Miami-based Lennar Corp. is crossing over from traditionalsingle-family homes to the realm of commercial real estate by wayof its $243-million deal with the Federal Deposit Insurance Corp.The company says it bought two loan portfolios with an unpaidbalance of just over $3 billion.

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Lennar subsidiary Rialto Capital Advisors, which will conductthe day-to-day management and workout of the portfolios,contributed up to $5 million toward the loan purchase. Lennarindirectly acquired 40% managing member interests in the limitedliability companies created to hold these loans.

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The FDIC will retain the other 60% equity interest and provide$627 million of non-recourse financing at zero interest for sevenyears. The transactions include approximately 5,500 distressedresidential and commercial real estate loans, 90% of which arenon-performing, from 22 failed bank receiverships.

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The real estate portfolio backing the loans consists ofpartially developed land, residential units, finished home sites aswell as retail, office and industrial space, according to a filingwith the Securities and Exchange Commission. The majority of theassets are in Florida, Georgia, Nevada and Arizona.

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"Acquiring and working out distressed real estate loans was alarge and extremely profitable part of our business during the lastmajor real estate down cycle in the early 1990s," Stuart Miller,Lennar president and CEO, stated in a release. He noted thatLennar, founded in 1954, understands market cycles andpoint-of-entry opportunities, and has been preparing for such aninvestment over the past two years.

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Analysts following Lennar give the company credit for its pasthistory of capitalizing on market downturns. However, they warnthat this recovery could be a lot more difficult.

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"This is appropriate, but at the same time there are long-termrisks given the unusually severe nature of this cycle," Nishu Soodof Deutsche Bank said in a research note. He anticipates Lennar canearn up to $15 million, or 8 cents per share, this year fromworking out loans on the distressed assets.

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The partnership of a private company and a government-sponsoredcompany has its critics. "When you have a public privatepartnership like this, oftentimes it is a recipe for disasterbecause they often have conflicting goals," Ken Thomas, a bankinganalyst in Miami, tells ALM publication Daily Business Review.

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Thomas points out that a private company's goal is to maximizeprofits for its investors, meaning it is more likely to forecloseon homes instead of trying to work out a solution. On the otherhand, he says, the FDIC may want to avoid foreclosures to preventadditional deterioration of the real estate market."That is not inthe best interest of a community," Thomas says. "It will end uphurting the FDIC in the long run because what they have done in theshort term is going to hurt more banks and cause moreproblems."


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