This article was posted on Friday, Apr 01, 2022
Real Estate


This is not a surprise: there are many ways people profit from real estate. We’ve been illustrating some of them through glimpses into the lives of the people involved. We’ve seen how Hetty Green (article #105) invested not only in stocks and bonds, but also was a real estate lender of last resort, securing loans by deeds to the underlying commercial property. Clearly, lending money on properly secured higher-risk loans, at appropriate rates, can sometimes work out well for everybody.

Then we jumped from Hetty Green to Alexander Hamilton (articles #106-109), the first Secretary of the Treasury, who established the present national banking system that, over time, caused the business cycle to evolve into a credit cycle. This eventually democratized access to money, and has been instrumental to economic growth.

Aaron Burr (#110) was contemporaneous with Alexander Hamilton. Unlike Hamilton, Burr was both a natural politician (Hamilton was not) and an inveterate rent-seeker, using his various political offices for personal gain (Hamilton was not this, either). Burr became a land speculator, his greatest gamble being the plot with James Wilkinson to create a new country – with Burr being the Grand Poo-Ba – out of Thomas Jefferson’s Louisiana Purchase. When that failed, he then tried the same thing with Spanish Texas. If either of these efforts was successful, Burr would have become very wealthy out of repurposing a larger real estate asset. People do the same thing now when they buy an office building and convert it into office condominiums.

In #111 we saw Bridget “Biddy” Mason, a former slave, make her first real estate purchase, an empty lot, at the age of 48. She paid $250 (then-money). Biddy continued to invest in unimproved lots at the edge of the Central Business District (CBD). She then waited for urban growth to catch up with her. In effect, she made time her friend, and it worked out reasonably well.  At her death in 1891, after an investment career of only 25 years, she had turned that original $250 into about $300,000 in then-money. That would be $8,700,000 today, adjusted for inflation.  Benefiting from time is pretty much what people do when they buy an income producing property and later refinance to buy yet another income producing property.

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Beginning with article #112 (Frederick Eaton & William Mulholland) and continuing below, we began to examine the synergistic effect when the driving elements of previous articles were combined into one grand engine. These elements include (1) public money (Hamilton), (2) last resort lending (Hetty Green), (3) speculation (Burr), and (4) time (Bridget “Biddy” Mason).

The Fellowship – Frederick Eaton and William Mulholland, in the early 1900s, joined together to divert the snow melt from mountains bordering the Owens Valley to benefit a growing Los Angeles. To accomplish this, they had to acquire local water rights, for to control the water one must first control the rights to the water.

Water Rights – Eaton and Mulholland were not the only buyers, but they were possibly the most desperate ones. If they did not secure enough water rights, Los Angeles would be doomed to having its population capped at about where it was at that moment, approximately 300,000. Thus, Eaton and Mulholland, to be successful, had to acquire not just the odd occasional random water right here and there, but nearly all of them. They had to control the water not just from the Owens River, but from Owens Lake as well. The river water would underwrite the growth of Los Angeles and the lake water would be a reserve against the inevitable droughts. Unquestionably, they must deliver Owens Valley water, river and lake, to Los Angeles.

There were three contending factions. Eaton and Mulholland were representing Los Angeles. Opposite them was the Federal Bureau of Reclamation, whose brief was to secure the water from the Owens River to irrigate agricultural land in the Owens Valley, and from Owens Lake as a drought-reserve. This is where the remaining faction, the local farmers and their families, comes in. Notice that the Bureau’s intentions almost exactly mirror those of Los Angeles: the river water for current needs and the lake when droughts appear. The Bureau and the Eaton / Mulholland faction were disputing the same things at the same time. The difference was who benefits. Eaton / Mulholland were driven by the needs of Los Angeles, and the Bureau was driven by the needs of the local farmers.

The Farmer’s Dilemma

Farmers had their own opinions as to how the Bureau’s actions might affect them at a personal level. Farming was difficult, and nearly all wished to either (i) sell out to the highest bidder, or (ii) at least wind up on the other side of this rodeo with more water rights than they had coming in.

Historically, large civil engineering attempts (both private and state supported) often failed. Occasionally this was due to inadequate engineering skills, but more often to unexpected cost overruns. There was therefore a realistic apprehension that while a man might offer his water rights to the Los Angeles faction, there was no guarantee that the Owens Valley irrigation project would succeed. Then where would he be?

In contrast to most private and state projects, the Bureau of Reclamation was no stranger to successfully engineering and developing large public works projects. Federal dollars had earlier been deployed back east in the construction of other large projects like railroads, harbors, and canals. While locally managed and funded infrastructure attempts had seen only checkered success, Federal attempts were largely victorious.

The Feds had the money, and money bought good engineering. It had become not uncommon for the Federal government to assume hegemony over regional infrastructural projects. But dealing with the Feds wasn’t a free lunch.

The Reclamation Act of 1902 now required that the beneficiaries of the projects, over time, repay construction costs. That was usually accomplished through the imposition of use fees. So, the farmers were faced with a conundrum: “What might benefit my family more? Keeping the water rights and hoping that the (possible) larger harvests might offset the higher costs of Reclamation Bureau water, or selling the water rights and moving to the big city? Yeah, Lone Pine. Maybe we could buy a feed store in Lone Pine?”

Thus, the indigenous farmers, choices became clear: (i) breaking even or (ii) moving out. Most (but not all) farmers chose the Lone Pine option. That became the fragment of the population that would provide the water rights needed by both the Bureau and Los Angeles. For the farmers, the issue now became one of playing the Los Angeles representatives and the agents of the Bureau of Reclamation against each other.

Round Valley Reservoir

The Owens River has its headwaters north of Owens Valley, on the other side of the county line, in mid-Mono County. At this early date, little interest was shown by either the Bureau of Reclamation or the Eaton-Mulholland faction in buying land and water rights that far upstream. Too many things could go wrong. Both entities were purchasing water rights with public funds, and were hesitant about being seen by the public as incautious with money not theirs. Yes, Virginia, that was a different time.

Eaton, however, could source private money from many wealthy people in and around Los Angeles. They would, in the current vernacular, be termed “accredited investors”, able and willing to make their own investment decisions.

Using advance knowledge that Los Angeles expected to acquire Round Valley as the most appropriate location for an upstream storage reservoir, Eaton employed the private funds available to him to successfully acquire, covertly and without Mulholland’s knowledge, Round Valley. That was the land that Eaton later offered to Mulholland for one million dollars.

When Eaton first considered the aqueduct project it was in the form of a public-private operation. Los Angeles city officials convinced him that the Bureau of Reclamation would not approve anything but a purely public venture, so he agreed. But his dreams of sudden wealth persisted, and the result was Eaton interjecting himself between the previous owners of Round Valley and the potential buyers in Los Angeles. In contemporary terms, he was “front-running” the purchase of Round Valley through his inside knowledge of a future transaction. It is something that has been unethical for a long time and eventually became illegal.

Eaton, Afterwards – Fred Eaton experienced his first stroke in 1926, at the age of 71. This was the start of a series of strokes whose cumulative effects made an invalid of Eaton within five years. By 1931 he was unable to manage his own affairs. His family’s hope for independence collapsed in 1932 when he was unable to repay the mortgage on his remaining land holdings in Inyo County and the land was foreclosed upon.

Inyo County had five banks at the time. The reason Eaton was unable to retire the mortgage(s) was that the Watterson Brothers, who owned all five banks, embezzled the money (including funds deposited by Eaton).

The embezzlers were convicted and sentenced to 10 years in prison, but that was little help to Eaton or his wife. With the family money gone, his wife Alice could only turn to public welfare for sustenance. Eaton himself would die in poverty two years later, pretty much forgotten. He was buried at the Big Pine Cemetery, Big Pine, Inyo County, California.

Mulholland, Afterwards – Mulholland had earlier rejected participation in Eaton’s offer to sell Round Valley to Los Angeles for $1 million. The knock-on effect was that he still had to find a place suitable for a storage reservoir. Rather than searching the headwaters of the Owens River, he examined the opposite end of the aqueduct project, the area just north of Los Angeles. After poking around a bit, he settled on a section of San Francisquito Canyon, at the north end of Santa Clarita Valley. This was just over the hills from the San Fernando Valley. It was there that he constructed the St. Francis dam. Unknown at the time, the dam was built over weak bedrock and lasted only a couple of years. The dam burst in 1928, twelve hours after Mulholland and his assistant had performed a mandated periodic safety inspection and issued a clear report. The collapse caused the death of between 400 to 600 people (reports vary, as in the weeks to come bodies were found as far away as offshore Mexico) as 12.6 billion gallons of water in a wave 15 feet high followed the riverbed and swept through the downstream communities of Santa Clarita, Saugus, Saticoy, and Piru. It was (and continues to be) the most serious dam disaster in California.

Mulholland assumed full responsibility for the disaster. Nonetheless, and as one would expect, there was an inquest following the failure of the dam. It was found that responsibility lay in an engineering decision about the suitability of the area’s geology for a stable foundation for the dam. Wikipedia reports that the inquest jury recommended that Mulholland not be held criminally responsible. This, although he had been involved in an earlier dam that had collapsed prior to the St. Francis.

A third dam Mulholland had engineered was abandoned before completion after it was discovered (Wikipedia) that he had increased the height of the dam by 20 feet after construction was begun, without specifying a corresponding increase in the width of the base. William Mulholland had no dam luck.

Following these revelations, Mulholland retired in November, 1928 and lived the balance of his life in relative seclusion. He died in 1935 from a stroke and is buried at the Forest Lawn Cemetery, in Glendale, CA.

Broken Fellowship – At some unknown point in this timeline, probably just before or soon after Mulholland and Eaton began to openly negotiate for Owens Valley water rights, the two men representing Los Angeles, friends for decades, had an irreparable falling out.

To expand on what was noted earlier, Eaton disclosed to Mulholland that he’d been secretly buying land and water rights upstream of Owens Valley, in Mono County, at a place called Round Valley. At the time, upstream water rights would take precedence over downstream rights.

Eaton subsequently offered Round Valley to William Mulholland (as an agent for Los Angeles), for $1,000,000 in then-money ($31,194,907 in now-dollars).

Upstream water rights would be a way to circumvent those pesky farmers, he might have argued, and it would guarantee Los Angeles the water it so desperately needs. Eaton would then quietly disappear and Mulholland would be seen as a hero.

Eaton’s hidden profit appalled Mulholland, who adamantly refused to participate in the fraud. This offer (and, one assumes, the unexpected refusal) ruptured the relationship between the two men. It may not have been helpful when, later on, Mulholland publicly announced that Eaton had been trying to privately profit from a public venture.

 This article is for informational purposes only and is not intended as professional advice. Klarise Yahya is not a financial planner. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property – BRE: 00957107 – MLO: 249261. If you are thinking of refinancing or purchasing real estate, perhaps Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].