Behind the LandSource bankruptcy

Confused about the recent LandSource bankruptcy in California? Here's a good synopsis from BuilderOnline.com:

Large California property developer LandSource Communities Development LLC announced late Sunday that it 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 debtors and that both assets and liabilities exceed $1 billion.

LandSource had been diligently 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. ..

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 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 dependent on Lennar’s ability to buy lots at the predetermined price and 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 coffers of the JV dried up and the debt was unable to be serviced...

“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.