A New York-based investment firm is looking to acquire nine California projects of Irvine-based developer SunCal Cos. that once were backed by Lehman Brothers Holdings Inc. and now are tied up in bankruptcy court.
D.E. Shaw & Co. has bid $195 million for SunCal’s California projects, which once were valued in the billions.
They include Sun-Cal’s Marblehead deve-lopment in San Clem-ente.
If the bid succeeds, the projects would be wrested from Lehman, which filed for bankruptcy in October.
During better days, New York-based Lehman had hoped to earn a $2 billion profit on its $4 billion worth of investments in projects with SunCal, which plans housing and retail developments and then sells land to homebuilders and developers.
D.E. Shaw also has ties to Lehman. In 2007, the failed investment bank acquired a 20% stake in D.E. Shaw for $1.4 billion.
The long-term status of that stake is unclear as Lehman works through bankruptcy.
The bid covers about a third of the Lehman-backed SunCal projects that fell into insolvency late last year. SunCal, which didn’t itself file for bankruptcy, initiated many of the proceedings in a bid to find a new financier after Lehman’s downfall.
Restarting
If the deal gets bankruptcy court approval, real estate sources believe D.E. Shaw’s backing could restart some projects for SunCal, which has seen work halted at many of its largest projects for more than a year.
SunCal could regain control and earn management fees on some projects in Southern California and another in Oakland. It’s unclear if SunCal would regain any ownership stakes in the projects that presumably were lost as they declined in value in the downturn.
The developer also could end up ridding itself of land where development prospects aren’t as strong.
The projects D.E. Shaw is bidding on could hold some 11,000 homes, plus shopping centers and other buildings, according to court documents.
The most valuable of those assets is San Clemente’s 247-acre Marblehead Coastal, which is expected to hold more than 300 upscale homes and an outlet mall. Early work on Marblehead has been delayed for more than a year.
Marblehead has close to $258 million in loans tied to it. The project is worth about $188 million now, according to Lehman’s latest appraisal.
SunCal, which supports the D.E. Shaw bid, believes the property is worth less and values it at $74 million, or about $300,000 an acre.
Also being bid on by D.E. Shaw is a 2.4-acre site in Century City. SunCal paid $110 million for the site in 2006,beating out Donald Trump,with an eye toward building a high-rise condominium tower.
Lehman believes the Century City land is worth $51 million. SunCal values it at $39 million.
Loans on several SunCal properties were sold by Lehman in June to Fenway Capital LLC, part of New York-based private equity firm Hudson Capital Group LLC.
Lawyers for Lehman, which still holds investment stakes in some of the projects and is acting on Fenway’s behalf, oppose the D.E. Shaw bid, calling it a fire sale at artificially depressed prices.
Lehman contends the nine developments D.E. Shaw wants to buy are worth closer to $500 million.
October Hearing
A hearing on the D.E. Shaw bid had been set for late July but recently was postponed until October. As of last week, there were no other known bidders on the projects.
D.E. Shaw is the main financial backer of SunCal’s largest project, a 57,000-acre swath of land in New Mexico.
The two companies have worked together on another 18 projects, according to court documents.
But D.E. Shaw and other SunCal backers took a back seat to Lehman in recent years, according to a court statement by Bruce Elieff, SunCal’s president.
The statement by Elieff, filed in support of the sale of projects to D.E. Shaw, paints a picture of Lehman growing its SunCal partnership, which became increasingly one sided as the market turned.
Lehman made its first SunCal investment in 1997, a $20 million mezzanine loan for San Juan Capistrano’s Pacific Point project, according to the document.
By 2003, the two companies had worked on 15 deals.
That number had grown to more than 40 deals by 2007, with Lehman providing $2 billion in equity and debt from 2005 to 2007, according to Elieff.
Early returns on Lehman’s investments in SunCal projects exceeded 100%, he said.
At the peak of the market, Lehman projected it would earn profits of $2 billion on its SunCal investments by 2015.
Exclusive Financier
With a profitable track record, Lehman pushed SunCal to use it as its financier for nearly every deal, even if others were offering better terms, Elieff said.
Lehman pressured SunCal not to bring on Goldman Sachs Group Inc. as a partner in the Marblehead deal, according to Elieff’s statement, and kept D.E. Shaw out of the Century City deal, among other moves.
When the market began to sour in 2007, the relationship took a quick turn for the worse, according to Elieff.
Once signs of a slowdown became clear in mid-2007, SunCal officials went to Lehman and recommended slowing some developments and shutting down others but was overruled by Lehman, Elieff said.
Lehman said at the time it planned to refinance the SunCal projects and didn’t want it to look like the projects were distressed before going to the market with the loans, according to Elieff’s statement.
From then on, it was Lehman’s show to run, Elieff said. A cash-strapped SunCal was hard-pressed to fund urgent work at its projects, and Elieff was threatened with “massive bond exposure” if he didn’t consent to Lehman’s demands, he claimed.
‘Effective Control’
By mid-2007, Lehman had taken “effective control” of the SunCal properties and would “unilaterally dictate” what work would proceed at individual projects, according to SunCal’s court filings.
That picture of a one-sided relationship is in contrast to public statements from SunCal in 2008 as speculation swirled around its projects with Lehman.
SunCal officials refuted local assertions from real estate sources that Lehman was pushing the developer aside on the projects. Officials from SunCal told the Business Journal in early 2008 that contrary to industry “rumors” they remained in control of the Lehman-backed assets.
A restructuring agreement in the works for several months was finalized between the two in May 2008 and provided for “more patient money.”
The patience didn’t last,Lehman soon foreclosed on the San Juan Capistrano Pacific Point project. Funding never materialized for other projects as was promised, according to SunCal’s court filing.
