LandSource Communities Development LLC announced late Sunday that is had filed for Chapter 11 bankruptcy protection. The entity is structured as a joint venture between Lennar and LNR Property Corp., each of which have a 16% stake, and MW Housing Partners, which holds a 68% stake.

Court documents indicate that the company has between 5,001 and 10,000 creditors and that both assets and liabilities exceed $1 billion.

LandSource was attempting to restructure a $1.24 billion debtload for months. According to the company, it received a default notice on April 22 after missing a payment when a decline in the assessed value of its Southern California land holding triggered an additional charge.

"Unfortunately, the parties were unable to agree on restructuring terms that were mutually acceptable," said Marshall Ames, vice president at Lennar. "Because LandSource is a completely standalone entity, yesterday's court filing covers only this specific joint venture. Lennar and the other owners are not responsible for, nor a guarantor of, any of LandSource's debt."

LandSource is a holding company that was jointly owned by Lennar and LNR prior to February 2007. Early last year, MW Housing Partners, which is funded by the California Public Employees' Retirement System (CalPERS), was brought in as a third partner, infusing both Lennar and LNR with much needed cash--nearly $700 million each.

In addition, Lennar and LNR maintained 25% voting rights each in LandSource and the rights to build on the land held by LandSource, including some 4,000 lots MW Housing contributed to the partnership.

LandSource financed the deal with a $1.55 billion bank loan. LandSource's book value was $1.3 billion, but it was appraised at $2.6 billion for the loan with a potential increase of $600 million.

In return, MW Housing expected to gain access to profits from LandSource, whose principal holding is one of the biggest remaining entitled pieces of land in Los Angeles County. The Newhall Land and Farming Co. holds 15,000 acres in the Santa Clarita Valley 30 miles north of L.A., which includes 700 acres of commercial land as well as 23,000 home sites. The company also owns properties in Arizona, Florida, Texas, and New Jersey.

The deal was impressive at the time, 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, financial success of LandSource was heavily dependant on Lennar's ability to buy lots at the predetermined price and on schedule. As the market continued to slow 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.

In an April report, Standard & Poor's said the company's cash had declined to approximately $25 million from about $115 million in early February. With a syndicated group of more than 150 lenders involved in the distribution of debt, the negotiating was cumbersome. But ultimately, a majority of the parties agreed to a voluntary bankruptcy filing.

"Bankruptcy of this JV highlights the conundrum Lennar and other [builders] face with JVs while also validating some of the fears of investors regarding JV risk," stated Pali Capital analyst Stephen East in a note to investors this morning. "The flip side of those problems is the recognition that Lennar has the constitution to walk away from even the most attractive of land parcels."

"LandSource believes Chapter 11 provides the most effective means for the partnership to preserve the value of its business, meet post-petition obligations, and maintain constituents' confidence while it works with creditors to achieve a long-term restructuring," said spokesperson Tamara Taylor.

The company stated that it "expects not only to survive the current real estate downturn and credit crunch, but to flourish once the market stabilizes." Though there are no assurances, some speculate that bankruptcy protection could serve as a shelter for the assets, which will eventually begin to recover value. If the JV remains in bankruptcy long enough, a change in the market could potentially create a scenario where the parties might reengage in an effort to retain ownership and control.

In the meantime, LandSource plans to continue operations. Documents filed with the court include a Debtor in Possession (DIP) credit facilities commitment letter from Barclay's Bank to Lennar CIO Emile Haddad. In it, the bank and Marathon Special Opportunity Fund commit to providing a senior revolving credit facility of up to $135 million and outline the terms and conditions for the senior secured superpriority DIP facilities in aggregate of $1.185 billion.

According to LandSource, the DIP facility assures that vendors, contractors, and consultants will be paid for goods and services provided after the June 8, 2008 filing date.

The interim financing is subject to approval by the court. The date of the official first-day hearing had not been determined at the time of publication of this article.

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