In 1967, Charles and Ellen McClure purchased 70 scenic acres on the edge of Newberg, Ore., about 20 miles from Portland. Back then, Newberg was a sleepy farm town surrounded by hazelnut orchards. Today, it’s the gateway to the Willamette Valley’s renowned wine country.

In 2007, the McClures sought permission to develop their farmland as high-end housing. They faced one big hurdle. Their acreage sits just outside an imaginary line that divides urban Newberg from the rural countryside. Under...

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