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Lennar buys back 15% stake in Newhall Ranch development at big discount

The home builder had sold its controlling interest in the project to CalPERS in 2007. The giant pension fund loses its nearly $1-billion stake.

July 21, 2009|Peter Y. Hong and Marc Lifsher

LOS ANGELES AND SACRAMENTO — A U.S. bankruptcy judge in Delaware cleared the way Monday for a home builder to buy back, at a substantial discount, a chunk of the Newhall Ranch development north of Los Angeles that it sold for nearly $1 billion to the California state retirement system in 2007.

Lennar Corp. said in a news release that it paid $138 million for a 15% stake in a new company, to be called Newhall Land Development Co. Five lenders will own the other 85%.

The agreement concludes a fiasco for the California Public Employees' Retirement System, the nation's largest pension fund, which lost its nearly $1-billion stake.

The new company will be managed by Lennar's chief investment officer, Emile Haddad, who is leaving the Florida home builder to head the venture.

In 2007 Lennar, one of the nation's largest home builders, sold 68% of the development, which covers 15,000 acres in Newhall and Valencia, to CalPERS for $970 million. The purchase, made at the height of the real estate bubble, was one of several disastrous investments that led to CalPERS' losing roughly $3 billion in residential real estate in 2008.

As part of the 2007 sale, Lennar retained a 32% stake in Newhall Ranch with rights to the first option to purchase land owned by the partnership.

In March, the corporation developing Newhall Ranch, LandSource Communities Development, filed for bankruptcy protection.

CalPERS' Newhall Ranch purchase, though apparently ill-timed in hindsight, was seen at the time as a potentially lucrative investment.

At the time of the purchase, "I would have said that Newhall Ranch was going to be a winner," said Richard Green, head of USC's Lusk Center for Real Estate. "If I thought that at the time, criticizing others for doing the same would be unfair."

In the decade ahead, he added, the Newhall Ranch development still may be a winner.

"I wouldn't be surprised that in 10 years this isn't looking like the really golden thing to do," Green said.

CalPERS spokeswoman Pat Macht said the fund had decided to pull its stake in the development because "we've changed our overall real estate strategy to focus less on housing and more on commercial and international properties."

CalPERS wants to put its money into properties that create an income stream from rents rather than into land "that takes a long time to produce income," she said.

Joel West, a professor of management at San Jose State University, also said CalPERS would be wise to avoid future housing investments. Members of the CalPERS board of directors, its investment staff or outside consultants may lack the expertise to manage development of an entirely new community at the fringes of greater Los Angeles, he said.

"CalPERS may be down a billion dollars, but the best way to make that up is to buy shopping centers cheap on the bottom of the market," West said. CalPERS "is in a better position to evaluate" that sort of deal.

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peter.hong@latimes.com

marc.lifsher@latimes.com

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