environmental conditions permit). - . This concept is suitable for the area because the mix of agricultural and scattered rural residential use has already been established in the area. The agriculture presently being conducted includes very high value production from greenhouses and nursery crops, in addition to tomatoes, strawberries, and other row crops. The additional limited residential use would have two major positive impacts on agriculture in the area. First, roads would be constructed which would improve access to agricultural parcels (This is currently a very serious problem, since existing roads are not surfaced and are prone to flooding and erosion.). Second, the land dedicated to agricultural use would be valued by its agricultural productive capacity and would be secured for agricultural use. I1 - 151 DRAFT REPORT 1211 218 0 Negative impacts of additional residential use would pri- marily include operational conflicts with the remaining agricultural operations. The type of agriculture being conducted (i.e., nursery crops, field flowers, greenhouses, and the overall density of potential residential use within the area under the concept suggest that operational conflicts can be managed by adequate siting, setbacks, etc. However, operational conflicts for other more extensive field crops such as tomatoes, strawberries, etc. , are much more difficult to manage. A specific plan would establish building en- velopes and standards for mitigation measures. b. Larqe Parcels with Commercial Potential This case study considers a large existing agricultural parcel which has potential for commercial use. The case study area is near the Palomar Airport Road inter- #change with 1-5. The area is currently in agricultural use and surrounded on three sides by lands within an agricultural preserve. The area has frontage on Palomar Airport Road and Paseo Del Norte. It is shown on Figure 11-31. The mixed use proposal for this parcel involves a commercial planned unit development or land division and permitted for commercial use. The 15 acres between the freeway and Del Norte would be permitted for commercial use, while the I1 - 152 balance of the agricultural land would be permanently re- served for agricultural use. The area presently has an average assessed market value of approximately $3,000 per acre. Actual market value of the entire parcel is not known, but parcels zoned for commercial or industrial use, in the study area are on the market asking - $. 50 to $1 .OO per square foot. Since the case study area is zoned for agricultural use -- "(10) -- b; the City of Carlsbad, its present market value will be speculative. Development would require a rezoning, in addition to re- quiring a State Coastal commission permit. Small undeveloped commercially zoned parcels in the areawith good access, similar to the case study parcel, are currently on the market for $4.00 to $6.00 per square foot. For purposes of this analysis, the case study area's For purposes of this analysis, the case study area's existing value is assumed to be $.50 per square foot. The proposed commercial lot's value is assumed to be $5.00 per square foot. A comparison of the assumed value of the existing parcel with the mixed use proposal is shown on Table 11-32. Based upon the assumptions made, the commercial lot resulting from the I1 - 153 Figure 11-31 Commercial Development as a Supplemental Use Agricultural Preserve Case Study Area Area for Continued Agriculture Area for Commercial I ~ \\ Existing Commercial Use Agricultural Preserve Area for Continued Agriculture Area for Commercial Existing Commercial Use 4 I1 - 158 .. DRAFT REPORT 12/12/80 Table 11-32 Comparison of Estimated Value, Existing Parcel Versus the Mixed Use Proposal for Commercial Use 1. Present Value of Case Study Area 115.00 Acres @ $.50 Per Square Foot Total = $2,526,480 2. Value of Mixed Use Proposal Commercial Program, 16 Acres @ SS.00 Per Square Foot Remaianing Agricultural Parcel 100 Acres $5,000 Per Acre = $ 500,000 TOTAL $3,984,800 3. Added Value if Commercial PUD Concept is Implemented f I1 - 151 mixed use concept would yield over $1,458,320 more than sale of the area as it is presently restricted. The 100 acre parcel would be permanently deed restricted for agricultural use. The commercial area could be developed for visitor- serving uses or as an extension of commercial development which currently exists in the area. c. Larger Parcels with Primarily Residential Po- tential The final category of parcels in the study are those that are large (greater than 40 acres), and have potential for residential use. The mixed use proposal for these parcels involves application of a "planned community" (PC) type zone which allows clustering of the development. One positive note regarding this case study is that the appropriate zoning designation is presently applied to sev- eral of the largest ownerships in the study area which fall into this category. Also, the LCP supports this concept, and expands upon the existing PC zone. The LCP recommends use of a planned agriculture zone aswell. Implementationof amixed use proposal 'in these areas would involve the development of a suitable plan by the developer and approval by the City of Carlsbad and the California Coastal Commission. Several parcels suitable for planned community-type development also exist within the unincorporated island. These parcels would require rezoning and action by the County of San. Diego. Within the context of a planned community the agricultural land could be managed by a variety of techniques, including fee simple sale to an agricultural operator, commonownership and lease to an operator, or operation directly by members of the planned community. In each case, the development rights to the agricultural residual would be deeded to the City, a land trust, or the State Coastal Conservancy. The case study area is located near the intersection of 1-5 and Pointsettia Lane. In this area, the Coastal Commission supports the concept of mi-ed uses. The State and Regional Commissions have jointly approved that this area, owned by The Occidental Land Company, be designated as a planned agriculture zone, which allows additional developmentoppor- tunities if the planned development concept is adopted by the landowner. The designation allows additional commercial and residential density in trade for dedication of the most productive agricultural areas. A schematic diagram of this concept is shown on Figure 11-33. The total area is approx- imately 140 acres in size. Of this area, 50 acres would be permitted for residential/commercial use, while 90 acres would be preserved for agriculture. Density in the devel- opment area would be based upon the planned agricultural 7 I1 - 15f district which permits four and ten units per acre. Addi- tional density would be permitted in the development areas through the agricultural subsidy credit program described above, if it is implemented. It should be pointed out that this land is highly productive agricultural land that would have been totally preserved by the Coastal Act Prime Land Policy had it now been removed from production. t I The econokic return anticipated from the planned community development will vary depending upon the current investment costs and the value resulting from the approved plan. Table 11-34 shows a comparison of existing value and the mixed use proposal based upon estimated values. Table 11-34 demon- stratesthat the concept is potentially an economically sound approach, which also meets requirements of the Coastal Act. 4 I1 - 15f Figure 11-33 DRAFT REPORT 12/12/80 Table 11-34 Comparison of Estimated Value, Existing Parcel Versus the Mixed Use Proposal for a Planned Community Development 1. Estimated Value of Existing Area, 140 Acres @ $1.00 Per Square Foot = $6,098,400 2. Value of Mixed Use Proposal 36 Acres, Approved for Clustered Dwelling Units @ $2.50 Per Square Foot . 20 Acres, Approved for Commercial @ $5.00 Per Square Foot Agricultural Parcel, 90 Acres @ $5,000 Per Acre 3. Difference Between Existing Value and Mixed Use Proposal = 4,3S6,000 z' 450,000 $8,073 , 000 = $1,974,600 0 I1 - 16# 111. MIXED USE GUIDELINES DRAFT REPORT 11-20-80 A. Introduction to the Mixed Use Guidelines The mixed use guidelines are intended to assist implementation of the Local Coastal Plans (LCP). The guide- lines are essentially a set of procedures whereby mixed use opportunities for agricultural land can be identified, eval- uated, and proposed in a consistent manner. The guidelines were developed during the preparation of two mixed use pilot studies for agricultural land, one in Mendocino County and one in San Diego County. The purpose of the mixed use guidelines is threefold: First, the guidelines suggest a technique for the evalu- ation and inclusion mixed use projects within the LCP's, and include a model policy. . Second, the farm unit analysis, contained in the guide- lines, can be applied to develop appropriate farm unit size criteria for use in land use regulation. The farm unit analysis also can provide a standard format for determining the question of economic feasibility of a DRAFT REPORT 11-20-80 given farm unit. This can facilitate negotiations be- tween alandowner and the regulating agency. At present, economic analysis are often not done in a manner which is credible to either the landowner or the regulating agency. . Third, the farm unit analysis can be used to evaluate a specific mixed use proposal. This will be useful to the conservancy commission or local agency when they become involved in a specific mixed use project. The coastal conservancy can use the methodology to project their own project relative cash flow and as a component of a prospectus on projects that would be marketed. The concept of mixed use for agricultural land requires some definition. Most simply, mixed use means the addition of a non-agricultural use to a continuing agricultural operation, which provides supplemental income to the landowner. By this definition, many coastal farms and ranches are presently mixed use operations. Ranches along California's North Coast are an example. They typically combine livestock operations with timber sales. Mixed uses also include less traditional additions to agricultural operations including recreational, residential, commercial, and industrial uses. The mixed use .~ .. " - . . . 111-2 " DRAFT REPORT 11-20-80 guidelines are directed toward coastal agricultural arhas where agricultural land is subject to pressure for conversion to a higher intensity use or the long term agricultural use is otherwise threatened. Mixed uses supplement the agri- cultural landowners income and possibly meet some demand for higher intensity uses while preserving the agricultural use through deed restrictions, easements or other enforceable restrictions. In urban fringe areas, where urban development pressure is particularly intense, mixed uses might also involve divi- sions of the original farm unit to permit higher intensity use on a portion of the property in trade for development rights on the balance of the property. In this case, the farmer would receive a payment for the developed portion of the property and continue farming the remaining unit. Cash derived from the sale of the developed portion would become a source of capital for ongoing agricultural operations. The mixed use guidelines are intended for use in developing LCP implementation programs. A mixed use policy would be supportive of other planning tools, making regulation more flexible and equitable. Mixed use policy alone does not .DRAFT REPORT 11-20-80 represent a complete implementation program. /! When con- sidering agricultural preservation and land use regulation in general, it should be recognized that success is entirely dependent upon the local governments' resolve to formulate and consistently enforce land use regulations, Mixed uses or other economic enhancement or compensatory techniques such as transfer of development rights (TDR) purchase of develop- ment rights or density transfer schemes require firm ad- herence to zoning and general plan implementation, It is equally important to recognize the broader context of regu- lations affecting agriculture, including EPA environmental quality standards, federal price support programs, and state coastal commission regulations. B. Application of Mixed Use Policy in the Local Coast- al Programs The application of mixed uses as an agricultural enhancement technique requires two essential steps on the part of local government. First, apolicysupportiveofmixed uses must be adopted as a part of the LCP. Second, areas where the policy is applicable should be defined. The following section provides both a model mixed use policy for the LCP's and instructions for evaluating mixed use proposals. t DRAFT REPORT 12/12/80 1. Model Policy for Mixed Use Implementation The first step in formulating land use regu- lations consistent with the mixed use concept is the pre- paration of a policy which establishes support for mixed uses within the LCP. This must be followed by specific amendments to the local agencies' general plan and zoning ordinance. Although the language of a mixed use policy will vary given the specific needs of a local agency, a model policy is provided below. The basic orientation of this policy is toward use of a "conditional use permit" which establishes performance standards for the proposed mixed use project. Model Mixed Use Poli.cy There are numer'ous examples of agricultural operations, particularly those on non-prime agricultural land, or small parcels, which are economically marginal operations. Re- turns from agricultural production on these lands may be below ownership costs and necessary operating costs. Sup- plemental, higher intensity uses may improve profitability and enhance agricultural preservation. Supplemental uses on such parcels should be permitted. Pro- posed projects should be subjected to a conditional use I11 - 5 " 12/12/80 permit specifically developed for supplemental uses, in- cluded in the zoning ordinance. The conditional use permit should require the following findings and conditions, and impose other conditions that result from the environmental review procedure: a. The 'city/county shall make the finding that con- tinued and renewed agriculture is not feasible on the given ownership without the supplemetal use. b. The city/county shall make the finding that the long term economic viability of the agricultural portion of the ownership and/or the viability of the local agricultural economy will be enhanced by the prolect; and that the conditions of use imposed on the project will minimize conflicts between agricultural operations and the supplemental use. Where conflicts cannot be reasonably forseen, a workable means for conflict resolution should be provided. c. The city/county shall make the finding that the proposed supplemental use addressesthe priority of coastal uses contained within the coastal act of 1976. I11 - 6 .- DRAFT REPORT 12/12/80 d. The city/county shall make the finding that the proposed supplemental use, in combination with the ongoing agricultural operation does not exceed the environmental carrying capacity of the pro- ject site. Limited resources such as water shall be allocated first to existing agricultural oper- ations followed by the supplemental use. e. The city/county shall make the finding that the proposed development has been sited and designed so that: (1) The more productive agricultural soils of the site are avoided. (2) The construction of new roads or other facil- ities are minimized. (3) Environmentally sensitive habitats are pro- tected. (4) Views from beaches, public trails, and other public recreation areas not obstructed or de- teriorated (improvements required for the ag- I11 - 7 DRAFT REPORT 12/12/80 ricultural operation are excluded from these findings). (5) The rural character of the site is preserved. Should the city/county make these findings, the supplemental use may be permitted subject to the following conditions: a. Any public service capital improvement costs created by the project shall be borne by the owner. b. Residential supplemental uses shall require dedi- cation of development rights for non-agricultural uses on the portion of the project remaining in agricultural use. Development rights shall be deeded to the county and a third party such as the California Coastal Conservancy or the Trust for I11 - 8 DRAFT REPORT 11/20/80 i. lblic land. The residential users shall be re- sponsible for permanent maintenance of the agri- cultural and open space areas which will be held in common ownership. C. Large supplemental useprojectsor thosecontaining unique coastal resources may be required to dedi- cate and develop land for public recreation Or beach access. d. The developer must demonstrate market demand for the proposed supplemental use and prepare a cash flow pro forma analysis that exhibits the financial relationship between the supplemental use and the ongoing agricultural use. The purpose of the sup- plemental use is ultimately to make continued agri- cultural operations viable. In the case of a non-economically viable agricultural operation, a specific financial plan should be submitted by the developer o'r owner which demonstrates how the sup- plemental use will insure the long-term viability of the remaining agricultural operation. DRAFT REPORT 11-20-80 TI^ application of the context of LCP typically include such a mixed use policy should occur within implementation. LCP implementation will amendments to the local agency's general plan and zoning ordinance. The policies and regulations which encourage mixed use projects can be adopted among these other amendments required by the LCP. The data base developed during the LCP program will provide the basic information for application of policies and regu- lations. In most cases this should be rather simple, in- volving conditional use permit language to the existing agricultural district (s) within the local agency's zoning ordinance. In such areas where a specific mixed use is desired, a use-specific overlay zone may be appropriate. Land use regulation including both zoning and general plan designation are the basis of any agricultural preservation program. Planning and zoning an area for agricultural use indicates a commitment on the part of the community that the land is appropriately h'eld in agriculture. As stated in the introductory remarks to the mixed use guidelines, land use regulation should reflect the community's desire for the use t - 111-10 "" of the land and be consistently enforced. DRAFT REPORT 11-20-80 Zoning regulations for agricultural land typically establish parcel size requirements and various use restrictions. - It must be stressed that the calculation of farm unit size solelv on a cost-income basis, such as the farm unit size methodology herein proposed is not solely adequate for establishinq land use Policy and parcel size requirements. In addition to the farm Unit analysis, other factors should be considered in- cluding: 0 The minimum parcel size, if any is chosen, for a given area should be large enough to discourage cse solely for residential purposes. For example, the economic farm unit size in an area suitable for a highly productive, intensive crop such as strawberries may be small enough 'to permit use for residential purposes (5 to 10 acres). On the other hand, residential use of agricultural land has occurred in counties that have imposed 40 and 60 acre minimums. . A major issue conflicting with the need to limit resi- dential use in agricultural areas is the need to keep parcel sizes small enough to allow people to enter farming. The continued existence of agriculture depends DRAFT REPORT 11-20-80 upon new, younger people entering agriculture. The present costs of land, machinery, and equipment make a new agricultural investment very expensive. Entry re- quires the ability of an individual to "start small" and enlarge the operation over time. Many farm operations occur on several non-contiguous parcels under one ownership. If the unit size calcu- lation is applied to the aggregate size of all the agricultural parcels in a given operation, parcels below an economic unit size could be permitted. In this case the question becomes, "What is the smallest parcel that can be economically and conveniently operated and yet will adequately discourage use for solely residential purposes?" . Parcel size restrictions should not reflect the poten- tial addition of supplemental uses. The fact that the addition of an intensive recreational use such as an RV park on a 1000 acre cattle ranch.lowers the cash flow required from the cattle operation to one expected from a 100 acre unit is no justification for zoning an entire area 100 acre minimum. First of all, not every parcel could develop an RV park, and second, if the supplemental use fails a smaller than economicaliy viable parcel would have been created. 5 111-12 ~ ." . An effective approach to agricultural parcel sizes is to freeze all parcels in the agricultural area at their existing size. This can be accomplished by the adoption of an "overlay zone" on the existing agricultural zon- ing. Requests for land divisions would require a special review process which would only approve land divisions consistent with continued agricultural land use. In such a procedure, the farm unit analysis' methodology can be used to determine an economic parcel size. Similarly, mixed use programs could be proposed and approved if they met the planning agencies objectives. Land use regulations should permit the range of opportunities and mixed use possibilities that were developed in prior steps that are determined to be consistent with agricultural preservation. Another important factor is time. There are many examples of land held out of production while awaiting eventual urban development. Agriculture should be encour- aged on this "urban reserve'' land. It may be many years before the land is developed and during the interim, agri- cultural production should continue. 2. Guidelines for the Farm Unit Analysis The farm unit analysis prepared in each case study is essentially a pro forma cash flow analysis applied . "_ . .~ DRAFT REPORT 11-2 0- 8 0 to an agricultural business. The farm unit analysis may be applied to a specific farm operetion or be used in a more general fashion to develop local regulatory policies. As such, the methodology provides three types of information to an analyst: It can be used to estimate the average requirements of a given crop type farm. . It may serve as a tool for preparing "sensitivity anal- yses" of existing farm units, that is, it can be utilized to determine the impacts of operational, capital, or tenure changes on farm unit economics. . It can provide the bases for estimating the need for and impact of supplemental uses on a given farm unit. The cash flow analysis is an essential component for eval- uating the economics of a farm unit. Farm unit analyses which analyze a single year fail to exhibit the effects of time or the relationship of farm costs and income to the financial status of the owner/operator. The cash flow analysis pro- vides the ability to consider these factors. The effect of time is essential primarily because of equity DRAFT REPORT 11-20-80 accumulation, debt retirement and inflation. Few businesses are capable of producing profits during the first few years of operation. Over time, however, as debts are retired and income rises in proportion to fixed costs, the financial picture improves. This same principal applies to agri- cultural businesses. Farm commodity prices tend to rise in proportion to general inflation, although individual crops' prices may fluctuate dramatically from year to year. Over the ten year period between 1968 and 1978, average farm commodity prices in- creased 105% (€?-32) while the overall consumer price index (CPI) has incrertsed 87% (based upon a CPI in 1968 of 164.2 and a 1975 CPI of 195.3). Prices for goods and services required by farmers increased 112% over the same period. (R-32) However, major fixed costs of a given farm unit, such as a fully amortized land mortgage, decline in current dollar terms in proportion to this general rise in prices. A mortgage payment of $1,000 in 1968 would have equaled $504 in 1978, if expressed in dollars of constant purchasing power. The farm unit analysis is designed to be flexible and adagt- able to new assumptions, changed costs, or other conditions related to a pzrticular crop. The methodology contains three main sreps, description of the operating unit, investment cost summary, and finally a cash flow summary. Exam?les of completed farm unit analyses are included in the case studies. Step 1. Prepare description of the operatinq unit The description of the operating unit is prepared on a cost sheet (Figure 111-2) similar to those used by the U.C. Co6perative Extension. All costs and income asso- ciated with a producing acre of the subject crop should be listed, except those costs for ownership of land and equipment and interest on operating capital. It is im- portant to recognize that per acre operating costs are often a function of unit size. It may be necessary to prepare descriptions for a range of farm unit sizes. Data for the description of the operating unit must be deveioped concurrently with the farm unit size analysis. The U.C. Cooperative Extension cost sheets provide an excellent starting point, but often require precise updating and editing. It is often helpful to survey farmers or other knowledgeable,persons to insure accur- acy of the cost and income data. Step 2. Prepare Investment Cost Summary 111-16 DRAFT REPORT 12/12/80 Figure 111-2 Economic Analysis of Farm Unit, Form 1 Operational Cost and Income Summary Description of the Operating Unit: Crop/Livestock: Size : I tem GROSS PRODUCTION RECEIPTS 1. TOTAL PRODUCTION RECEIPTS 2. TOTAL OPERATIONAL COSTS i 3. GROSS OPERATION MARGIN Unit Price or or cost Quantity Cost/Uni t Value Price or or cost Quantity Cost/Uni t Value i 111 - 17 " . . . . . - . DRAFT REPORT 11/20/80 The investment schedule (Figure 111-3) is an estimate of the total capital investment required for crop pro- duction, including machinery, equipment, irrigation systems, land (if the unit is assumed to be owner- operated), and, in the case of Perennial crops, crop establishment costs. Cost estimates should be made for a realistic range of unit sizes for the subject crop. When possible, the chosen unit sizes should represent size "threshold points" above which an additional incre- ment of equipment would be required. It must be noted that great variations may exist in the actual capital investments individual farmers have made. For example, well and pump costs can vary greatly depending on groundwater availability. Estimates made for purposes of this analysis should represent, insofar as possible, averages of the local experience. Like the operating cost data, investment data must be developed concurrently with the farm unit size analysis. Unfortunately, much greater variation often exists in required investments than in operating costs for a par- ticular crop. A survey of local farmers operating a variety of unit sizes can provide this data. Care should be taken to choose truly representative numbers. Table I11 - 18 " . "" . ". . Figure 111-3 Economic Analysis of a Farm Unit, Form 2 Investment Coat Summary For x t " ,n 6 men t Replace Reserve Inv 2 cost teprecia 5 1 " " - ~ Debt Service I .-__ - -. " 19 ance Insur- -" ___ 18 Taxes proper I 0 - 4 Usefu. Li Le t rea 17 I\moUl 1 Quantity unl t 7 bunt Borrowed 8 Rate Intere 16 Percenl Eligibl - Annual Llne Straight 10 Yt Principi 11 1 lnteres 12 Y€ Principa - .I nteres 15 Interes TOTALS "" " 1 i DRAFT REPORT . 12/12/80 Figure 111-3, continued Column Description of Investment Cost Summary Column Item Description 0. N- of Investment, i.e., "Land," "Milk Cows," "Trac- tor, 75 HP," etc. 1. Quantity and Unit, e.g., "400 Acres" 2. Purchase Price of Investment 3. Year of Purchase of the Investment 4. Useful Life of Investment 5. Annual Straight-Line Depreciation: SBV - SAL L DEP, - - 6. Where : DEP, f Deperciation for each year of invest- ment's life SBV = Starting book value of investment SAL = Salvage value of investment L = Useful life of investment Replacement Reserve is the amount of capital which must be reserved each year to replace an investment when its useful life is completed. The Replacement Reserve is essentially a sinking fund which, at maturity equals the then purchase price of the investment. The rate of inflation during the period must be assumed- as well as the return expected on the reserved capital. The following table shows a schedule for Replacement Re- serve which assumes 10% inflation and 12% return on reserved capital. I11 - 20 h Figure 111-3, continued ANNUAL REPLACEMENT RESERVES NECESSARY TO REPLACE AN ASSET WITH REPLACEMENT COST INFLATION AT 10% PER ANNUM. . DRAFT REPORT 12/12/80 Return on Reserved Capital equals 12% Per Annum. Replacement Resserve (% of Original Price) Useful Cons tan t Current $ % Life $% In Year 1 In Year 5 In Year 10 2 Years 49.55% 54.50% - - 8 Years 11.73% 12.90% 18.88% - 10 Years 9.21% 10.13% 14.83% 23.89% 15 Years 5.86% 6.44% 9.44%. 15.20% 20 Years 4.19% 4.61% 6.75% 10.87% 40 Years 1.72% 1.89% 2.77% 4.47% Source: McDonald h Associates I11 - 21 DRAFT REPORT 12/12/80 Figure 111-3, continued Column Item Description 7. a. 9. 10. through 15. 16. and 17. Amount Borrowed is simply the original amount borrowed on the investment. Interest Rate is the annual interest rate, expressed as a percentage. - Term is the original term of the debt. Machinery and equipment loans are typically 5 years or less. Debt Service shows the actual cost of the investment divided into principal and interest for three annual periods. The years chosen may be sequential or skip years to show longer term consequences. Figures for Debt Service may be derived from loan amortization schedules or calculated on a financial calculator (such as the HP 22) , or a programmable calculator. Investment Credit The investment tax credit is a direct reduction of the tax liability, rather than a deduction from taxable income. Added to the law in 1962 , it was intended by Congress to stimulate investment by the business com- munity in assets other than real property. The credit has been subject to numerous significant changes since its original enactment. For property acquired or placed in service on or after January 27, 1975, an investment credit of 10 percent of original cost is allowed. In any one year, the amount of the credit available is limited to the first $25,000 of tax liability plus 50 percent of the excess over $25 , 000 of the acquirer's tax liability for that year. (1) Qualifying Property To determine the amount of the qualified investment eligible for the credit, it is necessary to determine three factors: (1) Does the acquired asset qualify? (2) what is its estimated life? (3) Is it new or used? * -. I11 - 22 DRAFT REPORT 12/12/80 Figure 111-3, continued Column Item Description In general, most agricultural investments will qualify for an investment credit, including all investments which are used in production such as fencing fruit trees, grain storage bins, silos, livestock, etc. Estimated life was calculated in Column (4). The amount of the credit is 10 percent of the qualified investment for assets having a useful life of seven years or more. A reduced credit applies to shorter-lived assets. The amount of the original cost that will qualify for the credit is based upon the life of the asset, according to the following scale: Percentage of Original Cost Estimated Life Qualified Less than 3 years ' 0% 3 years but less than 5 33-1/3% 5 years but less than 7 66-2/3% 7 years or more 100% It also is necessary to determine whether the assets acquired are new or used. In the case of used, assets, an annual maximum cost of $100,000 may be used in computing qualified investment. Each partner in a partnership or shareholder in a Sub- chapter S corporation is entitled to $100,000 of investment credit for qualifying used property. In no event may a partnership of Subchapter S cor- poration pass investment credit to all partners or shareholders on more than $100,000 of used prop- erty. The entity must select the items of used property that are to make up the qualified invest- ment. I11 - 23 Figure 111-3, continued Column Item Description Credit in excess of the amount usable in any one year can be carried back to the preceding three years and carried forward to the succeeding seven years. The credit is carried first to the earliest . year available and then to each of the seven years succeeding the year of acquisition. When invest- ment credit can be applied through carry-back, taxes paid in prior years are recovered by filing claims for tax refunds. The calculation of an investment credit for each investment which qualifies is done as follows: IC = SBV(PQ) (0.1) Where: IC = Investment credit SBV = Starting book value PQ = Percentage of original cost qualified For example, if the starting book value or qualified capital investment is $12,000, and its useful life ' is 15 years, the calculation of its investment credit would appear as follows: IC = $12,000 (1.0) (0.1) = $1,200 19. Property taxes are levied on real and personal property by the county government. The tax rate in California is 1% of assessed market value. This calculation is straight-forward for newly purchased property. Prop- erty tax on real property owned prior to 1978 is based upon 1975 assessed market value, increased by 2% each year. The county assessor is the best source of this data for a given parcel. If the agricultural land is under a Williamson Act Contract, land taxes will be less than 1%. Check with assessor for parcel specific taxes. Insurance is the amount of the annual insurance premium on a given investment. Insurance premiums are often shown as U.C. Extension cost sheets. I11 - 24 DRAFT REPORT 11/20/80 111-3 also gives descriptions of the data to be included in the columns of the investment cost summary. Step 3. Calculation of the Farm Unit Sizes When calculating economic farm unit sizes, it is im- portant to recognize the great variety of financial circumstances and lifestyles of farm owners and oper- ators. The economic farm unit size will vary greatly depending upon the owner's expectations and needs. For example, an established owner-operator may achieve a given level of economic performance with a smaller farm unit than a new agricultural investor. This is primarily because the established owner-operator may have owned a farm for years, perhaps having acquired it through in- heritance, and may calculate economic return on the agricultural operation without consideration of cash flow required to service a land loan. The new investor, on the other hand, must cover land and capital costs completely out of the farm's economic return. Farm owner-operators also have a variety of lifestyles that affect economic farm unit size. Farmers include a range, from "hobby farmers" to large scale corporate enterprises. Hobby farmers as well as an increasing number of commercial farmers supplement their farm in- I11 - 25 DRAFT REPORT 12/12/80 come with other employment. This variety leads to the necessity of distinguishing several levels of economic performance when defining farm unit size, although vir- tually any definition can be used. Four levels of economic performance have been defined in the present study to illustrate a range of farm unit sizes that match a range of individual financial circum- stances: 0 Long-Term Minimum Unit. The lower bound on the ability of an economically motivated individual to continue in business over a long term (i.e., for a time period longer than the remaining life of owned assets) is defined as a situation where net oper- ating margin (the farm operation's net cash flow) exactly equals the annual charge for the replace- ment value of machinery, equipment, and perennial crops. Conceptually, this situation would occur when the farm unit operation is just able to return cash sufficient to replace the value of assets with limited productive life. It should be noted that at this level of performance, there would be no return either to the operator for his labor or to the investment in land, equipment, machinery, or 111 - 26 " " . ." . __"" AL_" ~ . _._^L.^ ~ ." " . L 4 DRAFT REPORT 12/12/80 perennial croDs. Nonetheless, it is an econom- ically realistic situation for an i'ndividual who uses the farm operation as an investment in a lifestyle. Return to Operator's Labor. This farm unit is characterized as being more in keeping with the classic concept of providing a "household income." This unit performs as a self-sustaining unit and also provides an income to the operator of $18,000 per year. In this situation, the operator receives a living, but there is no return from the farm's operating margin for the investments in land, ma- chinery, equipment, or perennial crops. 0 Return to Landsand Capital Investment. This farm unit is characterized as a "commercial farming operation" where the revenues produced provide an economic return in excess of the foregoing levels. The rate of return is figured at 2 percent, net of 111 - 27 DRAFT REPORT 12/12/80 inflation, of the actual value of the farm's assets: machinery, equipment, and the agricultural value of the land. Return to Cover Costs of New Investment. The most demanding measure of economic performance is the farm unit size,requir.ed to support a new investment in a farm. In addition to meeting all of the above criteria, this farm unit must generate sufficient income to cover the costs of new investment in the required machinery, equipment and, in the case of an owner-operator, land. This level of performance is difficult to achieve even if the land is pur- chased on today's market solely for agricultural purposes. Land prices for agricultural land are often above agricultural production value alone. 1 g*he 2 percent rate of return is a l~realt~ rate of interest (which conventionally is assumed to be in the range of 2 to 4 percent). This rate. is applicable to farm unit economics, because it can be anticipated that the under- lying value of the land for agricultural purposes will increase in stepwith price inflation. The market price for the annual production (as well, of course, as annual operating costs) will increase, in contrast to a fixed interest rate situation such as a savings account. As with any other assumption used in the present report, an analyst with a different viewpoint could substitute a different assumption for an appropriate return on the value of the land in real terms. The rate of 2 percent was selected as appropriate for the purposes of the present project. I11 - 28 , x. " h DRAFT REPORT 11/20/80 Farm unit sizes consistent with these levels of economic performancemaybe calculated. The dataprovidedby the first two steps, operating cost and income summary and the invest- ment cost summary, are converted into per acre costs and applied to the formulas given in Table 111-4. A number of additional assumptions and data are required to complete the formulas: A value for the operator's labor and management must be estimated. Replacement reserve must be divided into two categories, one for capital investments which are fixed costs not directly related to unit size (such as a tractor), and one for investments that are directly proportional to acreage planted or used (such as irrigation equipmentor costs of establishing a perennial crop). An appropriate return on investment must be estimated. For purposes of this example, a two percent return, net of inflation, was chosen. The value of the equity in land, machinery, equipment, and perennial crops or livestock must be assumed. The lowest level of investment would be the minimum down- payment requaired to purchase the capital goods. (Column 2 minus column 7 on the investment cost summary). Loan payments should be based on current agricultural 111 - 29 1. 2. 3. 4. ._ - .. . " " . .. .~~ - ." "- .~.. . -. .c DWT REPORT 11-20-80 Table 111-4 CALCULATION OF MINIKUM SIZE OF FARM UNITS AT FOUR LEVELS OF ECONOMIC PEPJ'ORMANCE Long-Term Minimum Unit (U1) *1 = Dl M - D2 'Economic Return to Operator's Labor (U2) u.r = M -. D2 Economic Return to Land and Capital Investment (U3) + $18,000 + O.O2(V2) u3 = M - D2 - 0.02 (Vl+V2) Economic Return to Cover Costs of New Investment (U4) Replacement reserve on the minimum machinery required to operate the farm unit. This machinery represents a fixed cost that does not vary directly with size. Replacement reserve on equipment or perennial plants whose (dollar per acre) amount and cost increase in direct proportion to the unit size. The farm unit's gross operating margin per acre. (From the - Operating Cost and Income Summary) Investment in the agricultural land. Investment in machinery and equipment. Investment in perennial crops. Total annual loan payment on required machinery, equipment, and operating capital. Total annual loan payment on agricultural land (dollars per acre). 3 18,000 = Assumed return to operator's labor. 0.02 = Assumed 25 real rate of return on capital invesiments. DRAFT REPORT 12/12/80 :' . / lending policies and interest rates. (Column 8, invest- ment cost summary) All cost and income estimates must be updated with new data or appropriate assumptions to reflect the most recent data available. The assumptions must be rechecked for appropriateness after unit size has been calculated. For example, "Dl" in Table 111-4 represents the replacement reserve on a complement of equipment and machinery that was assumed to be appropriate and necessary for operation of the unit. After the unit size has been calculated, the analyst should confirm that the assumed equipment and machinery complement is appropriate to the estimated unit size. If not, a new assumption should be made and * the calculation should be repeated. The variables P1 and P2 relating to loan payments are based on the current financing available. As these loans are paid, value is transferred to equity which is re- flected by the variables VI, V2 and V3. The present analysis is based on 20% of the total investment as equity and 80% financed. The calculation of unit size for leased land may differ significantly from owner-operated land. Land lease payments are deducted from production revenue as a cash overhead item. Loan payments, for land as well as SI1 - 31 equipment, are deducted from the "economic return," The present cost of purchasing agricultural land is often greater than may be supported by lease payments, Land value appreciation is an important component of farm . income. The results of these equations are totally dependent upon the data and assumptions concerning net operating margin, equipment and machinery depreciation, costs of ownership, and levels of economic performance desires, \ A change in any of these assumptions will change the unit size required. In general, the less demanding the economic performance expectations ind the higher the net operating margin, the smaller the unit size required. This methodology for estimating unit sizes is generally applicable to any crop or farming operation for which the necessary data is available. I11 - 31(a) Step 4. Prepare Cashflow Summary. The cashflow summary (Figure 111-5) is a format for projection of farm unit cashflow expressed both in cash and tax terms. The cashflow can be carried forward for as many years as necessary. Typically a five or ten year period is adequate. Data for the cashflow summary is derived partially from Form #l (Figure 111-2) and Form 12 (Figure 111-3). The cashflow summary allows the evaluation of an agricultural investment over a speci- fied time span and permits the addition of other sources of income (such as supplemental uses). Tax advantages of the farm unit may also be estimated. The tax advan- tages are dependent upon the owner/operator's income tax bracket, the economic performance of the farm unit and available investment tax credits. ¶ Table 111-6 gives the source of data included on the cashflow summary. 111-31d DRAFT REPORT 12/12/80 Figure 111-5 Economic Analysis of a Farm Unit, Form 3 Cash Flow and Economic Return Summary I YEARS 1 Year 1 Cash Tax Cash Year Year Tax Cash Tax CAPITAL INVENTORY Flow Flow Flow Flow Flow Flow 1. Land 2. Machinery 3. Equipment 4. 5. 6. Total Investment GROSS OPERATING MARGINS 7. 8. 9. a. 10. 11. Total Gross Operating Margins """S - I 13. Property Tax 14. Insurance 15. Depreciation 16. Replacement Reserve 17. Total Interest Payment 18. Total Principal Payment 19. Interest on Operating Loan 20. Legal and Accounting 28. Net Economic Return 31. I 30. Annual Residual Economic Margin 29. Return to Operator's Labor I I11 - 32 Figure 111-5 CASH FLOW SUMMARY (FORM 3) DATA SOURCES Year 1 Year n1 ITEM BY ROW NUMBER CASH TAX CASH TAX Capital Investment 1. Land 2.-3. Machinery and H H 1 ’ equipment margins H 7.-10. Gross operating w 12. Land rent (if land is leased w 13. Property tax 14. Insurance 15. Depreciation 16. Replacement reserve 17. Capital investment interest payment 18. Capital investment principal payment Purchase price of land Current market value Form 1, Line 3 Annual rent for agricultural land Sum column 18, Form 2 Sum column 19, Form 2 None Sum column 6, Form 2 Sum column 11, Form 2 Sum column 10, Form 2 N/A N/A Same as cash Same as cash Same as cash Same as cash Sum Column 5, Form 2 None Sum column 11, Form 2 None N/A N/A N/A N/A Form 1, Line 3 Same as cash Same as Year 1 Same as cash Sum column 18, Form 2 Same as cash Sum column 19, Form 2 Same as cash None Sum column 5, Form 2 Sum column 6, Form 2 None Sum column 13, Form 2 Sum column 13, Form 2 , , Y Y Sum column 12, Form 2 None minus amortized loans Figure 111-5, continued Year 1 Year, ITEM CASH TAX CASH TAX 19. Operating capital interest Same as Year 1 Same as cash An assumed percentage Same as cash of operating costs multiplied by current interest rate 23. Total fixed and cash costs Sum rows 12 through 22 Same as cash Sum rows 12 through 22 Same as cash H n operations H I w 25. Sales of assets 24. Return from farm IP 26. Investment credits Row 11 minus row 23 Same as cash Row 11 minus row 23 Same as cash Assumption None Same as cash Sum column 17 Assumption Same as cash Sum column 17, Form 2 (Express as a negative number , Form 2 None (Express as a negative number Assumption Same as cash Assumption 29. Return to operator Same as cash 30. Return to investment $ Net economic return Same as cash (Row 28) minus operator's income Net economic return (Row 28) minus operator's income Same as cash Y DRAFT REPORT 11-20-80 3. General Considerations for Application of Mixed Uses a. Mixed Use Opportunities Mixed use proposals should address spe- cific problems and issues existing in a given area. Mixed uses should be applied in the context of the many oppor- tunities that often exist to an agricultural preservation program. Within any coastal agricultural area, various opportunities may exist beyond typical land use regulation which may support agricultural preservation. These opportunities are primarily other reasons, in addition to agricultural preser- vation, for keeping land in an open non-urban status. These may include a variety of reasons. Typical examples are utility corridors, clear zones surrounding airports, open space green belts surrounding urban areas, groundwater re- charge areas, watershed lands, and wastewater irrigation areas. These uses are typically compatible with some form of agriculture and provide additional justification for holding land open. They often provide scurces of funds for various purchase schemes. 3 Probably the best example of an opportunity is land for wastewater irrigation. It solves several planning goals at DRAFT REPORT 11/20/80 once, while providing for long .term production use of the land. Most coastal urban areas have problems with wastewater disposal as well as loss of agricultural land. Cities or districts can secure land by a variety of techniques as a part of the sewer project capital improvement program (R-14). By doing so, they accomplish at least three objectives: . Guaranteed, environmentally sound disposal of waste- water . Achievement of the agricultural preservation require- ments of the state Coastal Act . Permanent green belts in and around urban areas. Once these opportunities have been identified, they should be geographically located on the parcel base map. A mixed use program is the addition of a non-agricultural use ' to a continuing agricultural operation which provides sup- plemental income to the operator and/or landowner, or otherwise allows a portion of the farm unit to remain in production. Mixed use opportunities fall into a number of different categories depending upon the location of the farm, the proximity to urban areas and the surrounding recreational opportunities. Three general categories are identified: I11 - 36 .~ ." __ " . "" ""- . . c- L . . .. -. .. DRAFT REPORT 11-20-80 . ... Those which augment the farm operation by providing on-site processing of raw products Those which serve a visitor market such as roadside farm product sales . Those which serve a resident market The potential for on-site processing uses depend upon the type of farm, the structure of the local or regional commodity market, the availability of necessary infrastructure such as transportation and utilities, and the desire of the operator to expand his or her management responsibilities. An example of on-site processing is a milk processing plant on the dairy farm. On-site processing is advantageous for more remote farms. Transportation of finished products is often less expensive than raw products and processing costs in a rural area may be below large urban area processors. On-site processing also allows the farm to efficiently serve local markets directly. In coastal areas where visitors are a large or dominant portion of the local economy, visitor serving facilities may be developed in agricultural areas. Uses may include: . Visitor serving commercial uses On-site recreation such as a guest ranch, fishing, or hunting \Ti '. .J ,- ', DRAFT REPORT 11/20/80 Commercial camping and recreational vehicle (RV) sites Coastal agriculture within an urban fringe area is typically subject to demand for the full range of urban uses, resi- dential, commercial, industrial, and institutional. The level of this demand is determined by the urban areas' growth and the availability of other developable land. It is easier to imagine the mixed uses whi.ch provide on-site processing or serve visitor markets than mixed uses which are essentially urban. There are many existing examples of the former types of mixed.uses but the mix of urban and agricultural uses-is less common and more problematic. This is mainly because of the inherent conflicts which tend to exist between urban and agricultural land uses. Nonetheless, some potential does exist if the inherent con- flicts are somehow mitigated. The two most important com- ponents of an agricultural urban mixed use would be some form of permanent dedication of the agricultural portion of the project and adequate buffering to limit operational con- flicts. Mixed uses in the more remote agricultural areas, as exem- plif ied by the Galletti Ranch, should mostly involve low- intensity visitor oriented uses or supplemental uses asso- 111 - 38 DRAFT REPORT 11-20-80 ciated directly with the agr'kulture 1 such as on-site pro- cessing. In this case, implementation may require amendments to the local zoning ordinance (if not already compatible) which permits these supplemental uses, and possibly finan- cial assistance. Mixed uses in rural areas are essentially an economic development effort, where the Conservancy or the local government facilitates improvements to an existing agricultural operation. In this case land use regulation is viewed as the main component of the agricultural preservation program. Supplemental uses are intended to mitigate hardship situations and hopefully improve local agricultural econ- omics. The situation is entirely different in an urban fringe aarea. For purposes of this report, an urban fringe area is defined as an area contains, is directly adjacent to, or is inter- spersed with urban infrastructure such as roads, sewer and water service, etc. These areas have typically been indi- cated for some level of urban development in past planning efforts. Within urban fringe areas, high land values . and urban conflicts and general decay of the business infra- structure necessary for agriculture typically lead to a continual decline of agricultural operations. This process occurs in many cases in spite of land use regulations which attempt to hold the agricultural use. In these urban fringe DRAFT REPORT 11-20-80 /i areas, supplementa ' uses must be combihed with innovative types of land use regulations, including density transfer, planned unit developments, etc. Under this scheme, the value of the agricultural land for urban uses is utilized to preserve a portion of the land for agricultural use. This approach may not always be appropriate. Also, there will be numerous problems to be solved regarding the inherent con- flicts between agricultural and urban uses. The appropriate application of supplemental uses to preserve agricultural land on the urban fringe occurs when a unique agricultural resource exists, or when the agriculture is a component of the urban open space system, or contributes to stable urban boundaries. The mixed use concept for urban fringe areas is essentially = a density transfer approach for a single land ownership or group of cooperating ownerships. The test as to the type of density required in relztion to the entire ownership would have to be negotiated on a case-by-case basis, but general guidelines canbe established for agiven area. The essential rule is that the total market value of the land -- with the development concentrated upon a portion, plus the residual agricultural value -- must be roughly equivalent to the original market value of the entire holding. DRAFT REPORT 11-20-80 . Another key difference between the density transfer concept recommended for urban fringe areas, and the mixed use con- cept, as applied in the more rural areas, is that there would not necessarily be an ongoing relationship between the new "supplemental" use and the remaininq agricultural use, which would generally be the case in rural areas. In fact, an existing landowner, who may wish to sell off land, could put a project together in concert with the local government, sell the supplemental use portion of the land to one buyer and the agricultural portion to another buyer. Land divisions will nearly always be involved. It should be recognized,that most mixed use opportunities are of limited use. That is, are constrained by market demand or other factors to a few locations or occurances. For example, on Mendocino's south coast, there may be demand for milk processing or a small cheese factory, but this could only occur once. It would serve as a solution to a single agricultural operation directly, although there may be in- direct benefits to other farmers. Other mixed uses, such as wastewater irrigation, may have broader use, but will be limited by environmental characteristics and proximity to the source of the wastewater. Once potential mixed uses have been identified a market DRAFT REPORT *11-20-80 analysis should be conducted to determine whether or not the potential use would succeed. The market analysis can vary from a straight-forward judgment on the part of knowledgeable persons to a detailed study which quantitatively estimates demand, existing supply, and potential market share for the proposed supplemental mixed use. The market analysis for the three types of mixed uses would focus upon specific markets: Mixed uses involving on-site processing should focus on the specific agricultural commodity market and the role the new processing capacity might play in meeting local, regional, or other demand. Mixed uses involving recreational uses should focus on the existing pattern of recreational use in the area, how demand is being met, and projections for future re- creational use. Mixed uses involving urban uses should focus on supply and demand for the potential mixed use in the market area. Key variables are local population, economic growth, and competing supply of land. The market analysis conducted by the planning agency need not be specific or extremely detailed. The purpose of the DRAFT REPORT 12/12/80 analysis is simply to determine if the potential mixed uses are feasible in the study area. The answer to this question is often obvious and elaborate efforts are simply not re- quired. When a specific proposal is developed, however, the project proponent may wish to conduct a more detailed, specific market analysis for the project. This data, as it is developed, can be used by the local planning agency for evaluating subsequent projects. b. Mixed Use Impacts The addition of non-agricultural uses in an agricultural area can lead to various impacts. Insofar as possible, the local agency should anticipate these impacts - and attempt to mitigate them by revisions or amendments to the project design. ,As indicated in the model mixed use policy, mixed uses are themselves intended to enhance the agri- cultural operation or local agricultural economy. BY so doing they would address such fundamental problems as high land values in urban fringe areas, the poor competitive relationship of many rural coastal areas due,to their rela- tive distance from urban markets, and, in the case of both urban fringe and rural areas, the dependence by producers upon conventional marketing channels. Urbanization is an ongoing process in California as its population grows. The coastal zone is particularly attrac- I11 - 43 -. . DRAFT REPORT 12/12/80 .. -. tive as a place to live for many the same reasons agriculture located in the coastal zone (moderate climate, access to population centers, etc. ). Many cities and towns which -. I11 - 43(a) DRAFT REPORT 11-20-80 originally were developed to serve the surrounding agri- cultural economy have grown and displaced much agriculture and made continuing operation for the agriculture remaining difficult. Growth of major population centers along the coast and the advent of automobile transportation and free- ways has stimulated the market for rural residential and second home development. Agricultural areas are very at- tractive for this sort of development. Urbanization, either intensive urban uses or rural resi- dential type development causes two basic types of impacts on agriculture. Increase in land values beyond the land's value strictly for agricultural production Agricultural-urban conflicts including impacts of farm operations on urban land use and the impact of urban land use on agricultural operations. . The dynamics of land values within a conflict area is typ- ically complicated. In general, the pattern is established by the urban land market. As urban pressures develop prices invariably increase. Urban land uses typically yield a higher return on a per acre basis than does agriculture. The ' "-. \ '. ._. DRAFT REPORT 11-20-80 price established by the urban land market is much greater than can be justified by agricultural returns. Price of agricultural land rises to reflect expected future urban earnings (usually discounted by some level of uncertainty). The possibility of future conversion to urban use and the price inflation associated with it typically affects a much greater amount of land than can be absorbed by the market for a long time (often greater than 20 years). The chance for future urban conversion create farmers' unwillingness to make capital investments for long term productivity. The result of this process is that land is often removed from production, mined or underutilized. A large problem associ- ated with land values in,excess of agricultural use values is the problem this creates for turnover of the land to new agricultural operators, either heirs or new investors. If young farmers cannot afford to enter local agriculture, because of high land costs, it is only ,a matter of time before existing operators retire, cash out and operation ceases. . Agricultural-urban conflicts result from the close proximity of urban land use and agriculture. The conflicts work both ways, that is, farm practices may impact or be a nuisance to urban land use and visa versa. Farm practices which often cause problems for nearby urban land use, particularly resi- dential uses include: DRAFT REPORT 11-20-80 price established by the urban land market is much greater than can be justified by agricultural returns. Price of agricultural land rises to reflect expected future urban earnings (usually discounted by some level of uncertainty). The possibility of future conversion to urban use and the price inflation associated with it typically affects a much greater amount of land than can be absorbed by the market for a long time (often greater than 20 years). The chance for future urban conversion create farmers' unwillingness to make capital investments for long term productivity. The result of this process is that land is often removed from production, mined or underutilized. A large problem associ- ated with land values in excess of agricultural use values is the problem this creates for turnover of the land to new agricultural operators, either heirs or new investors. If young farmers cannot afford to enter local agriculture, because of high land costs, it is only a matter of time before existing operators retire, cash out and operation ceases. 4 Agricultural-urban conflicts result from the close proximity of urban land use and agriculture. The conflicts work both ways, that is, farm practices may impact or be a nuisance to urban land use and visa versa. Farm practices which often cause problems for nearby urban land use, particularly resi- dential uses include: DRAFT REPORT 11-20-80 . Spraying of gesticides 0 Dust 0 Noise 0 Odors Urban uses nearby agriculture typically are associated with increased operational costs or loss of crops or livestock. The impacts include: . Ctop theft . Predation of livestock by domestic animals . Equipment theft and damage . Trespassing and off road vehicle use Random creation of small "rural residential" parcels and other speculative land divisions which create parcels smaller than can be efficiently operated. In addition to the agricultural-urban conflicts and land value impacts, many agricultural commodities are suffering internal economic difficulties. While some crops and live- stock production is doing well from a cost-income standpoint, others are relatively poor performers. Factors which have been increasing the cost of agriculture which have not been t entirely reflected in price increases include: DRAFT REPORT 11-20-80 Market competition from other producing areas with more favorable costs of production Costs imposed by environmental quality regulations such as water quality, air quality, etc. Competition for factor inputs such as labor, water, and land The rising cost of energy The rising cost of money Since mixed uses are conscious combinations of agricultural and non-agricultural uses, it can be expected that these impacts would be mitigated by the project design and other requirements. Land value impacts should be mitigated by the required land dedication or deed restrictions. Operational impacts must be mitigated primarily to protect design fea- tures. Some combinations of agricultural operations, non- agricultural land uses, given a particular site, may simply not be feasible because operational impacts are beyond so- lution. In this case, other use combinations should be sought. 4. Specific Project Application of the Farm Unit Analysis The farm unit analysis can be used in both a generalized fashion as would be the case for establishing DRAFT REPORT 11-20-80 !, appropriate farmunit parcel sizes,or very specifically, for example, the Coastal Conservancy would typically use the methodology when evaluating a specific mixed use proposal in which they were involved. The following considerations assist the application of the farm unit analysis to specific farm units. Step 1. Prepare Description of the Operatinq Unit. (Figure 111-2) Because an actual farm unit is being considered, the unit description can be very specific. A problem may exist in having an owner/operator release detailed information about all operational costs because this information is proprietary. Often competition with other farmers' makes release of this information im- possible. Although it would be best to have the actual operating data, the analyst nay have to rely upon more general data and simply ask that the operator confirm the general validity of the estimated costs and revenues. Step 2. Prepare Investment Cost Summary. (Fugure 111-3) Similar to Step 1, the analyst has an opportunity to accurately record capital investment costs. However, similar limitations regarding proprie- tary information will apply. The cost basis in the land and the total amount of debt are also proprietary in DRAFT REPORT 11-20-80 I '. . " nature. The basic components of machinery and equip- ment, as well as land can be well defined. Ownership - costs related tocost basis, debt service, etc., may have to be estimated using the "financial prototype" approach used in the case studies. Step 3. Calculation of Farm Unit Size. No special consideration for the Conservancy's use is required. Application of the specific farm unit oper- ating costs and income and capital investment costs would result in the minimum size for the particular farm unit being considered. i Step 4. Prepare Cash Flow Summary. (Figure 111-5) The cash flow summary includes data from the operating cost and income summary and investment cost summary in a protection of farm unit summary in a projection of farm unit cash flow. The summary indicates both cash flow and tax flow associated with the farm unit, and estimates the economic returns from the farm unit. This information would be used as the baseline upon which the supplemental uses would be applied. The analysis would provide valuable information regarding the impacts of the new use upon the existing operator and operation, and also permit the comparison of different DRAFT REPORT 11-20-80 supplemental uses, and indicate long term financial performance. . . __ DRAFT REPORT 11/20/80 5. Tax Considerations for Farm and Mixed Use Operations. Income and estate tax considerations are par- ticularly important to farm operations and mixed use pro- jects. The tax consequences of such projects produce real economic effects and also produce perceptions about economic effects. Many of the "tax shelter" aspects of agriculture, such as annual deductibility of the preproduction costs of an orchard or vineyard by farm syndicates are no longer appli- cable. The tax laws were changed in response to perceptions about undesirable tax avoidance. Other tax benefits remain and are important to a complete economic evaluation of the farm unit. In fact, actual and perceived tax consequences are a primary reason that the economic evaluation depends on the circumstances of the owner/operator, as well as the circumstances of the agri- cultural unit itself. There are certain tax laws for agriculture that are not applicable to other forms of business. For example, a farmer can deduct all, or a portion of, the cost of soil and water conservation improvements, while another business (e.g., a land developer) cannot. As another example, a farmer (with certain exceptions) can use the cash basis of accounting, DRAFT REPORT 11/20/80 i without treating crops, seed, etc., as an item of inventory in the way that would be required of other businesses. In general, however, the tax impacts on farm unit operations arise out of the same laws that apply to any other business, but tend to have a different effect. The effect is generally applicable to: An operator or owner having non-farm income that can be "shelter" from incdme tax by farm unit operating losses or credits. An ownerr or investor, who, because of other assets or other income, does not need a high annual income, but is very interested in capital gain. (Increasingly, foreign investors are seeking an asset that is safe from ex- propriation, and that maintains a constant real value in the face of inflation). I An additional sensitivity to tax consequences arises because an agricultural operation may be difficult to convert into ready cash at the time that estate taxes are due. The major tax effects of farm operations are summarized briefly in the following paragraphs. It should be carefully understood that this is general information. It is intended only to identify instances where a more careful analysis I11 - 53 _" . . " . "" . . . . - ._~ "" " "" - - ." . .- . ... - - . ". DRAFT REPORT 11/20/80 .- - . should be done for an individual owner, or operator, by a qualified tax practitioner. Income and estate tax planning are highly specialized areas, and appropriate strategies depend very much on the, circumstance of the individual taxpayer. a. Profit and Loss The traditional farming "tax shelter" has depended on a situation wherein net operating costs exceed net operating income. In some types of investment (e.g., real estate development), the term "paper loss" is applicable since allowable depreciation (a non-cash item) is responsible for the difference between profit and loss. In fact, the asset is often appreciating in value, rather than depreciating. In farm operations, this is generally not the case. The "loss" from farm operation is a true economic loss, but it may be justified: . Because the farm unit (or a new mixed use) is in its formative period, and early-year losses can lead to significant profits over the long term. Because the owner/operator believes that increases in value of the assets more than justify theoperatin gloss. . Because the owner - particularly, an owner with a sub- stantial outside income, derives a certain amount of 111 - 54 " DRAFT REPORT 11/20/80 enjoyment from the farm operation, and considers the tax deductible operating loss to be outweighed of other gains. The third example deserves further discussion. A farm operation that is conspiciously and demonstrably, "...not engaged in for profit ..." does not produce a deduction. However, if the operation produces a prof it in two out of five consecutive years (or two out of seven for breeding, train- ing, showing, or racing of horses), the presumption is that the operation is not creating a so-called "hobby loss." The loss is deductible against other income. The preceding discussion of deductibility of farm losses is generally applicable, only if the taxpayer has other income to shelter.' This situationwould exist, for example, when the farming/mixed use operation was owned by one or more inves- tors who held the property as a general or limited partner- ship, and who had substantial income from other sources. The option of a corporation to be taxed as a partnership, provided by subchapter S of the Internal Revenue Code, may be avail- able, depending on the number and type of owners, and the sources of income. There is no equivalent to the Federal provision for tax option corporations in California's income tax laws. DRAFT REPORT 11/20/80 The use of carefully planned farm loss deduction strategies can be combined with a capital gain strategy (discussed below). For example, a supplemental use can be structured with the intention of selling or exchanging the property at the time when tax benefits are negligible or discontinued, and operating profits are available. For example, tax motivated investors could sell or exchange a mixed use unit to a buyer (e.g., a foreign investor) motiviated by capital appreciation and income, but not by availability or deduc- tions from U.S. taxes. b. Capital Appreciation, Gains and Security A major factor in the total economic value of a farm unit (and, increasingly, of any asset as long as the U.S. economy continues to experience high rates of inflation) is the ability of the asset to maintain or increase its value in the face of inflation. Farmland has tradi- tionally been able to maintain and increase its value, in part, because of the ability of the agricultural products to be adjusted in the marketplace to compensate for the effects of inflation. A non-corporate taxpayer may deduct from gross income 60% of net capital gains. In effect (neglecting the maximum tax on personal service income), the total capital gain is taxed at 111 - 56 DRAFT REPORT 11/20/80 f -. _. 40% of the rate that would be applicable if, instead, the taxpayer enjoyed the same amount of ordinary income. Thus, a high bracket taxpayer can justify operating losses, and, in fact, can improve farming practices, thus increasing the size ’ of the deductible loss, wi,th an objective to receive the preferential treatment given to capital gains when the asset is sold. A final factor should be mentioned regarding appreciation of agriculturalvalues. The extent to which agricultural lands in California are owned by foreign investors is not docu- mented, since disclosure of the true owners of real estate is not required in all circumstances. Nonetheless. there is no question that foreign investors are extremely active in California’s agricultural real estate market. This activity tends to accelerate the increase in value because foreign investors often have motivations that are satisfied if an investment maintains value in the face of inflation, and is secure from the threat of expropriation. As long as a world market is bidding for California agri- cultural land, and as long as immediate annual return is not the primary objective of a portion of this market, then capital gain considerations will continue to be important in the economic evaluation of mixed uses. 111 - 57 I DRAFT REPORT 12/12/80 C. federal income tax Investment Tax Credit The availability .- of a credit against for investments in certain depreciable personal property was discussed on page FF. In con- trast to a deduction, the value of which depends on the taxpayer's tax bracket, a tax credit produces a dollar-for- dollar elimination of taxes that would otherwise be paid. Nonetheless, the tax credit is of greater economic value to the higher bracket taxpayer. The percent by whic,h the higher bracket individual would have to have increased earnings to have the same net remaining income as exists because the credit is higher than for a lower bracket taxpayer. d. Calculating the Impact of Tax Ef- fects Provided that appropriate cautions are given about the necessity to review an actual situation with an individual's tax practitioner, it is often useful to make an initial example calculation of the after-tax impacts of farm unit economics. The after-tax income available to an individual with and without the farming operation can be calculated to indicate the total economic return to that individual. 'A form to facilitate this calculation is shown as Figure 111-6, and is followed by a comDleted example (Figure 111-7). 111 - 58 DRAFT REPORT 12/12/80 Figure 111-6 Illustration of a Tax Impact Analysis of a Farm Unit Operation (Sample worksheet with instructions) TAXPAYER FILING STATUS NON-FARM INCOME 1. Personal service taxable 2. Other taxable income 3. Income tax - U.S. 4. Income tax - California 5. Gross income tax 6. U.S. investment tax credit 7. Net income tax FARM OPERATIONS 8. Taxable income from farm 9. Personal service taxable 10. Total other taxable income 11. Income tax - U.S. 12. Income tax - California 13. Gross income tax 14. U.S. investment tax credit from farm investments 15. Net income tax 16. Net economic benefit from tax considerations income other than from farm operations operations income I11 - 59 Figure 1x1-6, continued DRAFT REPORT 12/12/80 Sources of Data Line 1 Estimate this amount for each year of the analysis. Deduct applicable items of tax preference income. Line 2 Estimate this amount for each year of the analysis. Line 3 Apply appropriate tax tables (e.g. , from R 34 or R 36) to calculate taxable income. Use "this year ' sn tax notes for future years , unless a change, is assured. Carry out the alternative calculation for Personal Service Taxable Income if taxpayer benefits from the maximum 50% rate. Line 4 Apply appropriate tax tables (e.g., from R 35) to calculate taxable income. Line 5 Line 3 plus Line 4. Line 6 Include any available investment tax credit other than from farm operations. Line 7 Generally, Line 5 minum Line 6, but the credit reduces only U.S. Income Tax. . See R 36 if both Line 3 and Line 6 exceed $25,000. Line 8 Taxpayer's portion of Form 3, Line 28 (Cash Flow & Economic Return Summary) . Line 9 Normally equal to Line 1, unless taxpayer also receives personal service income from the farm operation. Line 10 Line 2 plus Line 8. Line 11 Same procedure as for Line 3. Line 12 Same procedure as for Line 4. Note if loss from farm operations (from Line 8) creates a tax preference item under California law and adjust tax calculation. Line 13 Line 11 plus Line 12. Line 14 Taxpayer's portion of Form 2, Column 17 (Investment Summary). Line 15 Same procedure as for Line 3, applied to Lines 13 and 14. Line 16 Line 7 minus Line 15. 111 - 60 Figure 111-7 Illustration of a Tax Impact Analysis of a Farm Unit Operation -- Hypothetical Example TAXPAYER SAM SURGEON, M.D. FILING STATUS Married, filing joint return NON-FARM INCOME 1. Personal service taxable 2. Other taxable income 3. Income tax - U. S. 4. Income tax - California 5. Gross income tax 6. U.S. investment tax credit 7. Net income tax FARM OPERATIONS 8. Taxable income from farm 9. Personal service taxable 10. Total other taxable income 11. Income tax - U.S. 12. Income tax - California 13. Gross income tax 14. U.S. investment tax credit from farm investments 15. Net income tax 16. Net economic benefit from tax considerations income other than from farm operations operations income $100,000 20,000 52 , 008 11 I 232 63,240 -0- 63,240 (15,000) 100,000 5,000 42 I 628 9,582 52,310 1,000 51 IO00 $ 12,240 I11 - 60(a) DRAFT REPORT 11/20/80 e. Estate and Inheritance Tax AS noted previously, the - cash re- turn to agriculture is lower than for certain other capital investments because a portion of agriculture's economic return comes through appreciation of land asset value. Fur- ther, the appreciated value of the farm unit cannot be turned into cash nearly as readily as (say) a publicly listed security that has appreciated in value. These factors lead to the perception that the farmer "lives poor and dies rich and the family then can't pay the death taxes." In fact, the effect of estate and inheritance taxes is a key factor in agricultural economics. The effect is even more significant if an owner - particularly an older owner - is considering a mixed use and wonders whether the necessary capital investment should instead be kept available to pay death-related taxes. The intergenerational problems of a non-corporate farmer are quite comparable to those of any other closely held, privately owned business. Partial solu- tions lie in recognizing the ultimate requirement to pay estate and inheritance and take such standard estate planning steps as taking full advantage of federal laws that recognize the illiquid nature of a family-owned farm; I11 - 61 DRAFT REPORT 11/20/80 . securing adequate life insurance to pay estate taxes and, if necessary, providing cash in the estate that the heirs can then use to pay inheritance taxes. While the estate planning problems of agricultural operators are not unique, it should be understood that they are becoming more difficult to solve. Price inflation and real dollar appreciation create difficulties in any attempt to secure "enough" cash to cover estate taxes. Further, an "adequate" level of life insurance secured when an operator was rela- tively young and healthy, may appear totally inadequate 20 years later - at a time when additional insurance may no longer be available, A successful and'carefully planned mixed use project can ease estate planning problems in at least two important ways. First, certain mixed use concepts (e.g., cluster develop- ment) can produce significant cash flow. The mixed use directly improves the liquidity of the agricultural oper- ator. The second role of a mixed use strategy in estate planning is applicable even if the mixed use does not increase cash flow dramatically. Assuming the augmented use is economically I11 - 62 DRAFT REPORT 11/20/80 ;' -\ ,. *. . /' sound (considering profit, appreciation and intangible ap- peals) t it should be practical to establish a partnership or joint venture with a financially qualified partner. In . effect, the partner would buy an interest in the underlying asset - the farm, ranch, or vineyard - as well as financing the augmented use. The amount of payment and the terms of the transfer of partial ownership depend on all applicable cir- cumstances and are matters for negotiation between the par- ticipants. The point is that involving a partner can produce cash at the time a mixed use is implemented. 111 - 63 . -~. "." . DRAFT REPORT 11-20-80 IV. CONSERVANCY ACTION PROGRAM A. Introduction The Conservancy action program is essentially a series of recommendations regarding how the California Coastal Conservancy might implement a mixed use project and improve its agricultural preservation program. The recom- mendations address how mixed uses might be supported by the Conservancy. They also address management and legislature changes. Although the mixed use concept can operate at the local level without Conservancy intervention, an active and supportive conservancy agricultural preservation program could be of great assistance to local governments who wish to utilize this tool. There are three different roles the Conservancy can perform regarding mixed uses: The Conservancy can serve as a technical assistant to local governments. In this role the Conservancy staff might identify mixed use opportunities in a given area and assist the local government in evaluating actual mixed use proposals. Specific technical assistance could include market analysis and preGaration of the farm unit analysis. IV- 1 DRAFT REPORT 11-2 0- 8 0 The Conservancy can support a local government by serv- ing as the land bank for dedicated land or development rights that result from mixed use projects. In this role the Conservancy could also provide financial support for a specific project. The most aggressive role for the Conservancy would be actual packaging of mixed use projects. This would involve Conservancy purchase of agriculture land and sell back of a mixed use project. In this role the f Conservancy would act as a developer working closely with local government. The Conservancy would identify a mixed use opportunity, prepare an evaluation, 9urchase the land, and gain project approval. Both the agricul- tural operation and the non-agricultural components would then be marketed. A major conclusion of this report is that the California Coastal Conservancy could have, with adequate financing and legislative support, a major and effective role in preserving agricultural land in the coastal zone. The initial focus of the Conservancy's agricultural program, however, should be upon completing a project. A key to this goal is locating a situation where there is a need as well as willing players -- 3 including the land owner, the local government, and the n-\ i .-.J DRAFT REPORT 11/20/80 California Coastal Commission. A distinct difference was identified regarding the appli- cation of mixed uses in rural versus urban fringe areas. Conservancy mixed use programs, which essentially involve financing, assisting, or otherwise promoting a supplemental use on an existing agricultural operation are ideal for use in rural areas beyond the urban fringe. These areas, while not subjected to intense development pressure, may still suffer from poor economic performance due to factors such as the lack of service or processing infrastructure, or high costs of feed, water, energy, and labor. This poor economic performance may lead to complaints about lack of economic viability and subsequent land divisions which further aggra- vate maintenance of a healthy agricultural economy. Supple- mental uses in rural areas should be targeted at specific local problems such as energy production, development of local markets, as well as producing an additional source of farm income. Lowering the cost of production is equivalent to increasing income. A supplemental use can also broaden the economic base of a given farm unit and thus make inter- generational operation and transfer more successful. In the urban fringe areas mixed use programs will typically IV - 3 DRAFT REPORT 11-20-80 be associated with innovative land use policies. This is clearly indicated by the Carlsbad pilot study. Development pressures and existing land use conflicts are so great that simply improving a farm unit's cash flow is generally not adequate. In urban fringe areas, the Conversancy would utilize its traditional powers and resources (purchase- sellback, lot consolidation, etc.) in cooperation with the local agency and the California Coastal Commission. This is in contrast to the "economic development" role suggested by the mixed use programs in rural areas. B. Background of the Recommended Action Program The Conservancy staff has recognized the essential issues and problems surrounding coastal agricultural preser- vation. In a report prepared for the Coastal Conservancy Board, in October 1978 (R-17), the Executive Officer outlined the magnitude of the problem, the related Coastal Act poli- cies, the Convervancy's role in agricultural preservation, and techniques the Conservancy might apply to the problem. The problems presented in the Executive Officer's report have not decreased over the past two years. If anything, while inflation has proceeded and the critical decisions involved in the LCP's are surfacing, agricultural preservation has become even more difficult to achieve in the coastal zone. DRAFT REPORT 11-20-80 The Conservdncy Action Program begins with a summary of present powers and resources of the Conservancy, and a restatement of the scale of the problem of preserving coastal agriculture. This is followed by the program recommenda- t ions . 1. Summary of Present Powers and Resources a. Leqislation The California State Coastal Conservancy was brought into existence by the Coastal Conservancy Act of 1976, and funded by the Park Bond Act of 1976. It has been in operation since 1977. The Conservancy is granted author- ity for its agricultural preservation program under Sections 31150 through Section 31155 of the Government Code. This authority has been summarized as follows (R-19): "Section 31150 permits the Conservancy to acquire fee title interests in land located in the Coastal Zone in order to present loss of agricultural land to other uses and to assemble agricultural lands and parcels of ade- quate size to permit agricultural production. Section 33151 states that in acquiring an interest in agri- cultural land, the Conservancy shall give the highest priority to urban fringe areas where the impact of urbanization of agricultural land is greatest. . DRAFT REPORT 11-20-80 Section 33152 sets forth the two findings which the Conservancy must make in approving any agricultural preservation program. The first finding is that the lands to be acquired must be specifically identified in a certified Local Coastal Program (LCP) (or in an adopted Issue Identificationfiork Program) as agricultural lands. The second finding is that there must be no other reasonable means, including the means of police power, of assuring continuous use of such lands for agri- cultural purposes. As with all of the Conservancy's programs, the ultimate purpose is to carry out the policies of the Coastal Act of 1976. The policies most directly related to agricul- tural preservation are found in Sections 30241 and 30242 of the Coastal Act. These provide that the maximum amount of prime agricultural land shall be maintained in agricultural production to protect the agricultural economy. Conflicts between agricultural and urban uses shall be minimized by: . . Establishing urban-rural boundaries/buffer areas; . Limiting conversion of agricultural land to par- cels whose viability is severely limited by con- DRAFT REPORT 11-20-80 i flicts with urban uses where conversion will com- plete a logical neighborhood and help establish an urban development; b Developing lands not suited for agriculture first; Assuring that public facilityand service expansion and development do not impair agricultural via- bility; and Assuring that productivity of prime lands is not diminished by divisions and adjacent development (30241) . All other agriculturally suitable land shall not be converted to non-agricultural use, unless (1) continued or renewed agricultural use is not feasible, or (2) conversion would preserve prime land and concentrate development. Such conversion shall be compatible with adjacent agricultural uses (30242) .I' b. Financing and Budget The Conservancy was funded initially in 1976, under the State Urban Coastal Bond Act. The Conservancy was granted $10 million. Seven million was budgeted for DRAFT REPORT 11-20-80 Table IV- 1 Conservancy Costs - Cash, Accrued and Projected as of December 1979 Cash Expenditures - Administration (through FY 1981) - Programs Non-agr icultural 1,039,400 Agr icul tur a1 6,500 Total Cash Outlay $ 2,845,900 Comi tted Funds - Administration (through Fy 1983) - Programs Non-agr icul tural Agr icul tur a1 Total $ 1,200,000 2,085,500 665 ,0001 $ 3,950,500 Un-committed Funds - Programs Non-agr icul tural $ 3,452,500 Total - Cash, Committed & Non-commi t ted $ 10,24a,9002 Source: California Coastal Conservancy (R-30) 1/ It should be noted that the Morro Valley agricultural preserva- tion project represents 98% of the committed agricultural project funds . 2/ Additional funds may become available in the future from an appropriation of Tidelands oil revenues. DRAFT REPORT 11/20/80 projects and three million was budgeted for administration and contingencies or emergencies. Table IV-1 shows the actual use of the Conservancy's funding. A total of $2.8 million will have been expended by the end of 1980/81, an additional $4.0 million will have been committed but not yet expended and the remaining $3.5 million will remain uncommitted and available. \ Future funding for the Conservancy will come from additional state grants and financial returns on projects. Previous Conservancy projects have returned $0.88 for every $1.00 spent. Of course, turn around time for the payback is often several years. At existing levels of expenditure, the Conservancy will need an additional grant by the end of fiscal year 1983. However, with passage of the 1980 State Park Board Bond Act, the Conservancy is guaranteed an additional $10 million. The Conservancy will also administer $20 million in grants to local governments for LCP implementation. 2. Summary of the Conservancy's Agricul- tural Program During its existence, the Conservancy has evaluated a total of eight agricultural projects. Of the total, two projects were deleted after protracted but un- IV - 9 I DRAFT REPORT 11/20/80 successful negotiations. One was preserved without Con- servancy action; one was dropped from further consideration by the staff; and four are pending. A summary of the projects 3 Table IV-2 CONSERVANCY AGRICULTURAL PROJECT LIST Date of Conservancy Board Action Project Description Proposed Action Results and Comments 1. March 1979 2. April 1979 c" 3. May 1979 t c1 0 4. February 1980 5. Pending 6. Pending 7. Pending 8. Pending San Luis Obispo County Moro Valley Purchase 146 acres San Luis Obispo County Osos Valley Purchase 70-120 acres North Monterey County Exercise lease option on 365 acres San Mateo County Half Moon Bay Purchase 146 acres of agricultural land Mendocino Botanical Gardens Santa Cruz County Zils, San Andreas Rd. Ventura River Mouth Zellerbach Property Odello Ranch Project (Monterey County) Preserve agricultural Project deleted because "easement" on subject Owner was unwilling to land and commit an sell at appraised value. "easement" on adjoining land. Save the central agri- Project deleted because cultural lands by of complexity and cost of purchasing selected purchasing multiple ownerships. easement properties. Extend lease on farm land Project deleted because for farm cooperative. an agricultural cooperative was able to secure a lease. Save agricultural land Conservancy Board has taken which is surrounded by no action pending receipt of urban development. further information. Purchase of open space Project dropped by staff. easement on 45 acres. Purchase-Sellback of Staff proposal pending 30 acres of agricultural Conservancy Board action. land on urban fringe. Purchase-Sellback of Staff proposal pending 105 acres of agricultural Conservancy Board action. land. Cooperative venture with Staff proposal pending the Big Sur Land Trust to Conservancy Board action. preserve agricultural land via purchase-sellback. -. Source: R-27 , . 11 Y ti ...- DRAFT REPORT 11-20-80 and their status is presented in Table IV-2. The method of preservation proposed in each case was purchase of fee title, or purchase of some other interest in the land. No projects have been broughttocompletion successfully, and no preservation techniques other than purchase have yet been attempted. C. The Conservancy's Role in Implementing Mixed Use Programs 1. General Considerations As stated in the introdution, the Conservancy has essentially three roles in supporting the mixed use concept: The Technical assistance to local agencies Serving as land bank for local government initiated projects Developer of mixed use projects. following paragraphs describe these roles in more detail. a. Technical Assistance to Local Agencies Under the first role, technical assis- tance, the Conservancy would advertise its functions and -\ DRAFT REPORT 11-20-80 provide technical assistance to local agencies. The first aspect,’ advertising, would involve communicating to local agencies that specific services, such as project funding, land banking, and technical assistance are available. Ad- vertising might also include cooperation with federal aqen- cies to inform local agencies of how various federal programs might be applied in a local agency mixed use program. The farm unit analysis described in Chapter I11 is designed for use by non-economists; however, a clear understanding of the model and a maintained data base maintained by the Conservancy could greatly assist local governments who were considering a mixed use proposal. In such a case, the Conservancy’s familiarity with real estate finance would also be of great assistance. b. Financial Surqort and Land Bank The second role in supporting the mixed use concept should be a grant program for financing supple- mental uses. In this role, the Conservancy would evaluate various mixed use proposals made by landowners through the local agencies. Attractive ?roposalswould be considered for grant funding. In return, the Conservancy would receive development rights to some portion of the land. 3 IV- 12 DRAFT REPORT 12/12/80 In this event, the landowner would be assured a more inten- sive, economically productive land use, as well as having the advantage of grant funding. In return the Conservancy would receive title to development rights, scenic easements or accessways. c. DeveloDer of Mixed Use’Projects The Conservancy should evaluate the feasibility of a mixed use project on land that is purchased in fee. If a mixed use concept is feasible, the Conservancy should implement this project during the time that the land is in public ownership. When the land is offered for resale (with the development rights remaining in public ownership), potential buyers will capitalize the additional revenue from the mixed use. This additional value would seldom equal the value of the land with its development rights, but can provide an important increment of value. Presence of the mixed use may increase buyer interest in the property because the energies required to run the mixed use operation and the improved financial return may well suggest that a full-time owner/operator would be appropriate. Financing for a Conservancy-initiated mixed use project could come directly from Conservancy funds or from any other appropriate source, such as the Farmers Home Administration. IV - 13 2. DRAFT REPORT 11/20/80 Conservancy Action Steps Toward Implementinq Case Study Projects The two case studies, the Galletti Ranch in Mendocino County and the Carlsbad Area in San Diego County, provide good subjects for howtheConservancycouldintervene to implement 3 a mixed use project. In actual practice the role of the Conservancy would be defined by the precise nature of the project and the needs of local government. The following paragraphs describe how the Conservancy could be involved in promoting the mixed use projects suggested in the case studies. a. Mendocino Pilot Study The Galletti Ranch is typical of many of the large ranches along California's rural coastalareas. It is presently a mixed use operation by virtue of the current combination of dairy, beef and timber operations. Demand for urban land use is low, comprised of demand for visitor serving ' uses (guest ranch) or low density residential (vacation or second homes). In general, this low level of demand makes county land use regulation a viable, long term method of preserving agricultural land. A key problem in these areas, even when urban pressures are IV - 14 , DRAFT REPORT 11-20-80 low, is the economic viability of agriculture. Agriculture is often a difficult business under the best of circum- stances, and several factors work against profitable agri- culture in remote areas like Mendocino's south coast. Al- though the ranch, along with much of Mendocino's south coast, is physically ideal for dairy operations, the distance to markets makes costs higher than more close in dairies. An obvious response to this problem would be increased local marketing. The mixed use concept which evolved in response to this situation was an on-farm cheese plant. Other concepts exist such as on-farm milk processing or development of a local cooperative for both local milk sales and cheese production. 3 The role of the Conservancy in this situation is more in the area of economic development than land use regulation;.that is, the principal goal of such an intervention would be to enhance local agricultural economics. In turn, the long term agricultural use of the land would be promoted. The following discussion documents how the Conservancy would approach a situation such as the south coast of Mendocino County pre- sents. It is important to note that this role (economic development) DRAFT REPORT 11/20/80 or any involvement in an area such as the south coast of Mendocino County transcends existing Conservancy policy. The area is certainly not on the urban fringe and the agricultural use can probably be maintained by existing zoning. Assuming that the Conservancy decided that it were appro- . priate to pursue a mixed use project on the Mendocino Pilot Study Area and also assuming that the landowner was inter- ested, and that the information in the case study is complete and accurate, the implementation action steps might be as follows: . Project Approval -- The landowner would need to gain approval of the mixed use project from regulatory agen- cies including Mendocino County and the California IV - 16 DRAFT REPORT 11/20/80 Coastal Commission. The Conservancy would participate in this process, insuring compatibility of the project with local land use requirements and Coastal Commission policies, and assisting in required dealings and nego- tiations. It appears that the mixed use proposal for the Pilot Study area would be consistent with both Mendocino County and Coastal Commission policies. Hence, project approval should not meet major obstacles. Project Implementation -- Once the project has received approval it could be implemented. A contract would be prepared and signed by the landowner and the Conser- vancy. A grant for the required capital investments could then be issued. b. Carlsbad Pilot Study Area The Carlsbad Study Area is typical of coastal agricultural areas which suffer from a high degree of conflict with urban uses. This fact, in combination with its high agricultural productive capacity, make the area an obvious target for Conservancy action. Under the density transfer approach suggested in the case study, the Con- servancy could play two major roles. 0 First, the Conservancy would be the logical agency to IV - 17 DRAFT REPORT 11-20-80 receive the development rights or easements on the dedi- cated residual agricultural lands (although a local land trust would also be acceptable). The Conservancy could also purchase the remaining fee simple interest for consolidation or other resale back to agricultural users. Secondly, the Conservancy could also provide technical assistance to local governments interested in such a plan. For example, the Conservancy could prepare the farm unit analysis (as suggested in Chapter I11 of this report), as a means of determining the most acceptable mix of agricultural and supplemental uses. Assuming that the Conservancy decided to yrsue a mixed use project within the study area, and assuming that a landowner could be interested, and that the concept was endorsed by the California Coastal Commission and included in the Carlsbad LCP, the Conservancy's action steus might be as follows: . Choose a Good Potential Site for a Project the Con- servancy Would Like to Develop -- Of the different case studies, some provide better coastal management oppor- tunities and should be given priority for specific Con- servancy action. A good potential project is the mixed TV- 1 8 DRAFT REPORT 12/12/80 use project suggested in the Carlsbad market analysis near Palomar Airport Road. This project could invol've coastal access, visitor serving commercial uses, and a dedicated agricultural operation. Define Roles of the Players -- This project would be complicated by the fact that several public regulatory agencies (City of Carlsbad and the Coastal Commission) the state parks department, and the land owners would all be involved. The Conservancy could take a leadership role in organizing this group around a proposed project t or it could simply play a supportive role, providing technical support and serving the land bank function for the residual agricultural parcel. Define Precise Conservancy Function -- The functions of the Conservancy could range from technical assistance to financial involvement. At this point the project would be subjected to an evaluation. Any financial involve- ment would, of course, require Conservancy Board ap- proval. e Project Approval -- It can be assumed that a mixed use project, developed in coordination with the regulating agencies, would have little trouble being approved. The Conservancy could be involved in preparing various corn- IV - 19 ponents for the required environmental and adminis- trative documents. For example, the farm unit analysis could be a component of the project EIR. . Project Implementation -- The Conservancy could be the agency which manages the residual agricultural land in such a project. Similar to other. Conservancy agri- cultural projects a number of options are open. In this case the Conservancy might receive title to the agricul- tural residual for an agricultural price, approximately $5,000 per acre. This land could be deed restricted and sold or leased back to an agricultural operator. D. State Coastal Conservancy Agricultural Program Recommendations The following recommendations address the imple- mentation of mixed projects within the context of the entire Conservancy agricultural program. If mixed use projects are to be a viable tool for the Conservancy, certain basic changes are required. The following recommendations cover four basic areas: 3 Resource allocation ' Project screening and evaluation Pilot project development IV - 20 DRAFT REPORT 11-20-80 Legislative changes These recommendations imply an entirely new structure for the agricultural program as well as a level of commitment on the part of the Conservancy Board. 1. Resource Allocation The Conservancy has had, and will continue to have, limited financial resources for agricultural projects. It is important that these resources be allocated in a manner which maximizes the effectiveness of the program. The agricultural program is certainly one of the most important Conservancy functions -- a successful agricultural program would result in the largest amount of land secured and has the added advantage of enhancing local agricultural economies. a. The Conservancy Board should promote the success of the agricultural grogram by providing adequate funding for agricultural projects. b. The Conservancy staffing plan and the annual Conservancy budget should include a staff position for an individual who would be responsible for the technical assistance aspects of the agricultural program. This individual should have some experience in agricultural economics. .". DRAFT REPORT 11-20-80 In addition to the technical support function, this individual should have principal responsibility for de- veloping Conservancy agricultural projects. 2. Recommendations on Project Screening and Evaluation The following recommendations are intended to streamline and make more consistent the process of identi- fying and evaluating agricultural projects: a. Identifying Candidate Projects Land capability studies and land use in- ventories are useful and appropriate to the local governments who are designing, implementing and maintaining LCP's and to the Coastal.Comission. They are not particularly useful to the Conservancy. The Conservancy agricultural program must be opportunistic -- in a completely nonpejorative sense of the word. Land capability and resource value are important criteria when the Conservancy evaluates a project, but a far more critical criterion -- at least in terms of probability of successful implementation -- is the circumstance and attitude of the landowner or operator. By its nature and its legislative authority, the Conservancy is iii business to "make deals" and deal-making inherently hinges on the ob- jectives and the circumstances of the involved parties. IV- 2 2 DRAFT REPORT 11-20-80 Interest in considering a proposal from the Conservancy is normally affected by a change in circumstance, such as a desire to retire, a death in the family, a change in tax bracket, a.nd so on. There is no point to devoting major Conservancy resources to extensive inventories and evalua- tion without focusing on the first (and often most important) consideration -- whether a landowner or operator is ready to reach an agreement. What is essential is that such indi- viduals know that the Coastal Conservancy may be of help, and they are encouraged to pursue an agreement. The experience of land trusts and other conservancy organ- izations in the U.S. has demonstrated repeatedly that re- sponsiveness to the particular circumstances of individual owners and the factors that motivate them to enter into an agreement are usually the key to an agreement (R-28). The analysis of the attempts by the Coastal Conservancy, cited previously, indicates that while the facts varied from case to case, the overall problem was that the willingness or ability of both parties to "make the deal" was simply not present. Accordingly, the return on the investment in time and energy was zero. Unfortunately, an initial lzlck of an outstanding success or a series of projects that do not move forward to completion DRAFT REPORT 11-20-80 create a shadow that is very difficult to avoid. Landowners approached subsequently have a negative rather than a posi- tive series of footsteps to trace. In fact, the major rationale for the emphasis in Section D, following, is on an immediate "success story", even if it is not ideal in all respects, intended to produce a practical case study of success as quickly as possible. The immediate pressure on the Conservancy staff should be to extend this attitude to projects other than mixed use projects and to implement reasonable projects immediately. This will come about only if potentially participating landowners are aware of the Conservancy's intentions, as well as its powers and author- ities. Tangible steps that should be taken include the following: There must be an immediate emphasis among the Con- servancy leadership and throughout the Conservancy staff that "everybody sells". The attitude must be that projects are to be identified and implemented. Of some importance, the process of project identification must be carried out with both efficiency and candor, so that a decision that a project is not suitable, once an evaluation has started, can be made as quickly as pos- sible. A landowner who receives the answer ''no" quickly and openly will be willing to discuss further projects. DRAFT mPORT 11-20-80 . A landowner, or other participant, who is told "no" after months or even years will have quite another attitude about further involvement with the Conservancy. . The Conservancy Board should adopt tangible objectives for each year. These objectives should be publicized widely among potential participants. The objectives, if they are formulated realistically and communicated forcefully, will make clear to the entire coastal com- munity that the Conservancy staff is ready to take action and, in fact, is under considerable pressure from its governing board successfully to implement projects. The (slight) danger of appearing over-eager to approve a project is balanced by the fact that there are more potential participants than available resources would support. The Conservzncy's project evaluation process and time schedule should be published widely. The rhetorical commitment to successful project implementation and to a timely evaluation (even if the decision is "no") will appear significantly more credible if potential parti- cipants can understand the Drocess that will be used to evaluate projects and can be convinced that the Con- servancy has the cagability to use these procedures 3 . effectively. DRAFT REPORT 11-20-80 b. Project Evaluation and Development There are two alternative basic proced- ures used to evaluate potential capital investments and to Grepare a capital improvements program. In the first, projects are evaluated sequentially. A decision is made whether or not to invest in one project before a second project is even considered. The other alternative involves gathering a number of candidate projects, making a compara- tive evaluation and selecting the project or projects that, considered cumulatively, produce the best result, given the agency's criteria, and the funds available. The latter procedure is usually preferable for most public agency purposes, and is traditionally used in evaluating such disparate types of projects as parks and highways. Since a number of choices are available -- normally significantly more than could be funded, given the resources available -- the agency is able to apply a consistent set of evaluation criteria and to choose the best set of projects from among the contenders. t In the case of the Conservancy, the actual circumstances tend to require use of the first procedure. As previously em- "- c) c An appropriate evaluation procedure, in this circumstance, involves three steps: Establishing guidelines and criteria, endorsed by the Conservancy Board, that describe in conceptual terms the types of projects that can be considered and, in as specific terms as possible, the projects that will not be acceptable. - using the same criteria, but at a more general level of detail than the for detailed evaluation, carrying out a "first screen" evaluation of each individual #project proposal. This first screen is designed to identify projects that are either inconsistent with Conservancy objectives, or that, on the basis of informed judgment, do not have a high probability of success. 3 IV - 27 DRAFT REPORT 11/20/80 . The third and detailed evaluation is reserved for those projects that both meet the general criteria, and that have a high (if subjective) probability that they can be implemented. (I) General Evaluation/Acceptance Cri- ter ia The previous discusison suggests that the Conservancy should deliberately adopt a procedure that emphasizes a sequential, rather than comparative pro- ject evaluation process. A decision is made about an indi- vidual project proposal as early as possible, rather than collecting projects until a comparison can be made. This approach is definitely facilitated by as explicit a set of evaluation criteria as possible, so that staff will have standards endorsed by Conservancy Board policy that can be used in evaluating each project on its own merits. Additional, general criteria may be adopted that are appli- cable to all or most of the preservation techniques available to the Conservancy. A by no means exhaustive list of examples include: . A policy to test a broad range of techniques in practice, e-g., mixed use, transfer of density, transfer of devel- IV - 28 " u DRAFT REP( 11-20-80 opment rights, purchase/sale-back, purchase/leaseback. (An alternative and opposite policy would be to con- centrate maximum resources on the techniques that are first successful in producing actual project successes.) .. . An emphasis on project examples and on preservation techniques that are relatively permanent, e.g., a pro- ject that brings in a long-term agricultural operator may be more appealing than is a project where the pres- sure or desire for conversion to urban use may recur within the next 10 years. The first purpose of the general evaluation criteria is to identify almost immediately the projects that either are unsuitable or have an extremely low probability of successful implementation. The second and equally important purpose of adopted evaluation criteria, particularly those that refer' to a specific technique (e.g., mixed use) is to create a presumFtion that projects meeting the guidelines and cri- teria will be accepted by the Conservancy Board. (2) Evaluation of Individual Projects The following criteria would be ap- plied to all projects that are not in conflict with the general evalxation criteria, 2nd criteria for acceptance. DRAFT REPORT 11-20-80 They would be applied twice. The first application would occur as quickly as possible to identify projects that are worthy of a detailed evaluation. The proponents or potential participants of projects that do not appear destined for successful implementation would have every opportunity to request additional findings, but -- as noted previously -- would not suffer the extremely negative process of a time- consuming and protracted evaluation that leads to a negative decision. It is recommended that the following project evaluation criteria by applied in the following order: . Statutory criteria Participant's situation and motivation . Economic characteristics of the project Implementation analysis (a) Statutory Criteria An obvious but by no means per- functory first step in project evaluation is to test the project's conformance with the Conservancy's statutory cri- teria: ,Proximitv to Urban/Rural Fringe and Failure of the Po.lice Power. The major threat to agriculture occurs where urban land uses meet agricultural land uses. The two land IV-30 DRAFT REPORT 12/12/80 uses tend to conflict with each other inmanyways, including: . Land value -- residential land value far outstrips value in agricultural uses. . Air quality -- offensive odors, hazards of pesticide application, etc. . Noise level -- use of farm machinery. . Wastewater runoff -- creating nuisances or perceptions of nuisances that are unacceptable to adjoining resi- dents. . Vandalism to farm equipment or livestock from urban populations and their pets. . Presence of a transient workforce that is often un- welcome to permanent residents. . In recognition of these problems, the Conservancy legisla- tion specifies that urban fringe have a priority Over other areas. It is recommended that this particular statutory criterion, at least for the moment, be viewed as being desirable, but not mandatory. A proposed project that did not yet involve urban/rural conflicts, but that, otherwise, had high poten- tial -- particularly the potential to be implemented SUC- cessfully -- should still be considered. IV - 31 . \ I DRAFT REPORT 11-20-80 The Conservancy enabling legislation states that Conservancy action is warranted only when there is ". . . no other reasonable means, including the means of police power, of assuring continuous use of such lands for agricultural pur- poses." (R-33) This criterion is directly applicable, in some instances, but involves a careful judgment in others. For example, if the existing general glan designation and zoning would permit a use that conflicts with continued agriculture (and if this land use de'signation had not been granted capriciously) the police power to remove the incompatibility would exist only in unusual cases. =. The less simple but more commoncase occurs when the permitted uses on a potential project do not conflict with agriculture, but where other circumstances bring into question the perm- anency of the current zoning. A case in point would be a project in an area characterized by: A recent history of nonfarming and of conversion from agricultural to urban uses. An area characterized by small parcel sizes and con- tinuous subdivision activity. A physical setting where there are urban uses on two or DRAFT REPORT 11-20-80 . . .. three sides of the proposed area. . An obvious deterioration of local agricultural support services, including processing facilities, suppliers, repair services, etc. In general, thedecision as towhether continued use of police power is actually realistic is a professional judgment, but the statutes create a presumption that further evaluation of a project is warranted only if there is a clear question as to the applicability of land use controls and zoning powers. Projects that obviously fail both of the direct statutory tests (do not involve urban/rural conflicts, and are reason- able candidates for preservation through the police power) should be dropped from further consideration. Other candi- dates should be evaluated according to the remaining cri- teria, at least at the first, or screening level. - - (b) Participants' Situation and Motivation Considerable previous emphasis has been placed on the fact that a Conservancy project will seldom, if ever, succeed unless all participants are highly motivated to reach an agreement, and the circumstances of the participants (particularly the landowner) are such that ". DRAFT REPORT 11-20-80 there is an overwhelming advantage to a successful nego- tiation as soon as possible. Factors that indicate urgency or a high level: Declining health or death of a family member holding key parcels on the urban/rural fringes; A negotiating deadlock between owner and local govern- ment over an adjoining parcel, or even over a parcel in which the Conservancy could become an active partici- pant : A pending bankruptcy or other change in circumstances that would affect key Farcels; An impending change in local governmental land use pol- icy that might motivate either the Conservancy or the owner to reach an accord before such a change is imple- mented. The evaluation criteria related to urgency and motivation do not attempt to give value of one type of motivation over another. Instead, the point is to assess carefully the factors that exist which motivate either or both parties to 3 reach an agreement, and to give a negative weight to a project proposal where no such factors are present. DRAFT REPORT 11-20-80 (c) Economic Characteristics of the Project The feasibility and practical- ity of agriculture projects that would be of interest to the Conservancy depend on the project's economic characteris- tics. A project's ability to return some portion of the initial Conservancy cost is of particular importance. An economic evaluation of each project should be carried out, using the procedures presented previously in the present report. The following paragraphs consolidate and summarize these procedures. Site Chracteristics. The advantages and disadvantages of a site, and the potential for revitalizing either the current or historic use, or of developing a supplemental use, de- pends, in large part, on the following site characteristics: Characteristics of ownership; .. Size and shape of the parcel; Access to roads and highways; Current and historic land uses; 2roperty values - historic (owner Is price) IV-35 DRAFT REPORT 11-20-80 " . - current (market value); . Current agricultural carrying capacity - soil quality - water quality and availability - production statistics. After the site evaluation, it should be possible to develop a list of potential uses. These uses will fall into three categories: Community Settinq. Once a potential project, or projects have been identified as feasible based on the characteristics of the site, it is necessary to test the acceptability of the potential projects in terms of community goals and values, land use regulations, etc. The benefit of community accept- ance for a project are obvious. A potential project will have a greater chance of success if there is an existing infrastructure to serve the project. DRAFT REPORT 11-20-80 Market Demand. The next step is to evaluate the practicality of the potential uses in terms of market demand. An existing market structure may have an advantage over the development of new and untested markets. Alternatively, the profit potential may be extremely attractive for the first entrant in a new market. Novelty uses (e.g., a cheese factory) must be considered particularly carefully, since the first pro- ject may be successful but may also capture the entire market in an area. Local Management Potential. Are there people or groups in the community who are willing and technically able to manage the project? Is it necessary to look- outside the community for management potential? Income/Expense Analysis. If a proposed project appears to be feasible from a marketing and management standpoint, a com- plete income and expense analysis should be prepared. The format of the analysis of income, operating expense, and capital expenditure requirements can be that exhibited pre- viously in the present report. Careful consideration should be given to the tax consequences to the participants. (d) Implementation Analysis Assuming that all previous con- DRAFT REPORT 11-20-80 clusions have been relatively favorable, the final step of the analysis is to prepare a careful judgment as to the probability of success. Each step in the process of actually implementing the project should be listed and scheduled and the inter-relationships of the steps should be noted. A "critical path" schedule of the type used to schedule and control construction projects is quite suitable for this . purpose. At this point, depending on the technical background and preferences of the individuals evaluating the project, it would be feasible to assign a subjective estimate of the probability of successfully completing each step in the process and then to evaluate the overall probability of success. Whether this process is done mathematically or purely subjectively, it would be entirely appropriate to defer or discontinue consideration of a project solely be- cause success appeared improbable. Excellent project econ- omics and potential to contribute to the goals of the Con- servancy are insufficient to justify the commitment of staff time, if there is another project potentially available with, perhaps, slightly lesser potential, but wiith a much higher probability of success ant! irnplenentation. Assuming that the project appears to have a reasonable t IV- 3 8 - . - ~- .-.- - -" -~ "" - ".I . . . . - . . . . . ~. . DRAFT REPORT 11-20-80 probability of success, the final step is to document the project's merit in terms of: Ability of the project to achieve statewide goals and policies; . Difficulty, and time required to complete project; . Financial commitment required: . Ongoing administrative burden to the Conservancy. Achievement of statewide goals and policies is a value judgment about the ability of a project to meet statewide concerns, including : . Protection of coastal areas of critical statewide inter- est; . Efficient use of existing public investment/infrastruc- ture; . Conformance with mandated Coastal Act guidelines. The information used to make this judgment can be derived from project descriptions, from specific field interviews con- ducted by the Conservancy staff, and from discussions with Coastal Commission and LCP staffs. The key references are the State Coastal Act, the Conservancy enabling legislation, and other policies established by the Coastal Commission, Con- servancy , Difficult DRAFT REPORT 11-20-80 or the Legislature. ;y and time to complete project is a criteria whic :h places the highest value on simple projects that can be completed in a short amount of time. Financial commitment required considers the cost implica- tions of the project, both in terms of initial investment required and the ultimate net cost. The least expensive projects receive the highest value. Ongoing administrative burden considers the administrative aspects of the project following implementation. Projects which involved loans, or the Conservancy holding title to property, would place an administrative burden on the Con- servancy, The projects with the least administrative burden would receive the highest value, 3. Pilot Project Development The steps that the Conservancy Board should . take immediately to identify and implement a successful mixed use project that reflects the overall recommendations pre- sent4 previously. Immediate steps include: DRAFT REPORT 11/20/80 Adopting a specific objective of successfully nego- tiating (at least!) one mixed use project by June 30, 1981; . Endorsing and adopting the Mixed Use concept as des- cr ibed in the foregoing report, amended, as appropriate, to reflect Conservancy policy; . By formal and informal means, communicating as widely as possible in the coastal community the interest of the Conservancy in implementin4 a mixed use project; Providing Conservancy staff with adequate financial re- sources to accomplish a successful project; . Working closely with the agricultural advisor in each coastal county to be sure that potential participants understand that the Conservancy is serious and is com- mitted to a'mixed use project; . Moving diligently on promising proposals that are brought to the attention of the Conservancy. The general theme of the recommendations presented pre- viously was that an opportunity for the Conservancy is such a unique combination of physical and economic circumstances and individual circumstances of the landowner that projects should be evaluated sequentially. That is, a decision should be made about a particular opportunity without necessarily waiting to compare it with other investment opportunities. DRAFT REPORT 11-2 0- 8 0 If, in fact, the Conservancy is successful in attracting a number of candidates for mixed use projects, it would be appropriate to modify this evaluation procedure slightly and to compare the contending projects in terms of -- e Adherence to Conservancy policies, Economic potential, Probability of success, before a selection is made. This process should not be allowed to delay the initial "go -- no-go" decision for any specific proposed project. 4. Recommended Legislative Changes The Conservancy's agricultural preservation program is unnecessarily constrained by the current enabling legislation. The primary constraint which will continue to affect the program is limited funding. The Conservancy \ pogram should not, in addition, bedenied creative approaches to meeting the goals of the State Coastal Act. The following recommendations suggest amendments to the State Coastal Conservancy's enabling legislation which commences with Sec- tion 31000 of the State of California's Government Code. The limitation of $100,000 on the amount the Conservancy can IV-4 2 i' DRAFT REPORT ~/20/80 pay for an option should be removed. (Section 31150.1) The Conservancy staff, with governing board approval should have the flexibility to offer any reasonable option price depend- ing upon the circumstances and the merit of the project. The preservation of agriculture is threatened throughout the coastal zone, both within "urban fringe" areas and in more rural areas. Mixed use programs are an excellent means of enhancing coastal agriculture. Section 31151, which places highest priority on urban fringe areas, should be amended to include the following sentence: "Mixed use projects, which enhance agricultural operations beyond the urban fringe, shall also be given a high priority." Sub-section (b) of Section 31152 requires that "NO other reasonable means,, including the police power, of assuring continuous use of such lands for agricultural purposes" be available if a property is to quality for Conservancy action. While in theory this is a reasonable restriction, it is a finding that will vary depending upon who is making the finding. There are numerous examples where different regu- latory levels such as a local government and a regional coastal commission may differ on what lands can be held by regulation. In such an instance, whose opinion prevails? A IV - 43 . . . .. . .. ,- DRAFT REPORT 11/20/80 local government may designate agricultural land for 3i ban development simply because of the failure of zoning to hold agricultural use. In this case, Sub-section (a) of Section 31152 would restrict the Conservancy from acting. Section 31152 should be amended to allow the Conservancy to 'secure agricultural land regardless of LCP designation. The failure of the "police power" as a criteria should also be amended. The Conservancy should work in concert with a land regulation program, rather than in lieu of it. Suggested language for the two sub-sections: (a) The lands are specifically identified in a certified local coastal plan or program as agricultural lands or such lands, still capable of agricultural production, which are designated for urban use because of urban land use demand or operational conflicts. (b) The ability of the police power alone to maintain the agricultural use is questionable, because of severe operational conflicts. The Conservancy should ger,erally not pursue an agricultural preservation project which is opposed for cause by either the local agency or the state Coastal Commission. Opposition to IV - 44 ,/ . . DRAFT REPORT 11/20/80 a proposed Conservancy project by the Coastal Commission staff, should be forwarded in a staff report to the state Coastal Commission. The Commission should decidewhether the conservancy project is the best manner to preserve the agri- cultural use. Realistic alternatives to the Conservancy proposal should also be presented in the staff report. A key limitation of the agricultural preservation program is the inability of the Conservancy to work through local public land trusts. Recently adopted legislation, SB 1323, permits the Conservancy to work with public land trusts on public * access projects and should be expanded, to include agri- cultural preservation projects. - Local direction or management for a project builds local trust and support. The chances of success in obtaining an easement and developing a successful program for IV - 45 DRAFT REP 11-20-80 revitalized or supplemental use on the site are greatly enhanced. The potential for funding 'outside the Conservancy's resources is enhanced when public trusts or local agen- cies are involved. The Conservancy gains the contacts and resources of local which can facilitate larger, more successful projects. Administrative burden of the project on Conservancy staff is reduced. The Conservancy could provide grant funding to the public land trust or local agency as well as technical support. Language for the amendment to the Conservancy's enabling legislation should be included at the end of Chapter 4, Preservation of Agricultural Land: "31156. Where a public land trust or local agency is willing to undertake an agricultural preservation pro- ject in accordance with this chapter, the Conservancy may award s grant to the public land trust or local agency. Such grants shall be subject to the ficdings in Section 31152, and approval by the Conservancy of a plan for management of the project. 'I