'Savvy' Ventures Begin
To Haunt Home Builders
by Michael Corkery
From The Wall Street Journal Online
March 28, 2008
Getting caught with excess land during a housing downturn can be fatal to a home builder. Debt payments on the land drain cash, and it's hard to unload at a good price during a downturn.
Big builders looked savvy when they teamed up at the peak of the boom and bought land through "joint ventures" that were supposed to spread the risk associated with owning land, and the builders didn't have to record the debt on their own balance sheets.
Now these arrangements are coming back to haunt them. Some ventures are falling into default and face margin calls from anxious lenders. Default notices were sent recently to two huge joint ventures in Las Vegas -- Kyle Canyon Gateway and Inspirada -- which involved many of the nation's largest builders.
No large builder has more joint ventures than Miami-based Lennar Corp., which reports fiscal first-quarter results Thursday. Lennar had about $795 million of "recourse" debt, which it may have to pay back if certain joint ventures fail, and other guarantees involving 210 joint ventures as of Nov. 30, according to Lehman Brothers analyst Megan Talbott McGrath. Add to that other possible expenses, such as having to pay debt service for joint-venture partners that can't meet their obligations, and Lennar's maximum liability swells to about $1 billion.
It's unlikely Lennar would have to pay all $1 billion, and the company has a cash cushion of about $795 million to absorb many obligations and guarantees. But the potential losses, and the obscurity of these joint venture deals, remain a source of worry. Builders reveal few details about these ventures.
Investors learned a painful lesson last year when the small Florida builder Tousa Inc. had to pay about $450 million to settle a dispute with its lenders in a troubled joint venture. Tousa argued it wasn't liable for much of the debt. It filed for bankruptcy protection in late January.
In a market that has been battered by unpleasant surprises in the housing and mortgage sectors, this is another to look out for.
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