London calling

London calling

HOMEBUILDING by Jean Gruss | Editor/Lee-Collier

Luxury homebuilder Mark Wilson has always taken a contrarian's approach to what is traditionally a copycat business. Now, his company, London Bay Homes, is considering building condos. Don't bet against him.

A long-standing criticism of the homebuilding industry has been that builders operate more by the seat of their pants than by adhering to modern business practices.

The recent boom and bust in the housing industry once again reveals how many builders ignored basic economic principles and fundamental analysis in favor of blind speculation. Most didn't see the downturn coming and weren't prepared when it did.

So it's no surprise that the few builders who have adopted sound business practices are likely the ones that are going to survive. Naples-based luxury homebuilder London Bay Homes is among those. The firm's founder, president and CEO, Mark Wilson, 47, has brought financial discipline to the business that is very likely going to help it weather the broader downturn and make gains in the market.

"There are going to be opportunities to pick up some very good deals," Wilson says with a smile. That includes better land prices from developers and plucking assets seized by banks. Although London Bay now operates from Sarasota to Naples, Wilson is scouting deals all over the state.

London Bay is even exploring building condominiums, a deeply counter-cyclical move that would also be a departure for the builder of single-family homes.

Then again, Wilson's strategy in building his company has always involved a contrarian's streak. He was the first to smash through the multi-million-dollar barrier for a speculative home in Naples in 1993 and the first to break the mold of oversized Mediterranean-style homes in Southwest Florida during the boom.

"He doesn't ever accept the status quo in the marketplace," says Susan Watts, senior vice president with Bonita Bay Group, a Bonita Springs-based development company.

The lean and trim British-born Wilson sounds and looks more like an investment banker than a homebuilder. In many ways, that's what he is. He seeks out sophisticated and wealthy investors to buy the land and back the construction loans on the luxury homes he builds, splitting returns after the sale. Wilson says returns of 30% to 40% on invested capital weren't uncommon in recent years.

Although Wilson and his wife Gemma started the company in 1990 with just $25,000, Wilson's ability to pitch deals to savvy investors with detailed business plans provided him with the capital to build homes that sell for as much as $10 million. What's more, investors shouldered the risk because a loss on any one house could hobble Wilson's growing business.

London Bay Homes was thrust in the national spotlight recently when it won America's Best Builder Award this year from Builder Magazine. It's a marketing coup that is likely to cement the company's standing among its peers.

Million-dollar homes

Armed with a building engineering degree and an MBA from Manchester University in England, Wilson joined his father's commercial-development company and moved to Fort Myers in 1984. But the commercial market hit a downturn in the late 1980s and Wilson started London Bay Homes in 1990. The name is a play on his British background.

Wilson was among the first to recognize that buyers would pay more than $1 million for homes in Southwest Florida. It's hard to imagine now, but there once was a time when multi-million-dollar homes were rare in Lee and Collier counties. The first London Bay home cost $1.2 million in Fort Myers, the highest-priced speculative home at the time. The home's price tag made big headlines in the local press and "that got an enormous amount of people through," he says.

Wilson's initial success led the Collier County building industry association to ask him to build the 1993 "Dream Home". He decided to build a $2.6-million speculative home in the Quail West development. It was the highest-priced speculative home in Naples that year and most observers thought it would never sell for that price. "People thought I'd gone mad," Wilson says.

He was crazy like a fox: It sold in two weeks.

Wilson had done his homework. The luxury home market was just starting to grow in Southwest Florida and developers were designing communities to cater to them, with stunning lots and opulent facilities. "To assume the same old house would be acceptable seemed a little bit naïve," Wilson says.

Wilson's customers also became investors. They were sophisticated people who were accustomed to reading detailed business plans and that's exactly what Wilson delivered. His presentations were formal and his pro-formas contained detailed analyses of the market. Generally, investors put about 20% of equity in a deal and leveraged the rest with bank loans. "The investor stood behind the bank guarantee," he says.

Wilson won't say who his investors are; He doesn't want the competition or other businesses to solicit them. But he says they're generally wealthy individuals with a minimum of $5 million in assets, though most have $10 million. Once he had achieved initial success, raising money wasn't an issue.

Initially, Wilson let investors have influence over the design of the homes. But that sometimes led to homes sitting on the market longer than expected because of design changes that didn't appeal to buyers. "As a young company, you had to bend a little," Wilson recalls.

Of course, returns aren't guaranteed. "It's hard over the long term to hit a home run every time," Wilson says. But that's why he seeks out sophisticated investors who have the wherewithal to absorb a lower return. Still, Wilson's detailed analysis of each deal increased the likelihood of success.

Don't get comfortable

Five years ago, just as the residential boom was about to really take off, Wilson decided the company was becoming too comfortable with its designs. In the 1990s, luxury home building was all about the opulence of huge ceilings, formal dining rooms and 20-foot, double-entry front doors.

But the terrorist attacks of Sept. 11, 2001, and the subsequent "cocooning" of the American family, changed perceptions of what a home should be. So Wilson boarded a plane and flew around the country to see what other styles were being created. In California, he met Mark Scheurer, an architect who favors bringing homes down to a more human scale.

Scheurer and Wilson spent a year designing homes with lower ceilings, smaller doors and an emphasis on outdoor living. But the difficulty was that no one in Naples was building these kinds of homes. "It was very risky on his part on the first couple of projects," Scheurer says. "He knew he was bucking the system, but his peace of mind was that he had seen it [in California]."

The first projects weren't easy as the architect and the builder debated the details. "We battled all the way under construction to educate the team," Scheurer recalls. They argued about everything from ceiling heights to window placement, Scheurer recalls.

Scheurer reassured Wilson with this encouragement: "They're going to love it or they're going to hate it. But if they love it, you're the only one who's got it."

As it turned out, customers loved the new style of homes because the smaller scale made them more livable. Out went the rarely used formal dining rooms and entryways that made residents feel like they were living in a hotel lobby. In came small courtyards, cozy rooms and outdoor living areas with full kitchens when owners and guests could relax.

Luxury market stays afloat

London Bay Homes' fresh designs came just as the residential market was about to boom. In 2006, the company's revenues hit $73 million, a 60% increase over the prior year.

But sales at the privately held company have slowed as the market cooled. Last year, revenues dropped 8% to $67 million. "We're going through a blip," Wilson says. Projects that start today will be for sale from 2010 to 2015. "I'm pretty sure the market by then will be OK," he says. In fact, the market for homes over $5 million was healthier in 2007 than it was in 2006 or 2005. "The horrible market is the mass market," he says.

In recent years, though, Wilson decided to grow his company by shifting exclusively from a custom builder to building semi-custom homes and neighborhoods of villas for prices starting at around $1 million. Although he worried about diluting the company's luxury brand, Wilson believed that years of work perfecting unique designs would help it stay ahead of the competition. "We certainly debated that," Wilson recalls.

London Bay Homes also expanded geographically, entering the Sarasota market a couple of years ago at Lakewood Ranch. "We clearly understood that Sarasota was going to go into decline," Wilson acknowledges. That's because speculation on multi-million-dollar homes was excessive during the boom. But Wilson says the market will return in a more orderly fashion and he hired Missouri builder Kevin Krafve to lead the Sarasota operations.

To develop neighborhoods of 16 to 70 homes, Wilson has had to find investors with a minimum net worth of $20 million to $50 million. "Private equity has become part of the conversation," he says. "There's a group of investors looking at counter-cyclical investments who think that now is the best time to look at deals."

With the added risks in the markets, investors are demanding higher returns. These returns need to be at least in the 20% range. "A few years ago we were fine in the high teens," Wilson says.

Wilson's counterintuitive streak is now leading him to scout sites on which he plans to build condos. "In this environment that is not easy to do," Wilson says.

No bank will finance such a speculative project in the depressed condo market. "We need to take down land without financing and start construction with no financing," Wilson says. But if the market returns in two or three years, Wilson's counterintuitive streak will pay off again.

REVIEW SUMMARY

Industry. Homebuilding

Company. London Bay Homes

Key. Well-managed homebuilders will make it through the residential downturn.