The massive land bank joint venture LandSource Communities Development has received an official notice of default on a $1-billion loan it took out just over a year ago to buy 68% of the company from Lennar and LNR Property Corp.

The notice came after LandSource missed a deadline to re-margin the deal made necessary because the land has lost value in the plummeting home building market.

Despite the notice, discussions on how to restructure the total of $1.3 billion in debt so the company can make the payments in the current market continue, said Tamara Taylor, a LandSource spokeswoman.

"It [the official notice] doesn't accelerate any payments or any deadlines or anything," Taylor said. "There is nothing new at this point."

Talking might be all that can be done since the loans are said to be non-recourse to the borrowers. Barclays arranged the debt offering, which was syndicated to hundreds of financial institutions and investors.

As part of the deal, which was heralded as a masterful way to pull cash out of land while still retaining rights to use it later, Lennar and LNR Property each received about $700 million last year for selling 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 received 50% of the voting rights, while Lennar and LNR retained 16% ownership each and a combined 50% 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 about $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.

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