Lennar slows down 2 O.C. projects

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<p><em><strong>"Lennar Corp. </strong>is slowing development of two major projects in Irvine and Anaheim, holding some homes back from the market until conditions and prices improve, a company official said Tuesday. </em></p>

<p><em>The Miami-based company, which has about two dozen developments in Orange County, will halt sales of 259 low-rise condos in its Central Park West development in Irvine, said Emile Haddad, Lennar's chief investment officer.</em></p>

<p><em>The company will take orders on the 240 high-rise units there, but won't offer discounts to encourage sales, he said. Construction will continue on the project along I-405, with homes being completed between January through November of next year.</em></p>

<p><em>In addition, plans to start construction on the A-Town Metro and A-Town Stadium projects in Anaheim's Platinum Triangle have been put on hold, he said."</em></p>




I just wanted to start a discussion on this topic. Frankly, I'm amazed that Lennar will not be discounting CPW, can they're margins on this project really be that thin? Loft living is what I truly miss from the San Francisco area, and finding that in OC has been very difficult.





Despite the insane pricing structure of CPW, I was interested enough to visit the showroom. Does anyone think that this strategy of wait-it-out is going to work here?


<p> </p>
 
<p>step 1: stop building</p>

<p>step 2: inventory goes down</p>

<p>step 3: less supply means prices go back up</p>

<p>step 4: start building again</p>
 
Unfortunately there's a huge gap between step 1 and step 2.





More like stop building = stop selling = no revenue = no cash flow = no more credit = foreclosure on the business, There's a kind of irony here that I like!





But Step 2 isn't likely to happen for awhile since all the option ARMS and resets will continue into 2008. Once those rate resets and Option ARM resets happen in 2008 it'll take a good 6 months before they hit the foreclosure market. We're already at high inventory levels and I can only see even higher inventory going into 2008/09.





Maybe in 2012 we'll be at step 2, but that is a loong time for Lennar to have the development assets on their books and to carry all the associate land, building and municipal costs.
 
<p>They (Lennar) have a nice big building in Miami, with lots of employees (or did the last time I was there to do a closing, which is quite a long time ago now.) All that needs constant cash flow to keep going.</p>

<p>I told my developer client that he would be wise to get another job (he's a trained engineer) for the nonce, but he's a builder, and a builder's gotta build!! I told him he might lose everything, and he said, he's a Cuban, they know how to lose everything and keep on going.</p>

<p>Lawyerliz throws up hands in despair.</p>

<p>Other client, also Cuban, sez his wife thinks it's time to keep some cash in the house and I said he should listen to his wife. He owns 3 properties, all paid off.</p>

<p>Lennar could try to rent out most of their building, figure out where the mkt will come back first, let everything else go, and reduce to a skeleton crew. Will they do this? Hell, no. And actually, can they do this in the face of what would be very angry shareholders? But wait!!! That is the functional equivalent of bankruptcy, isn't it?</p>
 
Read an article about the builders (sorry, forgot the link), said the problem is that even if they don't build, they have all the land they bought, and sometimes that is half finished (with them paying interest on the land, the infrastructure under the ground like pipes and so on they already put in, and even taxes/mello roos to boot). So even if they stop all construction and reduce the number of people working, they still owe a bundle to the bank every month in interest. All they can do is build to completion and sell to get out. But no one is buying ...
 
I still suspect that CPW is going to become an eyesore and that the City will form a redevelopment district, float some bonds, buy the land from Lennar, and sell it off just to make it productive and "pretty" again.
 
<p>I think the banks are scared soo badly that they would be willing to negotiate.</p>

<p>My developer buddy has a couple of houses over a million--real million dollar houses, not ticky tacky, with coffered ceilings, every fine amenity, over 3,000 square feet, in a really nice development close in, build to withstand 160mph windspeeds, etc., which he can't sell. The construction lender is being extraordinarily helpful, says they'll stretch out the loan. I told him he should reduce below a million, but he thinks that will hurt his chance to sell.</p>

<p>Lennar is in the same position, only on a grand scale. I bet the banks, if negotiated with hard enough, might be forced to agreed that losing a lot of money is better than losing an ENORMOUS amount of money.</p>
 
Eva and Lawyerliz hit the nail on the head. The lenders, Lennar and the Irvine Company are joined at the hip whether they like it or not and they started a multi-million dollar poker game in which Lennar just made the first bet. This is about more than just CPW too. Lennar is the big player in the Great Park development don't forget and the Irvine Company certainly has a vested interest in how that turns out...
 
>>Lennar is the big player in the Great Park development don't forget and the Irvine Company certainly has a vested interest in how that turns out...





I'm a fan of the Great Park (definitely better than an airport), but that they were relying on development fees to build it shows how short-sighted everyone was. Although, in all fairness, it would have died a quick death if "someone else" wasn't paying for it.
 
Why can't the city just claim eminent domain, take the property and sell the land to the Irvine Company who can build some more Disney looking neighborhoods and strip malls?
 
See, the issue with this project, and many of Lennar's, is it is backed by private investors. This one is backed by a private equity group, who just happen to have CalPers as an investor. Lennar will start to have issues, if they are not able to produce the returns they had promised. They are not mothballing this project because they want to, they are mothballing it because they have to. I hope CalPers doesn't have too much money invested in this fund, because they will have to wait a long time for a return, if any at all.
 
As I understand, they will keep building CPW, undoubtedly at a slower (MUCH slower) rate - although if I was the Irvine Company, I'd be pretty pissed about having a construction site just sitting there for the better portion of two years.
 
I thought local governments could take land for redevelopment like they did in Hollywood. Weren't there stories a couple of years ago about cities using eminent domain to acquire land for Wal-Mart?
 
<p>lm- The SCOTUS says otherwise.</p>

<p>See <a href="http://www.supremecourtus.gov/opinions/04pdf/04-108.pdf">Kelo v. City of New London</a></p>
 
I would assume that the IC has some stipulations about how quickly the land must be developed, once development has begun. Its obviously not in their best interest to have a half-developed property lying around. Not to mention an eye-sore.





Does anyone think this strategy of "wait the market out" is going to work here? Lennar is a huge corporation, so they probably can afford to wait quite some time, but I'm extremely skeptical this will work, in the long run.





Perhaps I'm just hoping they'll fail here. The prices are insane.
 
Does TIC own the land on this project? I didn't get the impression that they did.





If they don't, they don't have any (direct) say in the matter. What TIC could accomplish through the City is another issue.
 
<p>Investor in the project: </p>

<p>"We are under no pressure to sell strong assets into a weak market, especially where the market's long-term prospects remain favorable." </p>

<p><a href="http://online.wsj.com/article/SB119492391355890969.html?mod=googlenews_wsj">online.wsj.com/article/SB119492391355890969.html</a></p>
 
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