A half an hour's drive from downtown Los Angeles heading northwest can be found a pristine wilderness with rivers and canyons, the last major tract of undeveloped land in Los Angeles County. Since the 19thcentury, the land belonged to the Newhall Land and Farming Company formed upon the death of its previous owner Henry Mayo Newhall. A partnership between two closely intertwined homebuilders, Lennar and LNR, acquired the company off the public markets in 2003 for $990 million with the goal of developing its land holdings, renaming it LandSource. The entity reappraised its assets in 2006 at $1.3 billion. Around the time the real estate market peaked in 2007, booking profits, the partners then offloaded most of this land exposure through a structured leveraged transaction onto counterparties led by major public pension fund CalPERS leading to a new valuation of the assets at $2.6 billion. The counterparties would take most of the losses or profits tied to land exposure, while LandSource would depend on Lennar's willingness to exercise land options it bought from the entity to secure land for future development. In the next two years, as the real estate market plummeted, Lennar stopped exercising options and LandSource no longer had the cash flows to make payments on the bonds it sold to create leverage. The entity filed for Chapter 11 Bankruptcy in 2008, wiping out CalPERS's stake, and under one of the proposed reorganization plans, Lennar would get to reinstate the options and buy a new ownership stake at a discount, with the unleveraged entity valued at $933 million, once again close to its 2003 purchase price.
What was the land worth over these six years? Did the roller coaster of reevaluations efficiently price these assets, with the $2.6 billion representing an upper end of rational approximations of potentiality when times were good? Or is the value just below $1 billion at which the story begins and ends the fair price? To provide a different perspective, the Los Angeles County tax assessor's office puts a value around $418 million on the land for taxation purposes. Is that too conservative? How does one determine the price of land? As you explore the tabs of the case, try to come up with your own perspective on this question.
Andy Pels and William Goetzmann, “Newhall Ranch Land Parcel,” Yale SOM Case 09-025, July 16, 2009.
- Real estate
- Asset Management
- Financial Regulation