June 12, 2012

Lehman Continues to Deal

By Robbie Whelan
The Wall Street Journal

Delta Coves, a planned luxury community in California’s Sacramento Valley, was sold to SunCal.

After years of fighting, Lehman Brothers Holdings Inc. has sold two large California housing developments for $60 million to one of its main real-estate partners during the boom years.

The deal is the latest sign that Lehman, little by little, is extricating itself from the soured real-estate deals that helped bring the bank to its knees, resulting in the largest bankruptcy filing in U.S. history in October 2008.

Lehman’s sale of the Fairway Canyon and the Delta Coves master-planned projects to SunCal Cos. also comes as major land developers are moving ahead with housing projects again. SunCal plans to finish out the projects along the lines of their original plans, using funds from private-equity firms Colony Capital LLC and Dune Capital Management LP, according to Stephan Elieff, SunCal’s president.

Colony’s involvement in the deal also is significant. Colony is one of a handful of private-equity funds that has stepped up its investment in the single-family housing sector in the past year by investing in both land and foreclosed homes to rehab and rent out. Investors are attracted to such housing by the low prices and the potential for high yields as the assets appreciate.

“Since the time SunCal negotiated the price for these assets last fall, the relevant markets have certainly improved, which is good for us,” said Paul Fuhrman, a principal with Los Angeles-based Colony.

In the decades leading up to its collapse, Lehman had lent more than $3 billion to SunCal, one of the largest land developers in the western U.S. At the time of Lehman’s failure, SunCal was the bank’s second-largest real-estate investment, valued at $1.6 billion, according to internal documents released last year.

After Lehman failed, SunCal took 21 of the Lehman-funded projects into bankruptcy. Since then, the developer and the bank have been fighting over how to unwind the projects, with both sides maneuvering to retain control.

After three years of litigation, the bank managed to wrest control of the assets from SunCal, agreeing to sell the developer two of them and release SunCal’s chief executive, Bruce Elieff, along with his wife, from hundreds of millions of dollars in personal guarantees.

In October, SunCal successfully bid on three other projects from the portfolio, buying them at auction for $71 million.

Before Lehman’s collapse, the bank had lent approximately $324 million to SunCal for the Fairway Canyon and Delta Coves communities, which was used to buy land, build infrastructure and prepare home sites for building.

Fairway Canyon, in the hills of California’s foreclosure-plagued Inland Empire, is a golf community with 3,300 homes planned on 985 acres, with parks, recreation facilities and 30 acres of commercial space, including a supermarket and a multiplex movie theater.

There are about 1,100 occupied homes there. Delta Coves, on Bethel Island, is 310 acres alongside the Sacramento River that is planned for 590 waterfront homes, a yacht club and private docks. No homes have been built there yet.

In the past year, SunCal has begun buying land again, although with more-modest ambitions than during the real-estate boom. Mr. Elieff said that SunCal may try to purchase some of the 14 remaining projects from the old SunCal portfolio that remains under Lehman’s control.

“We agreed to support their [bankruptcy] plan, and in return they agreed to sell us these two properties,” said Stephan Elieff, SunCal’s president and Bruce’s brother.

“They are two very nice investments. …It signifies the end of a very long battle.”

Lehman emerged from bankruptcy-court protection in March under a liquidation plan. In late May, Lehman sold its majority stake in LCOR Inc., a real-estate development company, to a pension fund for $820 million.

Lehman last year valued its real-estate portfolio at more than $13 billion.