Lennar Property Pawned Off Onto CALPERS Hits Default

We've been watching this story unfold with dread for about a year now, and it seems to be going about as rosy as we projected:

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees' Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership, which owns 15,000 acres in Southern California, had received an extension to meet its current loan terms, including a required payment, but the deadline expired on April 16. The default notice applies to about $1 billion of the total debt.

The following excerpt describes the original deal:

MW Housing Partners, which includes Calpers, took a 68% financial stake in LandSource in early 2007 amid the slowing housing market. Cerberus Capital Management's LNR Property Corp. unit has a 16% stake, and home builder Lennar Corp. has a 16% stake. Lennar and LNR operate the management of LandSource. None of these equity partners is liable for the debt if LandSource defaults. Calpers and Cerberus representatives declined to comment.

The original deal is described in this article from last year. Interesting note: MW Partners' stake in the deal seems to have quietly risen from 62% to 68%, given the disagreement between the articles.

The WSJ points out:

Partnerships such as LandSource were a common way to own and develop land during the housing boom. They provided high returns to investors and lenders and a way for builders to keep highly leveraged land off their books. But the ventures have run into trouble as the value of undeveloped land has plummeted and as demand for new homes has eroded.

Indeed. We wondered what CALPERS was doing buying a controlling stake in deals like this as the housing bust was well underway. It is unclear what in specific triggered the default event -- related to California's budget crisis and the housing market bust, no doubt.