Saturday, April 26, 2008

Major Landowner Default's in California

I hope everyone is enjoying the weekend. Its 75 degrees and sunny here in Maryland.

Well it looks like the housing boat has sprung a few more leaks. I wanted to talk about a big one that hit the news today in the Wall St. Journal. It appears major a landowner of over 15,000 acres of land in Southern California has received a default notice from its lenders. OOPS!

Here is some pieces of the article from the WSJ:

"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 billlion of the total debt.

Hundreds of lenders, including banks and institutional investors, hold the syndicated debt. Barclays Capital arranged the financing in early 2007. At the time, LandSource's assets were appraised at $2.6 billion.

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.

One problem with ventures such as LandSource is that they typically require builder partners to acquire land on a schedule, even if they don't need the lots. They also can require partners to contribute more equity if the land's value falls below a threshold."

My Take:

Expect these payment extensions from the banks to stop as they realize the housing game has come to a complete standstill. You will see string of bankruptcies among the builders and landowners as the banks get tired of giving these crippled companies extensions.

The reason the banks will start to pressure the builders for payment is because they need the cash! The insolvency risk among banks is rising as these foreclosures mount, and they will need to start pressuring everyone that is behind on loan payments. Its just a vicious cycle that's only going to get worse as long as people continue to default on debt in rising numbers.

The Land Source default described above is a mess because it involves hundreds of banks. It will be interesting to see how these negotiations go with the lenders. I think you now know why Calpers had a big shakeup this week. They helped put this thing together.

Bottom Line:

Builders and landowners will be the next explosion in the housing market. Expect many to go bankrupt as the bursting of the housing bubble continues to accelerate. The banks are broke and they need their money back in order to survive themselves.

Any bottom feeders buying the home builders during this financial rally beware! You were warned.

1 comment:

Anonymous said...

Ah! This is awesome! Thanks for dispelling severalsome
misconceptions I had read on this as of late.