Land Sale Unites Bargain Seekers
With Troubled Home Builders

Lennar Corp. has sold about 11,000 home sites to a venture mostly owned by the real-estate arm of Morgan Stanley for $525 million, a large land sale that signals that investors have begun to pounce on bargain deals.

The sites -- in 32 communities in areas hit hard by the housing downturn -- were valued on Lennar's books at $1.3 billion as of Sept. 30. The low price the venture paid is a vivid sign of how land values have plummeted with the downturn, precipitated by defaults on subprime mortgages and tightening credit that have led to a broader slowdown in sales.

Lennar, which will have a 20% ownership stake in the venture, will have the option to buy back certain home sites.

The deal, which closed with little fanfare Friday night, could be a catalyst for other "vulture" investors to swoop in and grab discounted land from other troubled builders. A wide range of investors have been raising money from pension funds and private-equity firms to acquire land.

While no one has yet been able to call the bottom of the housing slump, some land investors have a short-term strategy, hoping to sell house lots back to builders on a piecemeal basis. Other investors are planning to wait out the housing slump and hold the land for several years.

The Lennar deal comes just weeks after the nation's largest builder, D.R. Horton Inc., sold nearly 7,000 acres outside Phoenix for $70 million.

"There is a lot of money out there right now trying to do deals like this," says John Burns, a home-building consultant based in Irvine, Calif., who consulted with Morgan Stanley on the sale. "The problem has been the gap between what the buyers are willing to pay and what the sellers are willing to accept. This sends a strong message that somebody is willing to part with land at a significant loss."

Land has been the hardest hit of any property class during the housing downturn, with values in some markets falling between 40% and 60%. Until recently builders have been unwilling to accept the fire-sale prices being offered for land, hoping the housing market would recover.

Tax considerations are pressing builders to do deals that involve losses. The builders can only claim losses on land that has lost value once the assets are sold. If they close these deals by year end, the builders can recoup taxes all the way back to 2005, the peak of the housing market, when they were churning out huge profits and paying hefty taxes.

Lennar, which finished its fiscal year Nov. 30, will likely recoup about $250 million to $300 million in taxes from the recent sale. "Recouping the taxes is secondary," the builder's chief financial officer, Bruce Gross, said in an interview. "We wanted to turn hard assets to cash and further strengthen our balance sheet."

The venture, which is 80% owned by Morgan Stanley Real Estate, enables Lennar to move the land -- a mix of raw land and partially finished lots in both actively selling and future subdivisions -- off its balance sheet and into the venture. Lennar has the right to buy back the lots but is not obligated. Lennar will have 50% voting rights in the venture.

Morgan Stanley Real Estate raises money from outside investors to invest in commercial property throughout the world. It currently manages $88.3 billion in real-estate assets.

The deal with Lennar gives Morgan Stanley a big stake in heavily discounted land, while having Lennar manage the venture's operations.

"It's a good deal for Morgan Stanley" says Ivy Zelman, chief executive of Zelman & Associates, an independent housing research firm. "They are getting the lots at 40 cents on the dollar and Lennar will manage the venture and provide their home-building expertise for a fee." A Morgan Stanley spokeswoman declined to comment.

Ms. Zelman says another sticking point in the land market is that some investors, such as banks and hedge funds, aren't interested in building on the land themselves. "They don't want to be stuck with an asset that they can't perform on. You need to have a builder in the game," she says.

Home builders are being punished for excesses during the boom when, in some cases, they made as much profit speculating on land, as they did building houses. The builders borrowed heavily to buy massive swaths of land, typically on the outskirts of hot housing markets and then sold off parcels to other builders or built homes on it.

When the housing market sank, the builders got stuck holding the land. The land that Lennar sold includes 11,000 home sites in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey. At the end of its fiscal third quarter, Lennar owned 86,412 lots.

"Land is a nonearning asset. The builders have to get it off their balance sheet" says Jeffrey Gault, chief executive of LandCap Partners, a Los Angeles-based land investment company that has raised $350 million to buy land from builders across the country.

A former division president at KB Home, Mr. Gault's strategy is to buy lots from builders and then sell or option the lots back to the builders for a fee or form joint ventures. He expects returns of 12% and 18% and expects to close his first deal in the first quarter.

The Lennar-Morgan Stanley deal could prove a model for struggling builders, needing cash to stay afloat during the downturn. Analysts say home builders Centex Corp. and Standard Pacific Corp. may be close to negotiating large land deals that may be announced by year end. But not all builders may be eligible for joint ventures. "You are going to be less willing to do this with a builder on the verge of bankruptcy," Mr. Burns says.

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