Ritter Ranch's Long Trail of CFD Defaults May Near an End

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Back in 1990, the original developers of the Ritter Ranch project envisioned a mixed-use golf-course community on 10,000 acres of rolling hills in the Mojave Desert city of Palmdale, Calif.

Ritter Ranch Development LLC predicted there would be 20,000 residents by 2010. But years later, all that has developed out of Ritter Ranch is a long record of litigation and bond defaults.

But Ritter Ranch's time may have finally come. Attorneys involved in the protracted litigation say a solution may be at hand.

The 17-square-mile tract near the Mojave Desert city of Palmdale, Calif. appeared to be an ideal location to build a master-planned community with 7,200 homes. But the project has been troubled nearly since its inception.

Multiple bankruptcies suffered by various developers who have tried to fashion something out of the property over the years have resulted in an incomplete infrastructure and a long list of bond default notices.

Not a single house of the 7,200 planned for the golf-course community has been built, according to disclosure filings from Palmdale on the Municipal Securities Rulemaking Board's EMMA website.

The $33.5 million in outstanding City of Palmdale Community Facilities District No. 93-1 bonds, to be paid by taxes from a special district created to fund infrastructure for the project, are in default—again.

The bonds were originally sold in 1995 with Stone & Youngberg LLC as lead underwriter. The unrated bonds carried coupons between 8.1% and 8.5%, according to the official statement.

Developer Ritter Ranch Development LLC, the owner of 7,285 acres, filed for bankruptcy in 1998—and shortly after the bonds went into default.

Disclosure reports on the California Debt and Investment Advisory Commission website display a running tally of bond defaults dating back to the first missed payment on March 1, 1998.

The senior bonds were resuscitated by Irvine, Calif.-based residential home developer SunCal Cos. when the company outbid three other companies to buy the development company out of bankruptcy for $57.2 million in 2004, according to court documents. SunCal also purchased the senior bonds.

But everything was thrown into disarray when Lehman Brothers, SunCal's financial partner in the Ritter Ranch development—and about 10 other developments—filed for bankruptcy in 2008.

Lehman invested $2 billion in the joint venture with SunCal that involved thousands of acres of land throughout California before the investment banking firm declared bankruptcy in September 2008 in a harbinger of the global economic crash to come.

After being at loggerheads for several years, SunCal and Lehman, which continues in the long process of unwinding its obligations after the bankruptcy, struck a deal "on the courthouse steps in October 2011" later documented in an order issued by U.S. Bankruptcy Judge Erithe Smith on Jan. 6, 2012, said Rob Orgel, a partner in the Los Angeles office of Pachulski Stang Ziel & Jones LLP, co-counsel for Lehman Brothers in the bankruptcy.

"The deal was that Lehman, despite being a secured creditor and ahead of the other creditors, would pay something before taking the property," Orgel said.

The biggest factor in reaching a settlement was really the passage of time, said Joe Aguirre, a SunCal spokesman.

"The bankruptcy of the Lehman estate created significant complexity," Aguirre said. "There were a number of claims at the estate level as well as at the project level. At one point, it wasn't clear what entities controlled the project-related debt."

Until a number of these issues were worked out through proper legal channels, the ability to orchestrate a reasonable settlement for all parties was not possible, he said.

The two firms divided up the properties. As per the agreement, the Ritter Ranch land and bonds became Lehman's on April 27, 2012.

This time the default happened because an affiliate of Lehman Brothers, the property's master developer, has missed payments to another affiliate of Lehman Brothers that owns the bonds.

The bonds went into default because taxes on the property continued to be levied, and went delinquent because there was no one to pay while the property was in bankruptcy, said Robert Haight, a partner in the Los Angeles office of Goodwin Procter, an attorney who represents Lehman on the Ritter Ranch property.

"The delinquencies accrued—and there was money in the reserves to pay the bondholders," Haight said.

Over the past two years, the $3.35 million required to be held in reserve was depleted to make the bond payments, according to disclosure filings on EMMA. The remaining $373,872 in reserve was used to make a partial payment on Sept. 1, 2012, but left more than $2 million unpaid and sent the bonds into delinquency. The March 1 payment of $1.38 million was likewise not paid, according to disclosure filings.

The taxes on the land have been levied and unpaid for years, but Lehman intends to reconcile both the bond payments and the taxes, so the bond payments are made, Haight said.

"Even though Lehman was in bankruptcy, they weren't terribly cash poor," Orgel said. "But Lehman wasn't going to make the bond payments until they owned the property—and they did not own the land until April 2012."

Since April, Lehman has been in negotiations with Palmdale about the best way to move forward, Haight said. The bulk of the discussions include working out agreements on what infrastructure projects need to be completed, he said.

They anticipate reaching an agreement with Palmdale within the next few months.

"Since the bondholder is also a related entity of the landowner, there is no real harm," Haight said.