Calpers Takes Hit on Land Deal With Lennar and Cerberus

Calpers' investment in a venture called LandSource Communities Development appears to be souring. The deal was a joint venture with the beleaguered homebuilder Lennar, and LNR Property Corp, a unit of Cerberus Capital Management. These joint ventures were extremely popular during the housing boom, which allowed homebuilders to invest in land without having to keep it as an asset on their balance sheets. The property in this particular JV was north of downtown Los Angeles, once a booming mecca of future development opportunities, now a poster child of the bust. When Calpers originally invested in the vehicle in February 2007, the venture was appraised at $2.6 billion. The venture had assets valued at $1.8 billion as of the end of February 2008 and debt of about $1.24 billion. LandSource is facing problems with its debtholders and may need to file for bankruptcy soon. Lennar and LNR (the unit of Cerberus) reduced their stakes in the venture in February 2007 by coaxing a 68% investment out of the Calpers' vehicle MW Housing, which is managed by MacFarlane Partners. MacFarlane Partners, incidentally, posted a 53% loss for the year ended September 30, 2007, which was over six months ago. Even my ten month old, who spends most of her day soiling her diapers, knows that real estate valuations have declined since September 30, 2007. Although Lennar and LNR did a good job of punting a large portion of their ownership stakes close to the high, each retain a 16% stake, which could prove to be very expensive.

The Wall Street Journal claims that insiders insist that the soured land deal is not related to the resignation of two of Calpers' most senior executives this week. However, you can bet that their departure is related to what will more than likely be lousy performance numbers from Calpers this fiscal year which will close June 2008. As I stated recently in my story about Calpers, too many highly ranked executives are leaving the firm at the same time for it to be a coincidence. As for Lennar, it is the homebuilder who more than likely has the most exposure to off-balance sheet joint ventures. And Cerebrus? Those who read my blog frequently know that Cerberus pops up all the time in stories related to soured private equity deals. These guys seem to be the kings of mega-bucks blowouts. Add this one to the list. In summary, I reckon this won't be the only story about soured land deals we'll be reading about before the end of the year.