Value Questions Circle Lennar

The participation by Morgan Stanley's real estate arm shows that large financial institutions and opportunity funds continue to search for attractive opportunities in the distressed homebuilding sector.

John Peshkin, CEO of the real estate investing firm Starwood Land Ventures, told TheStreet.com last month that finished home sites and raw land are being sold by homebuilders for 50% to 75% discounts off peak values from 2005.

Lennar will receive fees and additional bonuses if the venture exceeds financial targets, which were not specified. Such ventures typically look for returns of 20%.

Lennar will keep the option to purchase some of the home sites at current market values in the future.

In a statement, Lennar CEO Stuart Miller said the deal gives the company "increased liquidity and flexibility at an opportune time."

While the deal surely creates liquidity for Lennar, it also raises the question of how much investors can trust homebuilder balance sheets.

"How can they sell land for 60% less than what they said it was fairly valued two months ago?" asks one homebuilder analyst, who declined to be named.

"It raises an accounting issue," the analyst says. "Auditors need to come in and take a close look at what assumptions builders are using."

A Lennar representative couldn't be reached for comment on the company's land valuation.