On a Fall Monday in 2004, Art Falcone gathered his key people around a conference table. His company, Transeastern Properties, was coming off a grand-opening weekend for a community in Orlando, Fla., and the reports were outstanding–some 200 sales in two days. For Falcone, a diversified businessman with experience in the broadband, restaurant, and hospitality industries, that meant one thing.

"That day it was very clear to me," he remembers. "If you are going to sell a business, this is the time to sell it."

A couple hundred miles south of the community, in Hollywood, Fla., Tony Mon, who had joined what was then Technical Olympic USA as CEO in 2001 amid a major infusion of capital and wholesale operational restructuring, was on the prowl. Wall Street and the Stengos family, majority owners of the company, wanted the second-tier public company to get bigger, better, and faster. It was sitting on 48,000 lots across four regions in some of the country's hottest housing markets, and with that, Mon believed he had the platform to fulfill those demands.

"We are going to be the growth story in the industry over the next few years," Mon, an executive with extensive experience in the home building and and finance industries, told Big Builder at the time.

Less than a year after Transeastern's watershed weekend sale, Mon and Falcone sealed a deal deemed as the largest ever acquisition of a private home builder. In August of 2005, Technical Olympic USA and Art and Ed Falcone created a joint venture that bought the assets and operations of Transeastern Properties. The JV was heavily leveraged, but Mon had structured the deal so that it could be kept off Technical Olympic's balance sheet–or so he thought.

Today, as Falcone sits on a half billion dollars in cash that he plans to use to grow a new company called Americrest Homes, and Mon meets with creditors in an attempt to somehow pilot what is now known as TOUSA Inc. through a $2.2 billion Chapter 11 bankruptcy, it appears that Falcone got the better of the 2005 deal. Ironically, their dealmaking with one another may not be done, because there's something more than the past conspiring to draw the two together once again: the economy.

With no clear indication of when the industry might hit an inflection point, those who control assets have locked horns with those who control capital. At the heart of the standoff is the value of land. Players like TOUSA stubbornly cling to the belief that land has retained a degree of value; players like Falcone see land at this point in the cycle as a commodity, to be bought and sold at a fraction of what it's penciled in as on the books. This disconnect currently leaves both Mon's and Falcone's plans at an impasse. But a potentially worsening housing economy leaves the future pregnant with the possibility that these two may each become a part of the other's resolution to move their respective companies forward.

The Backstory

Technical Olympic was certainly not alone in its expansionist goals during the height of the housing boom. "It was a time of focusing on growth," says Ara Hovnanian, CEO of Hovnanian Enterprises. "The market was strong. We were interested in entering new geographies and saw acquisition as one of the best ways to [do that]. I still think that's the case, but obviously, on Monday morning, our timing proved to be terrible, at least in regard to the acquisitions in 2005."

Florida was the largest and fastest growing market in the country with favorable demographics, population growth, job growth, positive net immigration and migration trends, and no state income tax to boot. With all these metrics stacked in its favor, the theory was that even if the rest of the country's housing market tanked, Florida could withstand the pressures.

Many were tempted to secure a strong Florida toehold through the acquisition of Transeastern, an operation that had $320 million in gross profits on the books, nearly $1 billion of backlog, and a well-respected management team. M.D.C. Holdings and Hovnanian were among the publics that looked into a deal, but those familiar with the thinking at the time say the price of entry posed too much risk.

"We do [diligence] based on financial performance and projections, and we verify that by breaking it down community by community, says Hovnanian. "We assume that prices stay flat forever, and the sales pace stays flat forever. We justify the financial returns on a flat market–no improvement or deterioration. [Transeastern] was a well-run company and had great land positions. Our only issue was that we couldn't reach an agreement at a price that made sense for us."

But for Mon, Transeastern was a natural complement to TOUSA. Not only were the companies both South Florida-headquartered, tier-two home building forces with roughly the same footprint, but Mon and Falcone were not strangers. "We've done business for years. I've bought lots from them; they have bought lots from us," Mon says, jokingly adding, "I know where Art lives."

Where others had found sticking points, Mon saw underlying value. Transeastern had more than 3,000 homes in backlog and projected deliveries of 3,500 homes in 2006, which Mon estimated would add approximately $35 million in income to TOUSA's 2006 results. Mon's company would take control of day-to-day operations and have access to roughly 22,000 home sites across Florida. TOUSA would quickly gain "significant critical mass in Florida," including entry into the Tampa market, where Mon hoped to become a major player. Moreover, option agreements on the lion's share of the lots and a joint venture structure that gave TOUSA and the Falcone entity a 50-50 ownership split offered Mon an opportunity to keep TOUSA's balance sheet relatively clean through what he considered "pretty attractive financial arrangements."

Mon and Falcone signed a letter of intent in April, 2005. By August, the $857 million deal was closed. The JV partners brought $165 million to the table–$90 million from TOUSA and the balance from Falcone–and secured roughly $675 million in debt to make the deal happen. It was a debt-to-equity ratio that would give others cause for pause, but Mon was willing to gamble. "High risk, high reward" was the phrase of the day, especially for the Greek owners. In 2001, when they hired Mon to harmonize the disjointed operations of two recent acquisitions, Texas-based Newmark Homes and Florida-based Engle Homes, the company had a 70 percent debt-to-capital ratio. In that light, the Transeastern JV didn't appear all that different from other deals. Yet in hindsight, some analysts argue that the JV structure was unusual in that it essentially gave its mezzanine debt lenders the power to pull the plug on the deal.

At first, the Transeastern JV not only met, but exceeded stakeholders' expectations. TOUSA ended 2005 with net earnings of $218 million, an 83 percent jump over the previous year. Aspirations for 2006 included 50 percent more closings than the 9,435 in 2005 and net income growth of another 30 percent.

Learn more about markets featured in this article: Orlando, FL.