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How builders share profits with Irvine Co.

November 10th, 2009, 12:10 pm · 16 Comments · posted by Jeff Collins

woodburye-ivy-onsetEver wonder how developer Irvine Co. makes it money?

William Lyon Homes officials said last week that its Ivy development on Irvine Co. land in Irvine has been so successful that they’ve raised the price by $10,000 and discontinued all discounts except for a financing incentive.

As of Friday, the company had sold 35 of the 58 townhomes it plans to build in the Irvine Co.’s Woodbury East subdivision, with 21 homes expected to close escrow in December.

But despite strong demand, company officials said during a conference call with financial analysts last week that the project won’t be a huge money-maker because of its profit-sharing arrangement with master developer Irvine Co.

One of the two speakers on the conference call, either company President Bill H. Lyon or interim CFO Colin Severn, said that Lyon Homes gets 100% of the first 6% of profit, but just 30% of the profits after that:

“I don’t think (Ivy’s success) had a huge impact on the numbers necessarily. The Irvine Co. deals are generally underwritten at 6%, and there’s a profit participation split with 70% going to the Irvine Co. over that. But honestly, (high sales there) helps a little bit. … Sales activity continue to be good there.”

The Ivy project, with prices starting below $400,000 per unit, was relaunched last summer after a delay caused by the housing slump.

Irvine real estate consultant John Burns told Register reporter Jonathan Lansner that the profit-sharing arrangement is typical of deals the Irvine Co. — Orange County’s largest land developer — has had with homebuilders. Burns added:

“Irvine takes the majority of the upside and sticks the builders with the downside.  Irvine provides the builders with rolling option lot takedowns (which means they don’t have to come up with much cash up front), which is why the builders agree to the deal.”

As we previously reported, the Irvine Co. is taking all the risk of the Woodbury and Woodbury East build out. (CLICK HERE!)

In a bold strike at the real estate credit crunch, Irvine Co. cash will pay for all the construction and marketing. (The land cost is not a worry; they own it!) The homebuilders involved will simply be paid a fee for their home design work, homebuilding skill, plus sales and warranty endeavors. Privately held Irvine Co. won’t say how much they’re investing - or what the builders will get paid — but my quick, back-of-the-envelope math tells you this is at least a quarter-billion-buck wager on an economic recovery.

The Irvine Co. wouldn’t comment on its profit-sharing arrangements with homebuilders, but company spokesman John Christensen did say the firm is pleased with Ivy’s success:

“We have been pleased with the popularity of Ivy, and look forward to providing additional new home opportunities in Woodbury and Woodbury East early next year.”

  • Do you think the value housing planned by Irvine Co. in the Woodbury area is a good bet? VOTE HERE!

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 16 Comments

  • BOGEY says:
    November 10, 2009 at 12 pm

    and the beat goes on . .. .

    “The number of loans deteriorating further into delinquent status is now more than twice the number of foreclosure starts, indicating another major wave of troubled loans in an already clogged loan pipeline”.

    “The six-month average deterioration ratio has risen the past two months to 300 percent, showing that for every loan that improves in status, three more deteriorate further”.

    http://www.cnbc.com/id/33834317

    • bpsqwerty says:
      November 10, 2009 at 2 pm

      d’oh!!

    • SC2 says:
      November 10, 2009 at 3 pm

      Nice post Bogey

    • Liar Loan says:
      November 10, 2009 at 5 pm

      Just remember that the 650,000 loans on trial plans are “deteriorating further into delinquent status” by the very nature of the program. Obama’s program requires that they “deteriorate” for 3-5 months on repayment plans before improving in status to a non-delinquent modified loan. So the 300 percent deterioration ratio is exactly what you would expect when about 1/4 of the trial plans are becoming finalized mods each month.

      It doesn’t mean there aren’t still loans deteriorating, particulary of the Alt-A exploding ARM variety, but just don’t get overexcited about the aggregate numbers being fed by Olick, because they are being artificially exaggerated thanks to Obama’s program.

      For anybody interested in the actual report she cites:

      http://www.lpsvcs.com/NewsRoom/IndustryData/Documents/10-2009%20Mortgage%20Monitor/LPS%20Mortgage%20Monitor%20Sep09.pdf

  • Tom M says:
    November 10, 2009 at 1 pm

    Diana Olick has an good article today

    http://www.cnbc.com/id/33834317

    • OC Real Estate Genius says:
      November 10, 2009 at 4 pm

      Good article. It almost seemed like a news article rather than a blog post…

    • Planet Reality says:
      November 10, 2009 at 9 pm

      So I’m concerned. I think buckle your seatbelts for Spring of next year.

      Been thinking about coming off the fence next year and buying, so hope this is a correct statement. If not, back to renting

  • Jc says:
    November 10, 2009 at 1 pm

    Yeap, not to many read her here.

  • DISCO says:
    November 10, 2009 at 2 pm

    No time to read it all, Irvine built it’s legacy on nice communities but in my opinion has not built a good one in two decades. All the new tracts lack continuity, open space, and a shared theme. The established neighborhoods will continue to appreciate much more than the much higher density and really lower quality new ones. I would rather pay a little more for a house with a park for kids to walk safely to rather than a glorified apartment surrounded by blacktop. But why not capitalize on location, it is business after all.

  • bpsqwerty says:
    November 10, 2009 at 2 pm

    I agree with that, seen Woodbury East concept and wasn’t exactly floored. Irvine Co. seems to think nicer amenities and materials are what it’s all about. understandable, to try to squeeze extra blood from a turnip because they’ve been running out of land, but it should be made clear to potential buyers that future appreciation seems to be “priced in”. not a giant fan of the location either, as there are already a lot of really nice neighborhoods west and south of here.

  • OC Top Agent says:
    November 10, 2009 at 3 pm

    I see nothing wrong with this… private industry bailing out other private industry is much preferable to governments jumping in.

  • Lucifer'sFlowers says:
    November 10, 2009 at 3 pm

    Nice homes.

    Won’t be worth much when the water runs out in a few decades from now.

    By then, I suspect Irvine Co. will have sold off all it’s land…

  • shockg says:
    November 10, 2009 at 4 pm

    Don’t buy Don’t buy! dead cat bounce! saw teeth! Shadows! lol