When survival beyond tomorrow is the main concern for many local builders, one Southern California company figures to endure.
"It's quite typical here to talk about what's going to be happening 30 years from now," said Richard Moran, the chief financial officers of the Irvine Co., in Newport Beach.
The real estate investment firm and community builder, which developed much of the City of Irvine and half a dozen other Orange County communities from scratch over the past three decades, has continued to prosper now that the market has gone bust.
Vast Land Holdings
A master plan drafted in the 1960s for the company's 97-square-mile tract 40 miles south of Los Angeles has enabled Irvine to gear its developments to a changing market - and to cut back when there is no market.
The company's vast land holdings are an advantage that few developers could duplicate. But Irvine's successful strategy of avoiding debt and relying on outside contractors provides developers and lenders with a object lesson in the importance of maintaining flexibility.
While its rivals battle to keep loans in place, the Irvine Co. has virtually no construction loans outstanding, and recently had its revolving lines of credit increased by its bank lenders, sources said.
Long-Term Mortgage Debt
The privately owned Irvine Co. has kept credit lines open with a long list of banks including Wells Fargo & Co. and Bank-America Corp. But its main debt is believed to be in the form of long-term mortgages on its 24.4 million square feet of income-producing property.
The mortgages are held by pension funds and life insurance companies. They were generally made at a conservative loan-to-value ratio of 75% or less, at a time when many builders were getting 100% financing from savings and loans.
Irvine's survival illustrates a winnowing process that takes place every time a real state recession plows into a region. As vacancies soar and rental income drops, overleveraged newcomers are cast aside, and the old guard companies suddenly find themselves in a position to dominate.
This has happened in every region. Apartment developer Wayne Duddleston in Houston and investor Jerome L. Rappaport in Boston were both able to get bank loans even in the worst of times.
Because they didn't get sucked into the borrow-and-build binge of the 1980s, they wound up with the capital strength to command credit for acquisitions or new construction in the aftermath.
With Southern California in a tailspin, Irvine is poised to become the latest example of the phenomenon.
In a region that has been developed mostly in the past few decades, the Irvine Co. is hardly a newcomer. It traces its roots to 1866, when a Scottish merchant named James Irvine assembled the Irvine Ranch by buying three Spanish and Mexican land grants.
The real estate empire, which stretches from the Pacific Ocean to the mountains of Cleveland National Forest, remains mostly untouched.
But since the 1960s, when urban development butted against the former sheep ranch, Irvine has gradually built a vast portfolio of commercial space and apartments, and developed tens of thousands of homes.
By building according to a master plan, as opposed to the slice-and-dice approach that had prevailed, Irvine set the stage for modern development.
Focus on First-Time Buyers
Having a plan that calls for a variety of uses also gave the company the flexibility to respond to its local market. Right now, Mr. Moran said, the company is concentrating on development of a residential neighborhood geared to first-time homebuyers.
"Here is a diversified real estate development organization, that has a homebuilding [program] that at least gives it a product that can be absorbed and generate some cash flow," in slow times for commercial space, notes Lloyd Lynford, president of Reis Reports, a New York real estate data service.
Another advantage is that its land is owned debt free, meaning Irvine can develop cheaper than its competitors, said James Noteware, director of real estate services at Price Waterhouse, who once conducted a study of the company's business.
But he said the saving on land costs is partially offset by having to pay property taxes in a highly taxed county
Anticipating Credit Crunch
In the boom years of the middle 1980s, Mr. Moran said, chairman Donald Bren took steps to prepare for a cyclical downturn in the market. He reduced the work force to 350 from 1,400, and started using outside contractors for building, brokering, and other activities.
This enables Irvine to avoid the expense of laying off employees with every lull in demand for real estate, and has buffered Irvine Co. from the current storm.
More recently, Mr. Moran said, the company anticipated the credit crunch. Rather than sell lots to builders who depend on traditional real estate loans for capital, it began hiring builders to develop its land. Rather than rely on lot sales for income, Irvine now sells land leases.
Nobody claims Irvine is immune to the real estate crunch. Mr. Noteware said the company, after depending on soaring demand in Orange County for decades, saw income from land sales dry up in the last year.
Work Force Pared Down
The firm's administrative work force has been cut to about 300, from 350, in the past 18 months. And one of the reasons Irvine has increased its bank lines is to be prepared to pay down long-term debt on commercial space, in the event that those lenders decide to reduce their real estate exposures.
And some reports have focused on recent asset sales, including the sale of a cable TV division to Times Mirror Co., as evidence that Irvine may be caught in a cash squeeze.
But Mr. Noteware pointed out that a project outside Houston known as Kingwood, one of very few with a comparable business plan, neatly survived the Texas downturn.
Mr. Moran a Irvine said the fiscal year just ended was "a record year. Four of the top five selling condo projects in the county were ours.
"Markets change. Business conditions change. We're responsive to all of those changes," Mr. Moran said. "The fundamental plan is still the same."