Banks Keep a Tight Grip on Lyon Co. : Real estate: Lenders win strict loan terms as California’s largest home builder struggles to repay its massive debt.

The William Lyon Co., the real estate empire built by developer William Lyon over nearly four decades, is likely to survive its financial crisis, but the price seems to be indentured servitude to the banks it owes perhaps hundreds of millions of dollars.

While Lyon Co. retains title to a number of large Southern California projects and continues to build and sell homes, it has lost the right in many cases to take any profit from the transactions, instead shifting all proceeds in excess of the marketing costs and other normal overhead directly to the lender to cover outstanding debt. It has also had to submit to lender approval of many other business decisions.

Lyon Co.’s troubles are not so different from financial difficulties faced by many other builders. But they are magnified by the company’s size. Ranked as the nation’s seventh-largest home builder, Lyon Co. has been California’s largest home builder for the last four years--now holding more than 7,000 acres of residential and commercial land in the state.

But the value of the land that secures many of its loans has plummeted in the last three years, making it worth less than the money Lyon Co. borrowed against it. Some Southern California parcels bought at the top of the market in 1988 and 1989 have lost half their value.

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-racked real estate--are forcing Lyon Co. to provide more collateral.

However, new homes aren’t selling well, and Lyon Co.--like many other builders--cannot generate enough cash to pony up the huge amounts banks are demanding.

Lyon Co.’s total indebtedness is difficult to determine. Officials of the privately owned firm won’t comment on finances. Many of its loans are made to partnerships involving Lyon Co. interests that don’t use the Lyon name.

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

William 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 one of seven major banks from which Lyon regularly borrows.

Despite the renegotiated banking arrangements, apparently there isn’t any panic selling of Lyon Co. holdings. Several major Southland builders--whose well-cushioned companies would be on any list of prospects to buy large tracts of land if Lyon Co. were selling--say that very little from Lyon is being offered these days.

A top executive in one of the Inland Empire’s biggest real estate companies said that various Lyon Co. 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 Co. 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.”

The head of a regional real estate consulting company said Lyon’s brokers have told him that 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.

To prove to regulators and shareholders that they are diligently pursuing Lyon Co. debts, banks have negotiated security agreements giving them dictatorial powers over the cash-strapped builder.

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

“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 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 Co. to sign over rights to its zoning, building permits and housing density entitlements--all marketable assets--on five Aliso Viejo projects as additional security for almost $140 million in land acquisition and development loans.

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

“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.

“They’re really turning the screws” on Lyon Co., Tsagris said.