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Paulson Wins Auction: March of Private Equity Land Deals Continues

Posted by: In: Industry Insights 20 Aug 2010 Comments: 0

(WSJ, by Robbie Whelan) – A company controlled by hedge fund giant John Paulson has won an auction for valuable land assets in Arizona, Colorado and Nevada owned by bankrupt homebuilder Tousa, Inc., the trade magazine Big Builder reports.

Mr. Paulson is best known for making a killing betting against the housing market three years ago.
The deal is the culmination of a bidding war that The Journal first reported on back in June. Notably, the result represents a trend that has gained traction in recent months: Wall Street money has recognized land as a potentially valuable asset class, and private equity and hedge fund investors are bidding against home builders–traditionally the biggest buyers of undeveloped lots–for valuable properties.
What’s more, it signifies a shift in tactics for the builders themselves, some of whom are beginning to see the sense in forming or beefing up their own investment units and pumping money into distressed assets including commercial mortgages and upside-down land loans.
Lennar Homes, one of the sector’s most financially-savvy companies, in February announced that it was expanding its portfolio of distressed assets through its investment wing, Rialto Capital Management LLC. The company optioned 2,700 lots from Starwood Land Ventures, and said it was buying stakes in two distressed loan portfolios from the Federal Deposit Insurance Corp. for $243 million.
On Tuesday, more details emerged on another venture, called Gibraltar Capital and Asset Management LLC, between top-10 builder Toll Brothers, Inc. and two major private equity funds, to buy a $1.7 billion portfolio of bad loans once held by Ohio’s Amtrust Bank NA. Toll is partnering with Milestone Merchant Partners, LLC and Oaktree Capital Management L.P. to take an equity stake in the assets, which include 200 loans and 80 REO properties across the country. Most of the these are Acquisition, Development and Construction loans, according to a statement from Toll.
Toll actively bought up distressed land for dimes on the dollar in the early 1990s, when the Resolution Trust Corp. was liquidating the assets of failed thrifts. These days, the deals aren’t as sweet, as the FDIC, the main seller of the broken land assets, usually hangs on to a large stake of the deals, and has a hand in financing the purchase of the assets themselves. In the Gibraltar deal, the government took a 60% stake.
“It’s a different game today,” said Douglas Yearley, Toll’s chief executive. “Back in the 90s, and I ran our distressed acquisition group, I don’t recall a single deal where the government took back any equity partnership position. Back then, when we bought a portfolio of RTC loans, we wrote a check, and we were done. The seller had no equity stake…What [the FDIC is] doing is maximizing the return to the shareholders, which are the taxpayers.”

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