Joint Ventures May Bury Builders

"You haven't seen any of the builders take any big impairments on their joint ventures. That's going to happen in the next quarter or two," says Rich Knowland, a partner in Pacific Terra Holdings, a California firm that is eyeing distressed land deals.

Part of the reason for a lack of joint venture impairment charges to date is that the partnerships often require unanimous approval of key decisions by all parties. Private players involved in the venture might be more eager to protect their capital, whereas public companies might now be looking to unwind the ventures and sell assets at a loss to create cash. This creates additional impairments.

Shaky Ground at Lennar

Lennar (LEN Quote) probably has the best disclosures relating to joint ventures, but it also has the largest JV exposure.

At the end of the third quarter, Lennar had a $1 billion equity investment in various joint ventures. These JVs had total assets of $9.9 billion and total liabilities of $6.9 billion. About $911 million of that debt is recourse to Lennar.

The joint ventures were unprofitable in the latest quarter -- even if you add back the $139 million of impairment charges that Lennar recorded on its share in them.

Of course, not everything is in the financials.

On the basis of conversations with several industry sources familiar with some of the ventures, it appears that there are several issues set to unfold at the company.

A good portion of the JVs -- mostly the ones in better locations -- have 10% to 20% equity from Lennar. But some of the ventures are 50/50 partnerships with weaker secondary players, says a former Lennar employee.

"Some partners had no money at all but had a piece of family land," the person says.

Such deals were in tertiary markets where landowners had land with a low cost basis but had no capital to build out the project and make money. That's where Lennar would step in, by agreeing to pay much of the development cost.

In some of these deals in secondary markets, banks are now likely becoming uncomfortable with the value of the underlying collateral. "Banks are going to start calling guarantees," the person says.