Risk Reverse

High-profile downtown parcels that once appeared to be the future of the industry now become a liability.

Before the world of housing was turned on its ear, it seemed that the bigger the land risk, the bigger the reward for home builders. As evidenced by the painful impairments and write offs announced in Lennar's most recent quarterly earnings, the story has been rewritten, and the plot lines all seem to lead to the same fate: Land risk now equates only to danger.

Less than two years ago, Lennar officials asserted they'd struck upon a strategic template for future growth as the city of Anaheim, Calif., approved its Platinum Triangle urban master plan for A-Town. After all, fresh on the heels of its winning bid to buy 3,700 acres of the decommissioned El Toro Marine base, Lennar's landmark land plays secured its stature as a serious residential and commercial land development rival to regional giants like The Irvine Company.

The original proposal for the zoning and re-zoning necessary to resuscitate the moribund 870-acre parcel of land in the shadows of Angel Stadium was ambitious and complicated, to say the least. Now, all the bargaining, cajoling, and wheeling-dealing that went into gaining approval from city officials seem to be coming full circle. Lennar execs went back to appeal to Anaheim city council members in mid-September. This time, however, their appeal to municipal leaders was for a red light rather than a go-ahead.

Anaheim city authorities learned that Lennar will continue to move ahead with infrastructure, but will not pursue any building permits for a minimum of nine to 12 months, stopping progress on the centerpiece of what some call the city's new downtown.

"We had a good feeling going in," Emile Haddad, Lennar's chief investment officer, was quoted as saying in an interview about garnering approvals for A-Town in late 2005. He was also quick to add, "But you must always be prepared for the surprises."

Surprise!

With the jumbo loan market in turmoil, liquidity is certainly affecting demand. "We are studying product, and we're choosing to let some of the other inventory get absorbed," Haddad says. "Until that sorts itself out, it's silly to push out a product that might not be accepted."

Does that mean that A-Town is being mothballed? Not really, Haddad claims. "I can start construction anytime I choose," he explains. "It's more that we are monitoring inventory, choosing to let some of that get absorbed."

As the project's primary developer, the decision to pull back on building has some local sources concerned about losing momentum. In addition, there is talk that the company is actively working to sell off a substantial amount of its stake in the area. "Lennar always told us that some of the sites would be sold and developed by others," says Anaheim city planning director Sherri Van Der Dussen.

Admittedly, owning land in the heart of Orange County is a solid long-term investment, but the real question is: How long can Lennar justify the cumbersome investment costs of land acquisition, development, and construction without generating returns? On the other hand, how can the company justify construction as originally planned when it is almost certain to lose money?

Lightening the Load

For the quarter ending Aug. 31, Lennar wrote off deposits and pre-acquisition costs on 15,000 home sites it no longer plans to buy. That adds up to a total of 24,000 home sites the company has abandoned in the first nine months of this year.

"We look at costs to develop a parcel of land and actually develop home sites and include in that the cost of building a home, and you get to the point where the residual value of the land itself–even in well located areas–is close to zero," says Lennar CEO Stuart Miller.

"Lennar has mothballed some large projects because the effective result of selling currently implies the land has zero value," says Stephen East, an analyst with Pali Research. "It also provides the company some accounting breathing room. By mothballing the projects, LEN is able to avoid taking impairment charges on the land that would reduce the value effectively to zero."

Local real estate executives across the nation report sales activity in Lennar communities of substantial size as the company continues to try and shed the weight of excessive holdings. As event funds, flush with private equity cash and seasoned helmsmen, jockey for position among entrenched builders and developers who have dry powder to spare, a wave of distressed land sales seems bound to occur soon.

In Dallas and Fort Worth, Lennar is pulling out of two of its largest communities in the market. Both master plans are over 1,000 units each and located in northern Fort Worth, which is the area's best selling submarket. Both are also reported to be recording better-than-average absorption rates.

In each case, a smaller, local builder is set to buy Lennar's remaining lots. In Parkview Hills, the company is closing out of its current phases in the neighborhood and selling off its position to Antares, which is entering the community at a lower price point. Lennar is implementing a similar strategy in Bar C Ranch, where its model has already closed, and First Texas Homes is assuming the lot position.

In Punta Gorda, Fla., Tern Bay, a Lennar project that ultimately would have amounted to upwards of 1,800 units, has been put on hold. Currently, 14 homeowners live in the community, and there are an additional 35 units of inventory standing or under construction.

The developer, Tern Bay LLC, reports that the project is not dead, just on ice until the market rebounds. However, sources claim that local developers are being contacted to discern their potential interest in the project.

–Lisa Marquis Jackson