The judge and the creditors have approved a plan that will bring LandSource Communities out of bankruptcy on July 31, free of debt, with more than $90 million in cash, and a new name: Newhall Land Development.
The large California-based land development company will also have new majority owners--the Barclays-led banking consortium that underwrote a giant loan to buy the majority of the company from Lennar Corp. and LNR Property Corp. in February 2007.
MW Housing Partners, a partnership among the California Public Employees' Retirement System (CalPERS), MacFarlane Partners, and Weyerhaeuser Real Estate that bought the majority interest in the company from Lennar, lost their interests in the company in bankruptcy.
What isn't new is that Lennar Corp. will still own a piece of it. The Miami-based builder has a 16% ownership in LandSource now and has agreed to kick in $140 million for 15% of the reorganized company as well as outright title to several of LandSource's assets: Mare Island, Kingwood/Royal Shores, Placer Vineyard, and interests in Lennar Bridges and HCC Investors. It was Lennar that announced the approval of the plan by U.S. Bankruptcy Court judge Kevin J. Carey of the Delaware District late Monday.
Management of the reorganized company will also provide a shot of déjà vu. Emile Haddad, Lennar's mega California land dealmaker who engineered the original purchase of the LandSource assets by Lennar, will resign from his job at Lennar to head a new management company that will manage the Newhall Land Development assets. As part of the plan, Haddad would put $1 million of his own money into the company as a requirement and receive some ownership in the new company in return. The management company itself will have 2.5% interest in the new company.
Debra Dandeneau, an attorney for Weil, Gotshal & Manges who represented LandSource in the bankruptcy, said the company is happy to finally strike an agreement that was palatable to the company's many creditors. It took the company, which filed for bankruptcy court protection June 8, 2008, nearly 14 months to navigate through the process.
"We are very pleased that all our key constituencies--our DIP lenders, our second lien lenders, and our trade creditors--ultimately came together to support the emergence of LandSource from bankruptcy," she said late Monday via e-mail. "In this wave of restructurings, I believe this is the first real estate-oriented case that did not end up in liquidation."
Analysts, who have long criticized Lennar for the potential of hidden risk in its joint ventures, began to issue positive notes in the aftermath of resolving the case. Citi analyst Josh Levin said the deal represents another joint venture delevering by Lennar and also proves that non-recourse joint-venture debt, which is what Lennar had in the LandSource deal, is truly non-recourse.
"With today's court ruling, LandSource's $1.4 billion of debt will be wiped out," Levin wrote. "As a result, the aforementioned $3.8 billion of total JV debt will drop by an equivalent amount or 37% to $2.4 billion."
The path to reorganization was far from smooth. As recently as two months ago, some creditors were saying that liquidating the company under Chapter 7 of the bankruptcy code would net them more than the reorganization plan at the time did. But Lennar and LNR as well as LandSource's biggest group of secured creditors, a consortium of investors managed by Barclays that financed the MW Housing Partners purchase from Lennar and LNR and is owed roughly $1 billion in the deal, salted the deal with sweeteners that, in the end, gained approval by close to 100% of voting creditors.
Some of the inducers included a $13 million contribution by LNR in exchange for 1% equity in the new company. That cash boosts the amount available to be divided between second lien and unsecured creditors in the case. The proposed second lien creditors would receive their pro-rata shares of $9.5 million in cash while the unsecured creditors would divide $10 million. In return, neither set of creditors would receive any shares in the reorganized company.There were also provisions included that would defuse other potential future litigation between LandSource and LNR and Lennar related to the sale of LandSource in early 2007. In less than a year after that sale, the appraised value of the assets diminished from $2.6 billion to $1.8 billion.
Under the proposed agreement, LandSource agrees not to sue Lennar and LNR for that sale, which netted each $660 million, and in return, Lennar and LNR agree not to sue LandSource for damages related to not paying agreed-upon management fees, and delivering on purchase and sale and option agreements made as part of the sale.
The deal ended up requiring the Barclays consortium to also pony up more cash beyond the $1 billion it has already invested. That group, which includes Anchorage Advisors, Marathon Asset Management, Affiliate Investment Funds of OZ Management, Third Avenue Real Estate Value Fund, Third Avenue Special Situations Fund (Master), and TPG Credit Management, ended up with majority ownership in the company. But to get that, the partners agreed to buy into a rights offering of up to $140 million to add to the $140 million contributed by Lennar to fund the reorganization.
LandSource Communites was born in 2003 at the beginning of the housing peak as a joint venture between Lennar Corp. and LNR Property Corp. Lennar and LNR formed the company to make strategic acquisitions and act as a holding company for land. In January 2005, LandSource spent about $1 billion to buy its largest and most valuable asset, Newhall Land and Farming Co., the developer of two communities on prime land in the Santa Clarita Valley 30 miles north of Los Angeles.
Lennar and LandSource made some improvements to the land, including getting some more entitlements, and then in February 2007, sold off most of its interest to MW Housing Partners. At the time, the land had a book value of $1.3 billion, but it was refinanced for $2.6 billion to reflect its increased value over three years. The refinancing allowed Lennar and LNR to each net $660 million in cash while retaining 16% ownership each, the rights to build on the land in the future, and "significant" management fees for the land. By the end of 2007, LandSource's value had crashed, causing the company to default on its loan payments and eventually forcing it into Chapter 11.Even as the market has ravaged the current values of land, no one has ever doubted that the rolling hills in the Newhall Land and Farming asset eventually will have great value.
Lennar CEO Stuart Miller called the land position a "home run" in 2007. "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 is going to do exceptionally well.
Learn more about markets featured in this article: Los Angeles, CA.