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November 06, 2007



For the record, if Lennar has this much debt off balance sheet, and if since the practice is accepted and industry-wide, one can be assured the other big builders have some surprises sitting off balance sheet as well.



I find all of your comments to be extremely insightful. Having worked as a Division/Region VP Finance for Ryland, Centex, Beazer and K. Hov, and a Division Controller for Lennar (did I miss anyone?), you are dead on regarding off Balance Sheet financing. While many analysts are busy dissecting the Balance Sheets of the public builders, they lack any clear understanding of the volume of off Balance Sheet transactions/ventures that were formed at the peak of the market. Ryland (like MDC)was very conservative regarding JV participation (i.e. they did not enter into such partnerships) while Centex, Beazer, KB, TOUSA and KB were relatively aggressive. K Hov took the middle ground position by analyzing the debt to equity ratios on these deals to determine whether they met their internally established benchmarks (just in case they were ever required to consolidate these deals). In essence, one builder entered into a JV with another builder (or builders), contributed capital and then leveraged the deal by attaining debt financing - they conducted their FIN46 testing to determining whether the structure would pass the consolidation sniff test and if so (meaning they did not have to consolidate), they went full speed ahead. In my opinion, this allowed builders to recognize additional profits without any negative impact on their other critical metrics (i.e. ROI, ROA, inventory turnover). As you know, if a builder holds land in inventory, their returns are diminished due to the higher inventory and asset values on their Balance Sheet (as a result of the lagtime in income recognition related to that inventory); however, if they can keep these transactions off-book, their returns are not negatively impacted by the off Balance Sheet land holdings. At any rate, I expect a number of these transactions to run into rough waters (if they haven't already) and you are one of the first bloggers I've read that really gets it.


"While many analysts are busy dissecting the Balance Sheets of the public builders, they lack any clear understanding of the volume of off Balance Sheet transactions/ventures that were formed at the peak of the market."

Shhhh!!! Not so loud. We don't want any of those analysts finding out our secrets, do we?

On a serious note, I am going over the financials for Lennar now, and it is difficult since they don't report everything. As for what I have found thus far, all I can say is... There is no wonder why they didn't report it. Who would, if they didn't have to. Regulatory bodies, if you are listening, off balance sheet secrets are just that... Secrets. They contribute heftily to market turmoils and bailouts. I have sniffed the secret trail of several comapnies in several industries. I am constrained by time, and that is with the help of a team of analysts.

You seem knowledgealble, and I would welcome a confidential heart to heart via email. Feel free to contact me via the email link in the upper right hand corner of this page.


I questioned the IR person at Lennar back in July about this same issue and did not receive a convincing defense of off balance sheet items. He said:

"It would not be accurate to add the equity and debt from our JVs. Most of this debt is non-recourse to Lennar or has recourse via maintenance guaranties."

I think that off balance sheet items will be the bete noire of many builders.


Debt is debt. The only issue of recourse or not comes about if you aren't planning on paying it back (hint, hint). If it is recourse via maintenance guarantees, then, from an applied perspective it is recourse. In addition, $1 billion is full recourse, and that is a lot.

I will probably have the full Lennar report posted by tomorrow. I added all debt and assets to my caclulations. No secrets allowed.

Lennar Observer

Lennar bought lots of closed military bases - many Superfund sites - that Lennar was going to dust up and sell as residential housing units.

Lennar would've had to have had billions of extra cash laying around just to do the clean up - never mind begin developing the properties.

It is no surprise to me that they are now "coming clean" if you don't mind the pun.


I have been monitoring Lennar for over 8 years and must say part of their downfall is their lack of respect for their clients. At Hunters Point Naval Shipyard on Parcel A with intent - they have poisoned children and elders bombarding them with heavy metals, radiological elements, dangerous particulates,tons of dust, and Asbestos structures. Lennar with intent failed to have dust monitoring and Asbestos monitoring equipment in place. Lennar has gone out of its way to bribe Regulatory Agencies and SF officials and SF Departments. You simply cannot do business in this manner. It has affected Lennar Stock and Shares because most innocent home owners that were adversely impacted by Lennar - have spread the word around. Witness the bankruptcies at Mare Island,Vallejo, California.Richmond, California. LandSource in Southern California. On Parcel A at Hunters Point - Lennar has no money and the project - will come to a halt - Lennar with default. The recent Housing fiasco has hit Lennar - worse then most other developers. Bottom line Lennar has lied and used every trick from the dirty book - to do their dirty deeds. There is Karma and Lennar will pay for it heavily. Lennar will drown in the cesspool of its own making. In Florida - Lennar has sold thousands of homes - forty cents on a dollar.
Lennar has some Equity but no one in their right mind will do business with Lennar - without some bias - based on Lennar's lack of standards and selling a pack of LIES.

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