William Lyon Co. No Longer King of Its Development Holdings : Real estate: Because it has borrowed millions of dollars, the well-known builder is reduced to the role of caretaker on some projects as the bankers’ control over its finances and future grows.

The real estate empire that developer William Lyon has built over nearly four decades is not likely to collapse under the weight of its current financial troubles, industry sources say, but the price of survival seems to be indentured servitude to its banks.

The William Lyon Co., one of the state’s largest and best-known home builders and land developers, has been reduced to the status of caretaker on a number of the large Southern California projects it owns.

And as Lyon Co. attorneys continue negotiating revisions to loan agreements and revising repayment schedules with some of the nation’s biggest banks, the bankers’ control over the company’s finances and future grows.

In short: While Lyon Co. retains title to the land and continues to build and sell homes, it has lost the right in many cases to take any profit from the transaction--instead shifting all proceeds in excess of the marketing costs and other normal overhead directly to the lender to cover outstanding debt.

Lyon’s troubles are not so very different from financial difficulties faced by many other builders.

But they are magnified by the company’s size--it owns more than 7,000 acres of residential and commercial land in California and has borrowed hundreds of millions of dollars to buy and develop it. The company recently was ranked by American Builder magazine as the seventh largest home builder in the nation. It has been California’s largest home builder for the past four years.

But the value of the land that secures many of its loans has plummeted in the past three years, making it worth less than the money Lyon borrowed against it. So the banks that made the loans--under the gun from federal regulators to clean up their balance sheets and cut their exposure to California’s recession-wrecked real estate--are forcing Lyon to provide more collateral.

But new homes aren’t selling very well and Lyon--like many other builders--cannot generate enough cash to pony up the huge amounts the banks are demanding to meet their need for collateral.

In Lyon’s case, the company bought several thousand acres of land in Southern California at the top of the market in 1988 and 1989--property that now is worth as little as half of what the company paid for it.

Lyon’s total indebtedness is difficult to determine--the company is privately owned, many of its loans are made to partnerships that involve Lyon interests that don’t use the Lyon name, and Lyon officials won’t discuss the company’s financial situation with outsiders.

But an example of the scope of the builder’s debt can be found in Union Bank’s 1991 annual report, which lists $131.7 million in loans to Lyon, including some that had been written off as problem loans. The bank did not specify how much of a loss was taken.

Lyon had been a director of Union Bank but resigned on Dec. 9, 1991--just before the annual report was issued--in order, he said, to devote more time to his various business interests. The Union Bank loans were made to a variety of companies and investment partnerships in which Lyon is a principal.

Union Bank is just one of seven major banks from which Lyon and his companies regularly borrow.

Despite the renegotiated banking arrangements, apparently there isn’t any panic selling of Lyon holdings.

Several major Southland builders--whose well-cushioned companies would be on any list of prospects to buy large tracts of land if Lyon were selling--say that very little from Lyon is being offered around these days.

A top executive at one of the Inland Empire’s biggest real estate companies said that various Lyon company executives have told him that the company has renegotiated most of its loans--extending payment deadlines for a year or more. The executive, who spoke on condition of anonymity, said that Lyon will be selling some land after the first of the year, “but not nearly as much as many people think they’ll have to sell.”

And the head of a regional real estate consulting company said Lyon’s brokers have told him they will start marketing some of the company’s undeveloped lots next month but will slowly offer the land in the market over an extended period to avoid depressing prices any further.

In the meantime, to prove to regulators and to their shareholders that they are diligently pursuing the debts Lyon owes, the company’s banks have negotiated security agreements giving them dictatorial powers over the cash-strapped builder.

The agreements require the company to submit to stiff oversight and to set aside all rents and home- and land-sales proceeds from at least half a dozen developments for exclusive bank use.

So restrictive are the banker’s conditions that in a trust deed securing a new $5.4-million loan from Bank of America to build apartments on property in the Robinson Ranch development near Rancho Santa Margarita, the Lyon Co. is prohibited from renting any unit for more than a month at a time without “prior written consent” from the bank.

“That is highly unusual, to strap a builder’s hands like that,” said Kenneth S. Kasdan, an Irvine real estate attorney.

Kasdan and real estate financing consultant William E. Tsagris of Yorba Linda, a real estate professor and author of several textbooks on California real estate finance, independently reviewed several sets of loan documents filed recently in the Orange County recorder’s office by Lyon Co. and its banks.

Both men said they found the banks’ demands to far exceed the normal loan security requirements in large real estate transactions.

In one case, First Interstate Bank required Lyon to sign over rights to its zoning, building permits and housing density entitlements on five Aliso Viejo projects as additional security for almost $140 million in land acquisition and development loans.

The zoning and density entitlements are marketable assets because they determine the ultimate value of the land by specifying what it can be used for and how many homes can be built on it.

And in a loan extension agreement between Lyon and Chase Manhattan Bank, filed just last week, the bank required Lyon to make an “absolute assignment” of all rents and profits from a residential tract in Tustin Ranch.

That deal, which gives Lyon until Dec. 31, 1993, to repay all principal and accrued interest due on an $11.9-million loan originally made in 1989, now requires the builder to apply the proceeds of all sales to the loan until it is paid off.

Typically, an assignment of rents is a general guarantee that the lender can attach the proceeds of each home sale to satisfy debt if the builder can’t make the scheduled payments. But those agreements allow the builder to keep a portion of the proceeds from each sale for its own profit.

In the First Interstate security agreement as well, Lyon is required to set aside all proceeds from each home sale and from any lot sales to be used exclusively to repay the bank debt.

“What they are doing is allowing the builder to cover overhead but keeping him from making any profit until their loan is repaid,” Kasdan said.

Tsagris put it in decidedly non-academic terms: “They’re really turning the screws” on the Lyon Co., he said.

At a Glance: William Lyon Co. * Corporate headquarters: Newport Beach. * Founded: As Luxury Homes in 1954; became William Lyon Co. in 1972. * Officers: William Lyon, chairman and chief executive officer; Dick J. Randall, president and chief operating officer until Jan. 1, when he retires and becomes a consultant to the company. * Divisions: Northern California, Southern California, Florida and a Newport Beach-based apartment division. * Landholdings: In Orange County: More than 1,300 acres. In Southern California: 4,250 acres. In Northern California: 3,025 acres. Nationally: More than 10,000 acres. * Employees: 350. Source: William Lyon Co.