Lennar being saved by Morgan Stanley...

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graphrix_IHB

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<a href="http://tinyurl.com/2jv9wo">Lennar sold a huge chunk of their holdings to Morgan Stanley</a>.





<em> The properties acquired by the new entity consist of approximately 11,000 homesites in 32 communities located throughout the country. The land portfolio includes a mix of raw land as well as partially and fully developed homesites in both active and future communities. The communities are located in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.</em>





This is just strange. Sounds like they were having a bigger cash problem than they were reporting.
 
I was thinking they must be having major cash problems if they just stopped construction of Central Park West. I have never seen a builder stop once they started going vertical. It takes almost as much money to mothball the place as it would to finish it. The only reason a builder/developer stops once they go vertical is that they are broke.
 
50 cents on the dollar? If they made those kinds of price drops available to home buyers two months ago, they could have saved themselves some money, not to mention saving their reputation.
 
IR,





What effect do you think, that the private equity backers of CPW had on the mothballing? I can't remember the name of the one PE group, but I know that CalPers was an investor in their fund. I wonder if the PE groups wanted to get the *&^% out. Lennar seems to be the builder with the best, and most slight of hand maneuvers.
 
Lennar basically has stopped advertising in the Brevard County newspaper. There was one ad with no pictures, rather hard to find, offering 3 % off. No pictures of houses, no price list of what it was 3% off of. Maybe they are planning to sell here too? But these are finished, or almost finished houses.
 
<p>Lawyer liz - saw a post over on theHousingBubbleBlog that said there are large glossy real estate inserts for Florida properties in the Toronto Sun. Perhaps that's where the buyers are coming from...</p>
 
<p>There are enclaves of Canadians in Miami/SouthBeach/Broward County (where Ft Lauderdale is), but not reason to think that Canandians will come in droves to the space coast. But maybe they will. What do I know? Prices have dropped here by 12% yoy. Actually, another 12%, and prices will actually become affordable for cops/teachers etc. There was always some not so expensive stuff in safe areas, now there will be some choice.</p>

<p>Or, they could always choose Cape Coral, see Calculated Risk. And buy nice stuff for practically nothing.</p>

<p>The Canadian dollar has soared vs the dollar, right? So maybe this is a good idea, for a few people. But the numbers just aren't there.</p>
 
My parents live right on the Canadian border in Washington, and their housing market is booming from the influx of buyers from north of the border. Considering it is a 2 hour wait to cross the border, i'm sure most of these people are retired or it doesn't matter where they live... they could easily move to somewhere warmer (CA, FL)
 
<em>" What effect do you think, that the private equity backers of CPW had on the mothballing?"</em>





I think they stopped simply because they are broke -- insolvent. I imagine Morgan Stanley bought their property REIT for 20% of book value knowing they have the patient capital to ride things out. Lennar may or may not survive, and I doubt Morgan Stanley cares because they now control their land assets. They will find someone to finish off their various projects, and they will probably make money on the deal. If you write down the land costs 80%, these deals will pencil out in markets like ours. Residual value hasn't gone negative here like it has in the Inland Empire.





When you think about it, it is the ultimate sign of desperation because they just sold every potential productive asset they own. Now they are just a homebuilding company with a bloated staff unable to stay afloat with their current level of revenue. I predict massive layoffs in 2008.
 
<p>I looked at Graphrix's post to see where the properties might be and there was no info.</p>

<p>I guess this was a kinder, gentler way of going bankrupt, except for when the employees get laid off.</p>

<p>I assume they have something left?</p>
 
<em> Lennar acquired a 20% ownership interest and 50% voting rights in the investment venture. . . . Lennar will manage the land investment venture's operations and will receive fees for its services. It will also receive disproportionate distributions to the extent the investment venture exceeds financial targets. </em>





This sounds similar to that equity sharing concept that we were talking about before that had been offered to individual homeowners. The "management fees" sound like a nice way of saying "providing funding for Lennar's on-going operations."








<em>As a part of the transaction, Lennar entered into option agreements and rights of first offer providing Lennar the opportunity to purchase certain finished homesites at current market values at the time of exercise from the investment venture. [para.] Stuart Miller, President and Chief Executive Officer of Lennar Corporation said: "We are very pleased to expand our long-standing relationship with Morgan Stanley.





</em>What Miller really meant was, "We owe Morgan Stanley so much money, that if we went belly up, those guys would lose their shirts. So they figured out a way for us to move the land off our books and provide us with a cash infusion without us having to lose the prime land acquisitions to competitors."





At least, that's how I read it.
 
Morgan Still needs Lennar to build out the properties to convert the land into cash. Morgan will make most of the money from how it sounds. I imagine the hurdle rate for Lennar to make anything extra will be very high (40% IRR).
 
IR -



Can you explain how this works? Take Lennar's development in Woodbury. It would seem that all of the land for the various planned development has long since been purchased from TIC. So, (potentially in the case of Woodbury) they are just turning around and selling it (or control) to Morgan Stanley? At a reduced rate? (So Lennar can clear up the books? etc? Or so Morgan can hold part of the bag for a few years until the down cycle is over?) I'm trying to see Morgan Stanley's incentive for buying the holdings from Lennar (in a down - and headed further down market) AND I'm trying to understand whether this means that although the properties may continue to be sold under the Lennar name, if it is Morgan Stanley that ultimately controls pricing and dates of release... thus preventing/delaying the reductions that I may be hoping for...



GUII
 
Morgan Stanley bought their raw land holdings at a price so low that they can wait a long time to get their money back and still achieve the rate of return necessary to satisfy their investors. This is known as land banking. In some markets, the residual value of raw land can actually fall negative, but land bank buyers will come in to acquire the property at low prices knowing the land values will return when the market turns around.





This will not impact Woodbury where Lennar is just building out TICs land. Lennar makes a small homebuilding profit, but the bulk of the profits go to TIC. Morgan Stanley will not control anything on Irvine Company land.
 
<p><em>Residual value hasn't gone negative here like it has in the Inland Empire.</em></p>

<p>IrvineRenter, is this another way of saying: in the IE, even if the builders get the land for free, they can't sell the houses for a profit ?</p>

<p>If so, this must means that home prices have gone down at a rate much faster than onstruction costs ? (b/c construction costs have been going down also).</p>

<p> </p>
 
<em>In the IE, even if the builders get the land for free, they can't sell the houses for a profit ?





</em>Yup. That is exactly what he is saying. Consider it costs around $300k to develop a lot, a $100-$150 a sqft in building costs for the structure, $10k-$100k for sales, marketing and customer service expenses. A 2500 sqft home in the I.E. costs roughly $660k to build, and they are not selling for that.





<em>If so, this must means that home prices have gone down at a rate much faster than construction costs ? (b/c construction costs have been going down also).





</em>True, but the costs that have gone down are for certain materials. So, if it cost $125 a sqft before the prices went down, it may only drop that down to $123 a sqft.





In other words... The builders in the I.E. are taking it in the shorts right now.
 
<p><em>So, if it cost $125 a sqft before the prices went down, it may only drop that down to $123 a sqft.</em></p>

<p>In 2002, it didn't cost $125/sq ft to build in the IE (b/c prices in 2002 didn't support $125/sq ft, but builders were making profits).</p>

<p>So, <em>something</em> must have pushed the costs up to $125 (and I don't think it's inflation). I suspect it's a combination of inflated profits for sub-contractors & material prices. Both of these have gone down. So, why haven't building costs gone down ?</p>
 
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