About a year ago, Victor B. MacFarlane, founder of MacFarlane Partners and primary gatekeeper of billions of residential real estate investment dollars from the fat California Public Employees' Retirement System (CalPERS) pension fund, dropped by to see Emile Haddad, Lennar Corp.'s mega California land dealmaker.

"He wanted to talk about taking our relationship to the next level," recounts Haddad, Lennar's chief investment officer.

DOWN IN THE VALLEY: Valencia, Newhall Land and Farming Co.'s first mixed-use development is nestled in the rolling hills of Los Angeles County's Santa Clarita Valley, right next door to the 15,000-acre Newhall Ranch parcel, destined to be the site of 23,000 homes. Photo: Courtesy Newhall Land and Farming Co. The partnership deal concocted during that meeting–and nurtured to fruition in a housing market on a swift downward slide–ranks as a countercyclical aberration in every sense. If people were not supposed to be making huge land deals in the back half of 2006, somebody forgot to tell Haddad and MacFarlane. Squeezing $1.3 billion in cash out of land at a time when almost nobody is buying land because its value is an elusive, tail-spinning target is a feat. And the size of this deal is such that, even in an active rising market, it would be considered huge.

That it could go down at all proves that well-located, buildable land has a strong value even in a slowing market; that motivated partners and creative financing can overcome formidable obstacles; and that timing is everything.

Tale of the Deal

MacFarlane and Lennar were far from strangers when they sat down with one another last year. MacFarlane's CalPERS-funded housing investment entity, MW Housing Partners, already had a land banking relationship with Lennar. In fact, that was one of the reasons for the meeting. Lennar wanted to renegotiate the terms it had agreed to pay MW Housing for the remaining 4,000 of 6,000 lots it still had in the takedown pipeline in 43 communities around the country. "At the time, all of us started realizing that the market had shifted," Haddad says.

At the same time, MacFarlane was interested in something Lennar had–LandSource and its biggest asset, Newhall Land and Farming Co., a 15,000-acre mixed-use property Lennar bought three years ago with LNR Property Corp. through LandSource, their joint land-holding venture.

Thirty miles north of land-constrained Los Angeles, tucked in the rolling hills of the Santa Clarita Valley with a river running through it, Newhall has the lion's share of its entitlements in place and was catching the eyes of others as well.

"Between January '04 and the beginning of '06 ... a lot of things were happening with Newhall," Haddad says. "The entitlements were finalized. We were starting to develop. [Throughout] that period, we had a lot of people interested in Newhall. It's a blue-chip asset. Investors, including CalPERS [and] Mr. MacFarlane, were interested."

But it was MacFarlane who was in the right place at the right time. He happened to show up just as Lennar was re-evaluating its Newhall investment. A little over two years after Lennar and LNR purchased and put the Newhall land into LandSource, Lennar was already looking to do what the company is noted for–cashing out the equity that had accrued and redeploying it for other purposes, perhaps to buy more land.

So, as Haddad and MacFarlane talked about renegotiating the terms on the land-banked lots, they also talked about LandSource's Newhall. Both had a lot to lose during the negotiations. If MacFarlane comes away from the table getting told that Lennar will abandon its deposits and walk away from its plans for the remaining 4,000 lots, he loses. If Haddad leaves the table and doesn't find a way to optimize the value of the LandSource land holdings, that land becomes vulnerable to a quickly widening, deepening national depreciation tug on land values. However, both men and their companies wound up winners.

Lennar would get a much-needed cash infusion to its balance sheet, plus keep the rights to build on Newhall land as well as the lots it had land banked with MW Housing. MacFarlane's MW Housing would net a significant partnership in the much-coveted, biggest chunk of entitled land remaining in Los Angeles County.

"We said, 'Are you interested in pursuing such a strategy?'" MacFarlane said, 'Absolutely.' That is what really happened with the discussion," Haddad remembers. Because the deal had not closed by Big Builder press time in late February, MacFarlane chose not to comment.

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