Lennar Megaproject Survives

Michael Corkery
Wall Street Journal Online

Corp.’s multiyear, billion-dollar effort to develop decrepit former military properties on San Francisco’s waterfront has tapped a new financing source, underscoring the home builder’s success in doing deals to survive the wretched housing market.

Lennar says it has formed a new venture with Ross Perot Jr.’s Hillwood Development Co., and the investment firm Scala Real Estate Partners LP. The venture is taking equity stakes in massive projects at former military properties across San Francisco , including a project at Hunter’s Point, which would bring development to one of the city’s poorest neighborhoods.

The new venture replaces the 50% stake held by LNR Property Corp., a unit of Cerberus Capital Management, in the Hunter’s Point project. It also is taking half of Lennar’s 50% stake in another ambitious development project on Treasure Island , home to a former naval barracks and sweeping city views.

The venture is taking half of Lennar’s 100% stake in Candlestick Point, the possible new home for the San Francisco 49ers, according to Lennar. The builder will continue to manage the projects. The developments are slated to create thousands of units of housing. The venture also took a stake in land on the New Jersey waterfront across from Manhattan.

As part of the deal, sealed during the weekend, the Lennar-Hillwood-Scala venture paid $145 million in cash to LNR, Lennar and the partner in the New Jersey project. Hillwood and Scala have committed to providing long-term financing to the projects, which could take 10 or more years to complete.

The capstone of Lennar’s megaprojects in San Francisco are Hunter’s Point and Candlestick Point, which were acquired from the city for a nominal fee. Lennar and its partners have agreed to spend more than $1 billion building thousands of affordable rental and for-sale housing, along with parks and a site for a new stadium for the National Football League’s 49ers. The first large phase of the project is to begin in 2010.

“We now have strategic partners committed to 50% of the cost going forward,” says Emile Haddad, Lennar’s chief investment officer, who negotiated the deal for the builder. “They are committing hundreds of millions of dollars.”

The San Francisco venture reflects the strength of the city’s housing market, where values have held up amid the national downturn — and Lennar’s ability to close land deals in such an atmosphere.

In March 2007, the builder and LNR turned heads when they reduced their stakes in a venture called LandSource. An investment vehicle for the California Public Employees’ Retirement System paid about $920 million for a 68% stake in LandSource, while Lennar and LNR each received $660 million in cash from the deal. LandSource filed for bankruptcy-court protection in June.

In December 2007, Lennar sold 11,000 house lots to a venture mostly owned by Morgan Stanley‘s real-estate arm for $525 million, which was about 60% less than what Lennar carried the land on its books. Since then, land values in some of the markets where the lots are located have continued to erode.

Hillwood has experience developing big projects such as the Fort Worth Alliance Airport and the American Airlines Center basketball arena in Dallas . Irvine Calif.-based Scala has been focusing on buying land during the real-estate downturn.

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