The giant LandSource Communities Development joint venture, which Lennar Corp. sold off most of its interest in 14 months ago, has missed a payment on the $1.3 billion in loans it took out to pay Lennar and LNR Property Corp. for a chunk of the land bank.

LandSource missed an April 16 deadline to re-margin the deal made necessary because the land has lost value in the plummeting home building market. Now the parties are negotiating to restructure the deal.

"Yes, the forbearance period expired [last] Wednesday, but they have not been notified that they are in default and they are still talking," LandSource spokeswoman Tammy Taylor said Friday, April 18.

The negotiations are complicated because the deal was funded using a leveraged finance transaction arranged by Barclays. Typically these higher risk transactions involve various layers of debt, ranging from senior secured bonds to subordinate debt, making it difficult to reach a consensus among bond holders.

As part of the deal, Lennar and LNR Property each received about $700 million for selling off 68% of LandSource to MW Housing Partners, an entity co-managed by McFarlane Partners on behalf of the California Public Employees' Retirement System (CalPERS) and Weyerhaeuser.

MW Housing got 50% of the voting rights, while Lennar and LNR retained 16% ownership each and 50% combined of the voting rights. Lennar also maintained access to the land for future construction and, in the meantime, would be paid "significant" management fees.

The deal was heralded as a perfect partnership. CalPERS is a long-term investor, valued for its patience in receiving returns. And it fit with Lennar's ongoing strategy to move more land–and its costs and risks–off its home building books.

At the time of the deal, LandSource's properties had a book value of approximately $1.3 billion. To fund the sale, $1.55 billion in debt was taken on the assumption that the land had more than doubled in value during the three years since LandSource's biggest asset, Newhall Land and Farming Co.'s 15,000 acres of mixed-use property in Los Angeles County, was bought.

There was speculation even then that the land had not truly doubled in value over three years, though part of the increased appraisal could be attributed to approximately $600 million in land and $300 million in cash MW put into the deal.

But even if the land was worth that much 14 months ago, it has certainly lost a good deal of value since the deal was consummated as the land market nosedived, particularly in California, the location of the lion's share of LandSource's land.

At the time of the deal, the loans were said to be non-recourse, which, if true, would take Lennar and the other partners off the hook.

However, just 18 months ago TOUSA was saying that the debt in one of its joint ventures, Transeastern, was non-recourse only to later decide to shift the operation onto its books–a move that contributed to its having to file for bankruptcy court protection.

But if the deal truly is non-recourse, Lennar and LNR will have managed to pull cash out of land just as its value was on the verge of plummeting, insulated itself from the biggest impact of most of that value fall, and still retained the valuable lots for future development. That much land so close to Los Angeles is bound to hold value in the future, even if the future is farther away than many had once thought.

"This transaction is a home run," Lennar CEO Stuart Miller said last year after the deal was completed. "It's not a home run because of the transaction; it's a home run because the Newhall land position is a home run. It's an excellently located parcel of land in a highly constrained market, and everybody associated with the transaction and outside knows that over time this parcel of land is going to do exceptionally well."

Learn more about markets featured in this article: Los Angeles, CA.