Challenging times often lead to shake-ups in the executive suite. And no truer has that been in home building than this spring when continued stress in the industry incited a rash of high profile CEO departures. In late May, Antonio B. Mon, president and CEO of the financially troubled TOUSA, became the latest home builder chief to relinquish his title, joining the ranks of Standard Pacific Corp.'s Stephen Scarborough and John Laing Homes' Larry Webb.
In the wake of the bankruptcy court filing, Mon's departure was much less surprising than Scarborough's unanticipated retirement or Webb's shocking exit, both to him and the industry. In a March interview with Big Builder, Mon acknowledged the possibility that he wouldn't remain in the company's CEO seat. "I'm not losing sleep over it; I'm a big boy," he said about the possibility of a forced exit, although he indicated he planned to stay through the company's restructuring.
While all home builders have been hard hit by the housing slowdown, TOUSA's situation deteriorated when a joint venture agreement with Transeastern Properties soured, requiring the company to take on a large amount of new debt to buy out the deal's creditors.
Until the end, Mon blamed the market and not himself for the company's troubles.
"At the end of the day, this is a market-driven condition," Mon said during the March interview. He pointed to the record levels of resale inventory, historically low affordability, dwindling consumer confidence, a mortgage market in turmoil, and a financial system under pressure as conspiring forces against the business.
"I don't think there's anything, given our structure, we could've done to avoid this," he said.
Given Boken's experience in restructuring and crisis management for financially distressed companies, it's likely he will be more of a place-holder than a permanent replacement for Mon. As a managing director at Kroll Zolfo Cooper for the past 15 years, he has led more than 50 projects in a variety of industries.
In an earlier interview, Boken told Big Builder his job was to look beyond how TOUSA got into its current financial straits and to determine how to get it back on track. "Now, it's about how we get out of it, how long will it take, and how much money will it take? How can we best work together to maximize the value? That's where my responsibility comes in because now I am the new party–independent of anything that happened historically," Boken said.
–Lisa Marquis Jackson and Teresa Burney
LandSource Goes BK
Lennar's Southern California joint venture files for Chapter 11 bankrutpcy protection.
The months-long battle to restructure $1.3 billion in debt and stay out of bankruptcy ended for LandSource Communities Development on June 9 when the joint venture filed for Chapter 11 bankruptcy protection in Delaware.
Rumors of a possible bankruptcy surfaced after the company received a default notice on a $1 billion first lien on April 22 after missing a remargin payment triggered by a decline in the assessed value of its Southern California land holdings.
LandSource is a holding company that was jointly owned by Lennar Corp. and LNR Properties prior to February 2007. Early last year, MW Housing Partners, an entity co-managed by MacFarlane Partners on behalf of the California Public Employees' Retirement System (CalPERS), and Weyerhauser were brought in as partners, infusing both Lennar and LNR with much needed cash–nearly $700 million each. MW Housing Partners holds a 68 percent stake in LandSource while Lennar and LNR Property Corp. each own 16 percent of the joint venture.
The deal was impressive at the time it was struck, and Lennar was lauded for squeezing $1.3 billion in cash out of land during a period when almost nobody was buying. Many pointed to the deal as proof that buildable land in desirable locations would maintain a strong value amid a slowing market and that motivated partners and creative financing could overcome formidable obstacles.
However, the financial success of LandSource was heavily dependant on Lennar's ability to buy lots at the predetermined price and on schedule. As the market slowed and land values plummeted, Lennar and other builders found no economic viability in their projected takedown arrangements. As Lennar walked away from option agreements that no longer made sense, the cash flow of the JV dried up, and it was unable to service the debt.
Some industry experts speculate that bankruptcy protection could serve as a shelter for the assets, which will eventually begin to recover value. In the meantime, LandSource plans to continue operations. Barclay's Bank and Marathon Special Opportunity Fund committed to providing a senior revolving credit facility of up to $135 million and nearly $1.2 billion in senior secured super-priority debtor-in-possession financing.
The bankruptcy fuels fears over big builders' exposure to hidden joint-venture risk. But Lennar's vice president Marshall Ames says that fallout from LandSource is nonrecourse to Lennar.
"Because LandSource is a completely standalone entity, [the] court filing covers only this specific joint venture," Ames explains. "Lennar and the other owners are not responsible for, nor a guarantor of, any of LandSource's debt."
–Lisa Marquis Jackson
LandSource Partner Sued
KB Home sues MacFarlane Partners over costs related to three urban projects.
Just days before LandSource Communities Development went BK, KB Home filed a lawsuit against San Francisco-based MacFarlane Partners–one of LandSource's major partners–for failing to make payments related to three urban residential projects in California. The suit, while marking another joint venture gone bad for KB Home, also augments existing fears over big builders' exposure to the off-balance sheet entities.
KB Home spokesperson Lindsay Stephenson says that the company was still committed to finishing the three projects–Anavia in Anaheim, The Carlyle at Colton Plaza in Irvine, and Warner Center in Woodland Hills–which are currently in various phases of construction.
"We definitely want to move forward with them," she says. "We're just trying to figure out the logistics."
But the suit is a sign of stress for KB's urban division, which was launched in 2005. The division was a pet project of former CEO Bruce Karatz and included a leadership team headed up by Jeffrey Gault. Today, neither Karatz nor Gault are in place to shepherd the fledgling division, and its strategic importance to the company is being challenged by CEO Jeffrey Mezger's push to reintroduce the company to its former bread and butter, the entry-level buyer.