No Retreat for Lyon : Others Dig In, but Nation’s Largest Home Builder Just Changes Tactics
Home buyers are scarce as desert rain clouds, builders’ financing sources are going the way of the passenger pigeon and the William Lyon Co. is planning for the future as zestfully as if it were entering the booming 1960s.
Crazy?
Well, a hallmark of Lyon’s nearly 40 years in the residential construction business is that he has mostly been right.
And Lyon, the nation’s leading home builder last year in sales volume, seems to think this is a great time for a builder who is willing to stretch. Lyon’s reach is moving his company into new fields--financing and land development.
Company officials maintain that there is no significant change going on, but industry consultants and fellow developers say Lyon is paving a path that large residential firms must follow to survive in an increasingly cash-starved market.
For Lyon, whose formula for success includes “constantly adjusting business plans to fit changing conditions,” the current climate calls for a reduction in his own residential construction while quietly shifting focus to finance other builders and become increasingly active as a land developer and master planner.
“They are very intelligently capitalizing on their abilities,” real estate consultant Alfred Gobar said. “They have huge amounts of capital and an excellent management and when you have that, the best risk-reward ratio in residential development isn’t in building homes, it is in assembling raw land, getting the entitlements and selling lots to other builders.”
That is true even in a recession--some would say especially in a recession. And while he won’t use the “R” word, Lyon acknowledges that his industry is in the dumps right now.
“There is no question but that there is a slow-up in housing sales,” Lyon said in a recent interview. “Some of that is public resistance to prices.”
The other cause, he said, is that people who have a home they must sell in order to move up don’t want to lower their own asking price.
The building industry also has been hit hard by the collapse of the savings and loan industry, new government regulations on banks’ real-estate lending and the withdrawal of large Japanese banking and development firms from the U.S. real estate market. Lyon estimates that “75% of the home-building capital in this country has gone away, and it won’t come back for a long period of time.”
But to Lyon, that grim landscape is littered with opportunity, not land mines. Lyon’s company is big enough and wealthy enough to weather the industry cycles that regularly break smaller development firms.
So in the midst of a severe housing recession, Lyon is involved in nearly two dozen developments on 10,000 acres of land, nearly half of it in Southern California.
Lyon has been among the industry’s leaders for decades--he was one of the first home builders, for instance, to recognize that Orange County would be a major growth area. From the beginning, Lyon stuck with entry-level homes and apartments, and made money.
Lots of money. Forbes magazine estimates Lyon’s wealth at $350 million.
Lyon’s businesses are privately owned--top executives collectively own a small share and Lyon and members of his immediate family own the rest. A retired Air Force major general, who prefers to be called Gen. Lyon, he lives in a 22,000-square-foot antebellum mansion on 130 acres in Coto de Caza. A special garage on the hilltop property houses his $60-million collection of classic cars.
Lyon, a fighter pilot in World War II and the Korean War, became a home builder in 1954 when he formed Luxury Homes in Fullerton with his brother, Leon. In 1968, Lyon sold the company to American Standard, the giant plumbing fixtures firm, in a deal that enabled him to remain in control of a subsidiary called Wm. Lyon Development. In 1972, upset with the direction American Standard was taking the business, he resigned and started the William Lyon Co.
A lot of his early financing came from ill-fated Continental Illinois Bank, but in 1979--as the bank was beginning to show signs of faltering--he wrenched its Florida-based real estate development arm from it in an unfriendly tender offer. That acquisition gave Lyon several thousand acres of prime land in southern Florida.
Lyon’s next expansion move, in 1985, was to acquire a 50% interest in Senior Corp., a Florida-based real estate investment and development firm formed in 1980 by creditors of Continental Mortgage Investors, a bankrupt real estate investment trust.
Lyon bought out his partner in the $141-million Senior Corp. purchase last year and currently is completing the last two Senior Corp. projects--a 900-acre commercial and residential project in Atlanta and a 3,000-acre residential community near Denver.
The developer, always looking for deals that would give him land to build on, next acquired Pacific Lighting Corp.’s far-flung real estate enterprises in a $325-million cash deal in 1987. As part of the transaction, Lyon personally acquired the Presley Cos., a well-known Southland home builder specializing in a more upscale product than Lyon normally builds.
He still owns the company and says he has not merged it with his own firm “because companies have their own cultures,” and it would not be fair to people in either company to jam them together into a single unit.
The Lyon corporate culture is a lean one in which executives and managers are paid well but required to be out in the field, not holed up in the office. It is a reflection of Lyon’s credo: “If you want high pay,” he has said, “you have to be where the risk is, on the playing field, not in the stands keeping score.”
Lyon has not stuck to one field. Beside home building, he has been involved in the aviation industry. From 1981 through 1986, Lyon was co-owner with fellow Orange County developer George Argyros of AirCal. They turned the troubled airline around and sold it to American Airlines--both pocketing a $15-million profit. He recently formed Air/Lyon, a holding company for aviation-service operations.
An intensely private man, Lyon comes across as uncomfortable with people he doesn’t know well. He also is powerful enough to stop most others from talking about him for the record. In interview after interview, people asked not to be quoted lest they anger Lyon.
One Lyon employee said that meetings with him can be painful, with awkward silences and stilted conversation. But when Lyon talks about building, a lot of people listen.
He says that his companies will continue building homes, and that they will continue building the kind of homes they always have--homes that don’t come equipped with all the bells and whistles some of his competitors provide, but that usually have price tags among the lowest in a given market.
While Lyon has built $600,000 homes, he acknowledges that he is best known for “Chevrolets, not Cadillacs.” The average Lyon home in California last year sold for just over $200,000. And William Lyon Co. did $1.1 billion in residential sales last year and had $1.5 billion in total revenue.
“The market is with people at the lower end of the price range,” Lyon said.
To those who scoff at a builder who finds fulfillment in building simple homes, Lyon offers this: “The easiest thing in this business is to build a big home. That doesn’t take a lot of skill. The skill is in developing affordable homes that people like.”
But Lyon’s new developments are being done by a new entity, Lyon Communities. And while that company was formed as part of the 67-year-old builder’s estate-planning strategy, its name also is a signal of the direction in which Lyon is heading.
Rather than simply buying into large land developers’ projects and building and selling tracts of homes, as a conventional merchant builder does, Lyon Communities is itself a large land developer.
Its projects include Mountain Gate, a 1,000-acre master planned community near Corona, a proposed 550-acre community in Walnut, the 1,000-home Gordon Ranch planned community near San Bernardino and four major communities in south Florida.
In most of its projects, Lyon Communities will build some of the homes but will sell many of the lots to other developers.
But in Florida, William Lyon Co. doesn’t build any homes at all. The company has built about 1,000 apartments over the years, but homes in the Lyon master planned communities around Ft. Lauderdale, Coral Springs and West Palm Beach all are constructed by local builders on land that they purchased from Lyon.
“That’s the way it is done in Florida,” said Ft. Lauderdale real estate analyst Tom Powers. “You are either a builder or a land developer, and land developers by far make the biggest profits. It is different in California, but when it comes to housing, Southern California is in never-never land.”
And it is in California that the Lyon company is breaking with its traditional role of merchant builder.
Dick Randall, William Lyon Co. president since 1982, says the company won’t adopt Florida techniques in California--that Lyon will still build homes in his home state.
But the company also will be a major land developer and a financial investor in other builders’ projects--and the new development work no longer will be done by the William Lyon Co.
That firm has become the holding company for assets that include Lyon-built apartments and the commercial and industrial properties Lyon is jointly developing with partners such as Hughes Investment Co. and the Koll Co.
Through its investment division, which manages a $1.5-billion portfolio, the William Lyon Co. also has become a big player in residential-development financing, providing the cash for projects in Orange, Ventura and San Diego counties by builders such as Warmington Homes, Aikens Development Co. and the Lusk Co.
“They really are moving in a new direction,” said Neil Dimick, national real estate services director for Deloitte & Touche, one of the country’s major accounting and business-consulting firms. “Because of its size and cash flow, Lyon has become the source of capital for a lot of good, medium-size builders.”
The transformation of the Lyon building empire provides a look at “the next step in the evolution of a sophisticated home builder,” said William Foote, president of Southwest Diversified, an Irvine-based residential developer.
“When you grow, you ultimately reach a critical mass where senior management just can’t handle all the little details of building hundreds of homes. A land-development project involves 10% of the decision-making of a housing project, so decisions can be made by the most capable people without choking them off,” he said.
And land development can be a lot more profitable than building homes.
“That’s where where the real money is in this business,” Foote said. “Bill Lyon is a very capable guy, and I think he still wants to create. And the only way he can continue to create is to do master planning.”
As for Lyon, he is convinced that the California housing market is going to rebound in a big way. “We’ll continue building a tremendous amount of homes, but now we are selling property to other builders, too.”
He predicts another run-up in prices because the supply of housing is artificially constricted by government policies at the same time that population growth continues in the state.
“In business, as in religion, you have to believe in something,” he said in a recent speech to developers. “If you are a California builder, you must believe that people will continue to come to California, or you will not get to heaven.”
WILLIAM LYON’S FAR-FLUNG HOLDINGS Air/Lyon Inc. Lyon’s newest venture is a holding company for a nationwide aviation ground-services, maintenance, engineering and charter operation with facilities 11 states and overseas. Lyon Communities. The newest company, formed for estate planning purposes. It will be the entity through which all new land development and home building is done. William Lyon Co. The home building business for which Lyon is best known, William Lyon Co. is now the holding company for real estate and financial assets and the investment arm of Lyon’s empire. Presley Cos. Lyon personally acquired the company when the William Lyon Co. bought Pacific Lighting Corp.’s real estate assets in 1987. Presley builds upscale homes in Caliofnria and Arizona
FOCUS ON CALIFORNIA AND FLORIDA Here is a list of some of William Lyon’s vast holdings. 1. Lake Worth, Fla., 925 acres 2. Davies, Fla., 1,000 acres 3. Sunrise, Fla., 900 acres 4. Margate, Fla., 560 acres 5. South Orange County, 300 acres 6. South Orange County, 900 acres 7. Corona, Calif., 1,000 acres8. Rancho Cucamonga, 500 acres 9. Walnut, Calif., 550 acres 10. San Bernardino, 1,000 lots 11. Modesto, Calif., 150 acres 12. Stockton, Calif., two developments of 600 and 1,400 acres 14. Tracy, Calif., 250 acres 15. Hayward, Calif., 600 acres 16. San Jose, Calif., 150 acres Note: Other developments not shown are located near or in the following cities: Atlanta, Denver, Chino, Chino Hills, La Mirada, Rancho California, Carlsbad, Aliso Viejo, Lake Forest, Rancho Santa Margarita, Santa Rosa, Napa.
Source: William Lyon Co.
