One of the biggest residential development projects in Arizona history is quietly turning into a major bust.

The question now is whether the big homebuilders involved in the deal -- Toll Brothers ( TOL) and Meritage Homes ( MTH) -- are properly marking down their land investments in the much-heralded venture.

In early 2006, the two high-end homebuilders partnered with the country's largest mall owner, Simon Property Group ( SPG), to pay $312 million for a 5,485-acre parcel of land northwest of Phoenix in the city of Surprise, Ariz.

With the once-hot Phoenix market crash-landing, it now appears that Toll Brothers and its partners ended up paying too much for the land, on which they likely cannot build today for a profit.

At the time of the purchase, Toll Brothers, the general partner of the joint venture, trumpeted the deal as the "most expensive" land transaction in Arizona history, citing research from the Arizona Republic. The plan called for the companies to build a mixed-use, master-planned community with 15,000 to 31,000 homes that were originally expected to go on sale in 2009.

Simon Property was planning to build the retail portion of the development. But a source at the real estate investment trust tells TheStreet.com that the company has decided to scrap the retail portion of the project, which is the reason for a writeoff of the venture last week.

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