Form 10-K LENNAR CORP /NEW/ For: Nov 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2014
Commission file number 1-11749
Lennar Corporation
(Exact name of registrant as specified in its charter)
Delaware | 95-4337490 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (305) 559-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, par value 10¢ | New York Stock Exchange | |
Class B Common Stock, par value 10¢ | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO ý
The aggregate market value of the registrant’s Class A and Class B common stock held by non-affiliates of the registrant (168,333,343 shares of Class A common stock and 9,705,207 shares of Class B common stock) as of May 31, 2014, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $7,219,372,214.
As of November 30, 2014, the registrant had outstanding 173,736,150 shares of Class A common stock and 31,303,195 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Related Section | Documents |
III | Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before March 30, 2015. |
PART I
Item 1. | Business |
Overview of Lennar Corporation
We are one of the nation’s largest homebuilders, a provider of real estate related financial services, a commercial real estate investment, investment management and finance company through our Rialto segment and a developer of multifamily rental properties in select U.S. markets primarily through unconsolidated entities.
Our homebuilding operations are the most substantial part of our business, comprising $7.0 billion in revenues, or approximately 90% of consolidated revenues in fiscal 2014. We have grouped our homebuilding activities into five reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida and Homebuilding Houston. Information about homebuilding activities in states in which our homebuilding activities are not economically similar to those in other states in the same geographic area is grouped under “Homebuilding Other.” Our reportable homebuilding segments and Homebuilding Other have operations located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2)
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Tennessee, Oregon and Washington
(1) | Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment. |
(2) | Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment. |
Our other reportable segments are Lennar Financial Services, Rialto and Lennar Multifamily. For financial information about our Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily operations, you should review Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is Item 7 of this Report, and our consolidated financial statements and the notes to our consolidated financial statements, which are included in Item 8 of this Report.
A Brief History of Our Company
We are a national homebuilder that operates in various states with deliveries of 21,003 new homes in 2014. Our company was founded as a local Miami homebuilder in 1954. We completed our initial public offering in 1971 and listed our common stock on the New York Stock Exchange in 1972. During the 1980s and 1990s, we entered and expanded operations in a number of homebuilding markets, including California, Florida and Texas, through both organic growth and acquisitions, such as Pacific Greystone Corporation in 1997. In 1997, we completed the spin-off of our then commercial real estate business, LNR Property Corporation. In 2000, we acquired U.S. Home Corporation, which expanded our operations into New Jersey, Maryland, Virginia, Minnesota and Colorado and strengthened our position in other states. From 2002 through 2005, we acquired several regional homebuilders, which brought us into new markets and strengthened our position in several existing markets. From 2010 through 2013, we started and expanded our homebuilding operations in the Atlanta, Oregon, Seattle and Nashville markets. More recently, we have been strengthening and expanding our competitive position through the development of land that was strategically purchased at favorable prices during the real estate market downturn, and through a focus on our ancillary and complementary platforms, including Rialto, Lennar Multifamily and FivePoint, a consolidated joint venture that was formed to manage master planned mixed use developments.
Homebuilding Operations
Overview
Our homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which we have investments. We primarily sell single-family attached and detached homes in communities targeted to first-time, move-up and active adult homebuyers. We operate primarily under the Lennar brand name. Our homebuilding mission is focused on the profitable development of these residential communities. Key elements of our strategy include:
• | Strong Operating Margins - We believe our operating leverage combined with our attractive land purchases position us for strong operating margins. |
• | Everything’s Included® Approach - We are focused on distinguishing our products, including through our Everything’s Included® approach, which maximizes our purchasing power to include luxury features as standard items in our homes. |
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• | Innovative Homebuilding - We are constantly innovating the homes we build to create products that meet our customers' needs. Our latest innovation, NextGen homes, or a home within a home, provides a unique new home solution for multi-generational households as homebuyers often need to accommodate children and parents to share the cost of their mortgage and other living expenses. |
• | Flexible Operating Structure - Our local operating structure gives us the flexibility to make operating decisions based on local homebuilding conditions and customer preferences, while our centralized management structure provides oversight for our homebuilding operations. |
Diversified Program of Property Acquisition
We generally acquire land for development and for the construction of homes that we sell to homebuyers. Land purchases are subject to specified underwriting criteria and are made through our diversified program of property acquisition, which may consist of the following:
• | Acquiring land directly from individual land owners/developers or homebuilders; |
• | Acquiring local or regional homebuilders that own, or have options to purchase, land in strategic markets; |
• | Acquiring land through option contracts, which generally enables us to control portions of properties owned by third parties (including land funds) and unconsolidated entities in which we have investments until we have determined whether to exercise the options; |
• | Acquiring parcels of land through joint ventures, which among other factors, limits the amount of our capital invested in land while increasing our access to potential future homesites and allowing us to participate in strategic ventures; |
• | Acquiring land in conjunction with Lennar Multifamily and Lennar Commercial; and |
• | Acquiring distressed assets from banks and opportunity funds, often through relationships established by our Rialto segment. |
At November 30, 2014, we owned 132,679 homesites and had access through option contracts to an additional 31,890 homesites, of which 24,855 homesites were through option contracts with third parties and 7,035 homesites were through option contracts with unconsolidated entities in which we have investments. At November 30, 2013, we owned 125,643 homesites and had access through option contracts to an additional 28,133 homesites, of which 20,966 homesites were through option contracts with third parties and 7,167 homesites were through option contracts with unconsolidated entities in which we have investments.
Construction and Development
Through our own efforts and those of unconsolidated entities in which Lennar Homebuilding has investments, we are involved in all phases of planning and building in our residential communities, including land acquisition, site planning, preparation and improvement of land and design, construction and marketing of homes. We use independent subcontractors for most aspects of home construction. At November 30, 2014, we were actively building and marketing homes in 625 communities, including 3 communities being developed by unconsolidated entities.
We generally supervise and control the development of land and the design and building of our residential communities with a relatively small labor force. We hire subcontractors for site improvements and virtually all of the work involved in the construction of homes. Arrangements with our subcontractors generally provide that our subcontractors will complete specified work in accordance with price schedules and in compliance with applicable building codes and laws. The price schedules may be subject to change to meet changes in labor and material costs or for other reasons. We believe that the sources and availability of raw materials to our subcontractors are adequate for our current and planned levels of operation. We generally do not own heavy construction equipment. We finance construction and land development activities primarily with cash generated from operations and debt issuances.
For additional information about our investments in and relationships with unconsolidated entities, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
Marketing
We offer a diversified line of homes for first-time, move-up and active adult homebuyers in a variety of environments ranging from urban infill communities to golf course communities. Our Everything’s Included® marketing program simplifies the home buying experience by including the most desirable features as standard items. This marketing program enables us to differentiate our homes from those of our competitors by creating value through standard upgrades and competitive pricing, while reducing construction and overhead costs through a simplified manufacturing process, product standardization and volume purchasing. In addition, our innovative NextGen homes and our advances in including solar powered technology in
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certain of the homes we sell, enhance our image and improve our marketing and sales efforts. We sell our homes primarily from models that we have designed and constructed.
We employ sales associates who are paid salaries, commissions or both to conduct on-site sales of homes. We also sell homes through independent brokers. Our marketing strategy is focused on advertising through digital and social media, including through our Internet website, www.lennar.com, which has allowed us to attract more knowledgeable homebuyers. However, we also continue to advertise through more traditional media, including newspapers, radio advertisements and other local and regional publications and on billboards. We tailor our marketing strategy based on the community being advertised, such as advertising our active adult communities in areas where prospective active adult homebuyers live.
Quality Service
We strive to continually improve homeowner customer satisfaction throughout the pre-sale, sale, construction, closing and post-closing periods. We strive to create a quality home buying experience for our customers through the participation of sales associates, on-site construction supervisors and customer care associates, all working in a team effort, which we believe leads to enhanced customer retention and referrals. The quality of our homes is substantially affected by the efforts of on-site management and others engaged in the construction process, by the materials we use in particular homes and by other similar factors.
We warrant our new homes against defective materials and workmanship for a minimum period of one year after the date of closing. Although we subcontract virtually all segments of construction to others and our contracts call for the subcontractors to repair or replace any deficient items related to their trades, we are primarily responsible to the homebuyers for the correction of any deficiencies.
Local Operating Structure and Centralized Management
We balance a local operating structure with centralized corporate level management. Our local operating structure consists of homebuilding divisions across the country, which are generally managed by a division president, a controller, management personnel focused on land entitlement, acquisition and development, sales, construction, customer service and purchasing. We decentralize our homebuilding operations to give our division presidents and their teams, who generally have significant experience in the homebuilding industry, and in most instances, in their particular markets, the flexibility to make local operating decisions, including land identification, entitlement and development, the management of inventory levels for our current sales volume, community development, home design, construction and marketing of our homes.
We centralize at the corporate level decisions related to our overall strategy, acquisitions of land and businesses, risk management, financing, cash management and information systems.
Deliveries
We primarily sell single-family attached and detached homes in communities targeted to first-time, move-up and active adult homebuyers. The average sales price of a Lennar home was $326,000 in fiscal 2014, compared to $290,000 in fiscal 2013 and $255,000 in fiscal 2012.
The table below indicates the number of deliveries for each of our current reportable homebuilding segments and Homebuilding Other during our last three fiscal years:
Years Ended November 30, | ||||||||
2014 | 2013 | 2012 | ||||||
East | 7,824 | 6,941 | 5,440 | |||||
Central | 3,156 | 2,814 | 2,154 | |||||
West | 4,141 | 3,323 | 2,301 | |||||
Southeast Florida | 2,086 | 1,741 | 1,314 | |||||
Houston | 2,482 | 2,266 | 1,917 | |||||
Other | 1,314 | 1,205 | 676 | |||||
Total | 21,003 | 18,290 | 13,802 | |||||
Of the total home deliveries listed above, 32, 56 and 95 represent deliveries from unconsolidated entities for the years ended November 30, 2014, 2013 and 2012, respectively.
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Backlog
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by deposits. In some instances, purchasers are permitted to cancel sales contracts if they fail to qualify for financing or under certain other circumstances. We experienced a cancellation rate of 17% in 2014, compared to 16% and 17% in 2013 and 2012, respectively. The cancellation rate for the year ended November 30, 2014 was within a range that is consistent with historical cancellation rates and below those we experienced from 2006 through 2009. We expect that substantially all homes currently in backlog will be delivered in fiscal year 2015. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.
The table below indicates the backlog dollar value for each of our current reportable homebuilding segments and Homebuilding Other as of the end of each of our last three fiscal years:
November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
East | $ | 672,204 | 600,257 | 368,361 | |||||
Central | 310,726 | 195,762 | 168,912 | ||||||
West | 437,492 | 257,498 | 202,959 | ||||||
Southeast Florida | 214,606 | 215,988 | 141,146 | ||||||
Houston | 225,737 | 180,665 | 135,282 | ||||||
Other | 113,563 | 169,431 | 143,725 | ||||||
Total | $ | 1,974,328 | 1,619,601 | 1,160,385 | |||||
Of the total dollar value of homes in backlog listed above, $39.8 million, $2.5 million and $3.5 million represent the dollar value of homes in backlog from unconsolidated entities at November 30, 2014, 2013 and 2012, respectively.
Lennar Homebuilding Investments in Unconsolidated Entities
We create and participate in joint ventures that acquire and develop land for our homebuilding operations, for sale to third parties or for use in their own homebuilding operations. Through these joint ventures, we reduce the amount we invest in order to assure access to potential future homesites, thereby mitigating certain risks associated with land acquisitions, and, in some instances, we obtain access to land to which we could not otherwise have obtained access or could not have obtained access on as favorable terms. As of November 30, 2014 and 2013, we had 35 and 36 Lennar Homebuilding unconsolidated joint ventures, respectively, in which we were participating, and our maximum recourse debt exposure related to Lennar Homebuilding unconsolidated joint ventures was $24.5 million and $41.0 million, respectively.
Ancillary Businesses
We have ancillary business activities that are related to our homebuilding business, but are not components of our core homebuilding operations.
FivePoint Communities - In 2011, we transferred the management of several large properties in California to FivePoint Communities Management, Inc., a consolidated joint venture. FivePoint Communities is currently undertaking six master planned mixed use developments, three in Southern California and three in or near San Francisco. These developments are planned for a total of 50,000 homesites and 20 million square feet of commercial space, as well as parks and sports and entertainment venues.
Lennar Commercial - Lennar Commercial is focused on the development, investment and management of retail, office and mixed-use projects generally in the same states as our homebuilding operations.
Sunstreet - Lennar’s solar business is currently focused on providing homeowners in California and Colorado through its solar power purchase program, a high-efficiency solar system that generates most of a home's annual expected energy needs at a cost below current utility rates for the average homeowner.
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Lennar Financial Services Operations
Mortgage Financing
We primarily offer conforming conventional, FHA-insured and VA-guaranteed residential mortgage loan products and other products to buyers of our homes and others through our financial services subsidiary, Universal American Mortgage Company, LLC, which includes Universal American Mortgage Company, LLC, d/b/a Eagle Home Mortgage, from locations in most of the states in which we have homebuilding operations, as well as some other states. In 2014, our financial services subsidiaries provided loans to 78% of our homebuyers who obtained mortgage financing in areas where we offered services. Because of the availability of mortgage loans from our financial services subsidiaries, as well as from independent mortgage lenders, we believe almost all creditworthy purchasers of our homes have access to financing.
During 2014, we originated approximately 23,300 residential mortgage loans totaling $6.0 billion, compared to 22,300 residential mortgage loans totaling $5.3 billion during 2013. Substantially all of the residential mortgage loans we originate are sold within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements. Therefore, we have limited direct exposure related to the residential mortgages we originate.
We finance our mortgage loan activities with borrowings under our financial services warehouse facilities or from our operating funds. At November 30, 2014, our financial services warehouse facilities had a maximum aggregate commitment of $925 million including $150 million of accordion features. The facilities have various maturity dates and we expect the facilities to be renewed or replaced with other facilities when they mature. We have a corporate risk management policy under which we hedge our interest rate risk on rate-locked loan commitments and loans held-for-sale to mitigate exposure to interest rate fluctuations.
Title Insurance and Closing Services
We provide title insurance and closing services to our homebuyers and others. During 2014, we provided title and closing services for approximately 90,700 real estate transactions, and issued approximately 220,400 title insurance policies through our underwriter, North American Title Insurance Company, compared to 101,200 real estate transactions and 192,400 title insurance policies during 2013. Title and closing services are provided by agency subsidiaries in Arizona, California, Colorado, Delaware, District of Columbia, Florida, Illinois, Indiana, Maryland, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Texas, Utah, Virginia and Wisconsin. Title insurance services are provided in 40 states.
Rialto Operations
The Rialto segment is a commercial real estate investment, investment management, and finance company. Rialto’s primary focus is to manage third-party capital and to originate commercial mortgage loans which it sells into securitizations. It also has invested its own capital in mortgage loans, properties and real estate related securities.
Rialto is the sponsor of and an investor in private equity vehicles that invest in and manage real estate related assets. This includes:
• | Rialto Real Estate Fund, LP ("Fund I") that was formed in 2010 to invest in distressed real estate assets and other related investments to which investors have committed and contributed a total of $700 million of equity (including $75 million by us); |
• | Rialto Real Estate Fund II, LP ("Fund II") that was formed in 2012 to invest in distressed real estate assets and other related investments to which investors have committed $1.3 billion (including $100 million by us); and |
• | Rialto Mezzanine Partners Fund (the "Mezzanine Fund") that was formed in 2013 with a target of raising $300 million in capital (including $27 million committed by us) to invest in performing mezzanine commercial loans that have expected durations of one to two years and are secured by equity interests in the borrowing entity owning the real estate assets. |
Rialto also earns fees for its role as a manager of these vehicles and for providing asset management and other services to those vehicles and other third parties. In addition, Rialto owns general partner interests in each of the funds, which entitle it to a share of the sums distributed by the funds after investors have recovered their investments and received specified internal rates of return on those investments. For both Fund I and Fund II, in order to protect investors in the Funds, we agreed that while the Funds were seeking investments (which no longer is the case with regard to Fund I) we would not make investments that are suitable for the applicable Fund, except to the extent an Advisory Committee of the Fund decides that the Fund should not make particular investments, with an exception enabling us to purchase properties for use in connection with our homebuilding operations.
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During 2013, Rialto Mortgage Finance ("RMF") was formed and began originating and selling into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. RMF has secured two warehouse repurchase financing agreements that mature in fiscal year 2015 with commitments totaling $650 million to help finance the loans it makes. This business has become a significant contributor to the Rialto segment's revenues.
In 2010, our Rialto segment also acquired distressed residential and commercial real estate loans and real estate owned ("REO") properties from three financial institutions (“Bank Portfolios”). We paid $310 million for the Bank Portfolios, of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions.
In 2010, our Rialto segment also acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the Federal Deposit Insurance Corporation (“FDIC”), which retained 60% equity interest in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs held performing and non-performing distressed residential and commercial real estate loans (“FDIC Portfolios”). If the LLCs exceed expectations and meet certain internal rate of return and distribution threshold, our equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60% / 40% with the FDIC.
Lennar Multifamily Operations
We are actively involved, primarily through unconsolidated entities, in the development of multifamily rental properties. Our Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets. We currently use third-party management companies to rent the apartments though we anticipate renting the apartments through our own entities in the future.
Our net investment in the Lennar Multifamily segment as of November 30, 2014 and 2013 was $203.7 million and $105.6 million, respectively. Our Lennar Multifamily segment was participating in 26 and 13 unconsolidated entities as of November 30, 2014 and 2013, respectively. During 2014, our Lennar Multifamily segment sold two operating properties through unconsolidated entities. As of November 30, 2014, it had interests in 24 communities with development costs of approximately $1.5 billion, of which one community was completed and operating, three communities were partially completed and leasing, 19 communities were under construction and one was under development. Our Lennar Multifamily segment had a pipeline of future projects totaling $4.3 billion in assets across a number of states that will be developed by unconsolidated entities. We are exploring opportunities to create a fund, which we would manage and in which we would make an investment, to provide funding for the rental communities we develop.
For additional information about our investments in and relationships with unconsolidated entities, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
Seasonality
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in the second half of our fiscal year. However, periods of economic downturn in the industry, such as we experienced in recent years, can alter seasonal patterns.
Competition
The residential homebuilding industry is highly competitive. We compete for homebuyers in each of the market regions where we operate with numerous national, regional and local homebuilders, as well as with resales of existing homes and with the rental housing market. In recent years, lenders’ efforts to sell foreclosed homes have been a significant competitive factor within the home sales industry. We compete for homebuyers on the basis of a number of interrelated factors including location, price, reputation, amenities, design, quality and financing. In addition to competition for homebuyers, we also compete with other homebuilders for desirable properties, raw materials and access to reliable, skilled labor. We compete for land buyers with third parties in our efforts to sell land to homebuilders and others. We believe we are competitive in the market regions where we operate primarily due to our:
• | Financial position, where we continue to focus on inventory management and liquidity; |
• | Access to land, particularly in land-constrained markets; |
• | Access to distressed assets, primarily through relationships established by our Rialto segment; |
• | Pricing to current market conditions through sales incentives offered to homebuyers; |
• | Cost efficiencies realized through our national purchasing programs and production of value-engineered homes; |
• | Quality construction and home warranty programs, which are supported by a responsive customer care team; and |
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• | Everything’s Included® marketing program, which simplifies the home buying experience by including most desirable features as standard items. |
Our financial services operations compete with other mortgage lenders, including national, regional and local mortgage bankers and brokers, banks, savings and loan associations and other financial institutions, in the origination and sale of residential mortgage loans. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer. We compete with other title insurance agencies and underwriters for closing services and title insurance. Principal competitive factors include service and price.
The business of Rialto, and the funds it manages, of purchasing distressed real estate related assets is highly competitive and fragmented. A number of entities and funds have been formed in recent years for the purpose of acquiring real estate related assets at discounted prices and it is likely that additional entities and funds will be formed for this purpose during the next several years. We compete with these and other purchasers of distressed assets. We compete in the marketplace for distressed real estate related asset portfolios based on many factors, including purchase price, representations, warranties and indemnities, timeliness of purchase decisions and reputation. We believe that the major factor distinguishing us from the competition is that our team is made up of already in place managers who are already working out loans and dealing with similar borrowers. Additionally, because of the high number of loans made to developers, we believe having our homebuilding team participating in the underwriting process provides us with a distinct advantage in our evaluation of these assets. We believe that these factors, together with our ownership of a mortgage services firm, puts us ahead of many of our competitors and has us well positioned to take advantage of the large pipeline of opportunity that has been building. In marketing the real estate investment funds it sponsors, Rialto competes with a large variety of asset managers, including investment banks and other financial institutions and real estate investment firms.
Rialto’s RMF business competes with other commercial mortgage lenders in a competitive market and its profitability depends on our ability to originate and sell into securitizations commercial real estate loans at attractive prices. Some of our competitors may have a lower cost of funds than we do and access to funding sources that may not be available to us. In addition, some of our competitors may have higher risk tolerances or make different risk assessments, than we do, which could allow them to consider a wider variety of investments and establish more relationships than us. We believe that our major distinction from many of our competitors is that our team is made up of highly seasoned managers who have been originating and securitizing loans for over 25 years with long-standing relationships and can leverage Rialto’s/Lennar’s infrastructure facilities for a rapid market entrance as well as Rialto’s current underwriting platform.
Our multifamily operations compete with other multifamily apartment developers and operators, including REITs, across the United States. In addition, our multifamily operations compete in securing capital, partners and equity, and in securing tenants within the large supply of already existing rental apartments. Principal competitive factors include location, rental price and quality, and management of the apartment buildings.
Regulation
The residential communities and multifamily apartment developments that we build are subject to a large variety of local, state and federal statutes, ordinances, rules and regulations relating to, among other things, zoning, construction permits or entitlements, construction materials, density, building design and property elevation, building codes and handling of waste. These include laws requiring the use of construction materials that reduce the need for energy-consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some instances, we must comply with laws that require commitments from us to provide roads and other offsite infrastructure, and may require them to be in place prior to the commencement of new construction. These laws and regulations are usually administered by counties and municipalities and may result in fees and assessments or building moratoriums. In addition, certain new development projects are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial. Also, some states are attempting to make homebuilders responsible for violations of wage and other labor laws by their subcontractors.
Residential homebuilding and apartment development are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. These environmental laws include such areas as storm water and surface water management, soil, groundwater and wetlands protection, subsurface conditions and air quality protection and enhancement. Environmental laws and existing conditions may result in delays, may cause us to incur substantial compliance and other costs and may prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.
In recent years, several cities and counties in which we have developments have submitted to voters “slow growth” initiatives and other ballot measures that could impact the affordability and availability of land suitable for residential development within those localities. Although many of these initiatives have been defeated, we believe that if similar initiatives were approved, residential construction by us and others within certain cities or counties could be seriously impacted.
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In order to make it possible for some of our homebuyers to obtain FHA-insured or VA-guaranteed mortgages, we must construct the homes they buy in compliance with regulations promulgated by those agencies. Various states have statutory disclosure requirements relating to the marketing and sale of new homes. These disclosure requirements vary widely from state-to-state. In addition, some states require that each new home be registered with the state at or before the time title is transferred to a buyer (e.g., the Texas Residential Construction Commission Act). In some states, we are required to be registered as a licensed contractor and comply with applicable rules and regulations. In various states, our new home consultants are required to be registered as licensed real estate agents and to adhere to the laws governing the practices of real estate agents.
Our mortgage and title subsidiaries must comply with applicable real estate laws and regulations. The subsidiaries are licensed in the states in which they do business and must comply with laws and regulations in those states. These laws and regulations include provisions regarding capitalization, operating procedures, investments, lending and privacy disclosures, forms of policies and premiums. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of new requirements relating to mortgage lending and securitizations. These include, among others, minimum standards for lender practices, limitations on certain fees and a requirement that the originator of loans that are securitized retain a portion of the risk, either directly or by holding interests in the securitizations.
Several federal, state and local laws, rules, regulations and ordinances, including, but not limited to, the Federal Fair Debt Collection Practices Act (“FDCPA”) and the Federal Trade Commission Act and comparable state statutes, regulate consumer debt collection activity. Although, for a variety of reasons, we may not be specifically subject to the FDCPA or certain state statutes that govern debt collectors, it is our policy to comply with applicable laws in our collection activities. To the extent that some or all of these laws apply to our collection activities our failure to comply with such laws could have a material adverse effect on us. We are also subject to regulations promulgated by the Federal Consumer Financial Protection Bureau regarding residential mortgage loans.
Because Rialto manages two real estate asset investment funds, one mezzanine loan fund and two entities partly owned by the FDIC, a Rialto segment entity is registered as an investment adviser under the Investment Advisers Act of 1940. This Act has requirements related to dealings between investment advisers and the entities they advise and imposes record keeping and disclosure obligations on investment advisers. Our RMF subsidiary must comply with laws and regulations applicable to commercial mortgage lending. It or its subsidiaries must be licensed in states in which they make loans and must comply with laws and regulations in those states.
Associates
At November 30, 2014, we employed 6,825 individuals of whom 3,578 were involved in the Lennar Homebuilding operations, 2,707 were involved in the Lennar Financial Services operations, 383 were involved in the Rialto operations and 157 were involved in the Lennar Multifamily operations, compared to November 30, 2013, when we employed 5,708 individuals of whom 2,944 were involved in the Lennar Homebuilding operations, 2,377 were involved in the Lennar Financial Services operations, 300 were involved in the Rialto operations and 87 were involved in the Lennar Multifamily operations. We do not have collective bargaining agreements relating to any of our associates. However, we subcontract many phases of our homebuilding operations and some of the subcontractors we use have employees who are represented by labor unions.
NYSE Certification
On April 9, 2014, we submitted our Annual CEO Certification to the New York Stock Exchange ("NYSE") in accordance with NYSE's listing standards. The certification was not qualified in any respect.
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Available Information
Our corporate website is www.lennar.com. We make available on our website, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the Securities and Exchange Commission. Information on our website is not part of this document.
Our website also includes printable versions of our Corporate Governance Guidelines, our Code of Business Conduct and Ethics and the charters for each of the Audit, Compensation and Nominating and Corporate Governance Committees of our Board of Directors. Each of these documents is also available in print to any stockholder who requests a copy by addressing a request to:
Lennar Corporation
Attention: Office of the General Counsel
700 Northwest 107th Avenue
Miami, Florida 33172
Item 1A. | Risk Factors. |
The following are what we believe to be the principal risks that might materially affect us and our businesses.
Market and Economic Risks
The homebuilding recovery has continued its progression at a slow and steady pace, however a downturn in the recovery or decline in economic conditions could adversely affect our operations.
In fiscal 2014, we experienced a steadily improving housing market, and in our business saw a strong recovery in the number of new sales contracts signed and improved gross margins compared with the prior year. However, demand for new homes is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. The economic downturn that began in 2007 was one of the most severe in U.S. history, and severely affected both the numbers of homes we could sell and the prices for which we could sell them. We cannot predict whether the recovery in the housing market will continue. If the recovery were to slow or stop, or economic conditions were to worsen, the demand for new homes would likely decline, negatively impacting our business, results of operations, cash flows and financial condition.
For several years we had to take significant write-downs on the carrying values of land we owned and of option expenses. A future decline in land values could result in similar write-downs.
Inventory risks are substantial for our homebuilding business. There are risks inherent in controlling, owning and developing land and if housing demand declines, we may own land or lots at a cost we will not be able to recover fully, or on which we cannot build and sell homes profitably. Also, there can be significant fluctuations in the value of our owned undeveloped land, building lots and housing inventories related to changes in market conditions. As a result, our deposits for building lots controlled under option or similar contracts may be put at risk, we may have to sell homes or land for a lower than anticipated profit margin or we may have to record inventory impairment charges with regard to our developed and undeveloped land and lots. When demand for homes fell during the recent recession, we were required to take significant write-downs of the carrying value of our land inventory and we elected not to exercise many options to purchase land, even though that required us to forfeit deposits and write-off pre-acquisition costs. If market conditions were to deteriorate significantly in the future, we could again be required to make significant write downs with regard to our land inventory, which would decrease the asset values reflected on our balance sheet and adversely affect our earnings and our stockholders' equity.
Inflation may adversely affect us by increasing costs that we may not be able to recover.
Inflation can adversely affect us by increasing costs of land, materials and labor. In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on demand for our homes. In a highly inflationary environment, depending on industry and other economic conditions, we may be precluded from raising home prices enough to keep up with the rate of inflation, which would reduce our profit margins. Although the rate of inflation has been low for the last several years, we have been experiencing increases in the prices of labor and materials and there could be a significant increase in inflation in the future.
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Homebuilding, mortgage lending, distressed asset investing and multifamily rentals are very competitive industries, and competitive conditions could adversely affect our business or financial results.
Homebuilding. The homebuilding industry is highly competitive. Homebuilders compete not only for homebuyers, but also for desirable land, financing, raw materials, skilled management and labor resources. We compete in each of our markets with numerous national, regional and local homebuilders. We also compete with sellers of existing homes, including foreclosed homes, and with rental housing. These competitive conditions can reduce the number of homes we deliver, negatively impact our selling prices, reduce our profit margins, and cause impairments in the value of our inventory or other assets. Competition can also affect our ability to acquire suitable land, raw materials and skilled labor at acceptable costs or terms.
Lennar Financial Services. Our Lennar Financial Services business competes with other mortgage lenders, including national, regional and local banks and other financial institutions, many of which are far larger, and some of which are subject to fewer government regulations, than our financial services subsidiaries. Mortgage lenders who are subject to fewer regulations than we are or have greater access to low cost funds or different lending criteria than we do may be able to offer more attractive financing to potential customers than we can.
Lennar Multifamily. Our multifamily rental business competes with other multifamily apartment developers and operators across the United States. We also compete in securing capital, partners and equity, and in securing tenants with the large supply of already existing rental apartments. These competitive conditions could negatively impact the ability of the ventures in which we are participating to find renters for the apartments they are building or the prices for which those apartments can be rented.
Rialto. There are many firms and investment funds that compete with Rialto in trying to acquire distressed mortgage debt, foreclosed properties and other real estate related assets that have been adversely affected by the recent recession. At least some of the firms with which Rialto competes, or will compete, for investment opportunities have, or will have, a cost of funds that is lower than that of Rialto or the funds it manages, and therefore those firms may be able to pay more for investment opportunities than would be prudent for Rialto or the funds it manages. Our RMF business competes with national and regional banks as well as smaller community banks within the various markets in which we operate and non-bank lenders, many of which are far larger than RMF or have access to lower cost funds than we do.
Operational Risks
We may be subject to significant potential liabilities as a result of warranty and liability claims made against us.
As a homebuilder, we are subject in the ordinary course of our business to warranty and construction defect claims. We are also subject to claims for injuries that occur in the course of construction activities. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes we build. We have, and many of our subcontractors have, general liability, property, workers compensation and other business insurance. These insurance policies are intended to protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. However, it is possible that this insurance will not be adequate to address all warranty, construction defect and liability claims to which we are subject. Additionally, the coverage offered and the availability of general liability insurance for construction defects are currently limited and policies that can be obtained are costly and often include exclusions based upon past losses those insurers suffered as a result of use of defective Chinese drywall and other products in homes we and many other homebuilders built. As a result, an increasing number of our subcontractors are unable to obtain insurance, and we have in many cases had to waive our customary insurance requirements, which increases our and our insurers’ exposure to claims and increases the possibility that our insurance will not be adequate to protect us for all the costs we incur.
Products supplied to us and work done by subcontractors can expose us to risks that could adversely affect our business.
We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and obtain building materials. Despite our detailed specifications and quality control procedures, in some cases, subcontractors may use improper construction processes or defective materials, such as defective Chinese drywall that at one time was installed by subcontractors in homes built for us and for many other homebuilders in Florida and elsewhere. Although our subcontractors have principal responsibility for defects in the work they do, we have ultimate responsibility to the homebuyers. Defective products widely used by the homebuilding industry can result in the need to perform extensive repairs to large numbers of homes. The cost of complying with our warranty obligations may be significant if we are unable to recover the cost of repairs from subcontractors, materials suppliers and insurers.
We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with applicable laws, including laws involving things that are not within our control. When we learn about possibly improper practices by subcontractors, we try to cause the subcontractors to discontinue them. However, we are not always able to do that, and even when we can, it may not avoid claims against us relating to what the subcontractors already did.
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Supply shortages and risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.
Increased costs or shortages of skilled labor and/or lumber, framing, concrete, steel and other building materials could cause increases in construction costs and construction delays. During 2014, we experienced increases in the prices of some building materials and shortages of skilled labor in some areas. We generally are unable to pass on increases in construction costs to customers who have already entered into purchase contracts, as those contracts generally fix the price of the homes at the time the contracts are signed, which may be well in advance of the construction of the homes. Sustained increases in construction costs may, over time, erode our margins, particularly if pricing competition restricts our ability to pass additional costs of materials and labor on to homebuyers.
Reduced numbers of home sales extend the time it takes us to recover land purchase and property development costs.
We incur many costs even before we begin to build homes in a community. Depending on the stage of development a land parcel is in when we acquire it, these may include costs of preparing land, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs related to ownership of the land on which we plan to build homes. If the rate at which we sell and deliver homes slows, or if we delay the opening of new home communities, we may incur additional pre-construction costs and it may take longer for us to recover our costs.
Increased demand for homes could require us to increase our corporate credit line, and our inability to do that could limit our ability to take full advantage of market opportunities.
Our business requires that we be able to finance the development of our residential communities. One of the ways we do this is with bank borrowings. At November 30, 2014, we had a $1.5 billion Credit Facility, subject in part to additional commitments. If market conditions strengthen to the point that we need additional funding but we are not able to increase our Credit Facility or obtain funds from other types of financings, that could prevent us from taking full advantage of the enhanced market opportunities.
Failure to comply with the covenants and conditions imposed by our credit facilities could restrict future borrowing or cause our debt to become immediately due and payable.
We have a Credit Facility that is available for us to use to help finance our homebuilding, acquisitions and other activities. The agreement governing our Credit Facility (the “Credit Agreement”) makes it a default for us if we fail to pay principal or interest when it is due (subject in some instances to grace periods) or to comply with covenants, including covenants regarding various financial ratios. In addition, our Lennar Financial Services segment has warehouse facilities to finance its lending activities and our Rialto segment has warehouse facilities to finance its mortgage origination activities. If we default under the Credit Agreement or our warehouse facilities, the lenders will have the right to terminate their commitments to lend and to require immediate repayment of all outstanding borrowings. This could reduce our available funds at a time when we are having difficulty generating all the funds we need from our operations, in capital markets or otherwise, and restrict our ability to obtain financing in the future. Further, Rialto's 7.00% Senior Notes due 2018 contain restrictive covenants imposing operational and financial restrictions on our Rialto segment, including restrictions that may limit Rialto’s ability to sell assets, pay dividends or make other distributions, enter into transactions with affiliates or incur additional indebtedness. In addition, if we default under the Credit Agreement or our warehouse facilities, it could result in the amounts outstanding under our senior notes and convertible senior notes to become immediately due and payable, which would have a material adverse impact on our consolidated financial condition.
We have a substantial level of indebtedness which may have an adverse effect on our business or limit our ability to take advantage of business, strategic or financing opportunities.
As of November 30, 2014, our consolidated debt, excluding amounts outstanding under our credit facilities, was $5.2 billion. The indentures governing our senior notes and convertible senior notes do not restrict the incurrence of future secured or unsecured debt by us, and the agreement governing our Credit Facility allows us to incur a substantial amount of future unsecured debt. Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal, interest or other amounts due on our indebtedness. Our reliance on debt to help support our operations exposes us to a number of risks, including:
• | we may be more vulnerable to general adverse economic and industry conditions; |
• | we may have to pay higher interest rates upon refinancing or on our variable rate indebtedness if interest rates rise, thereby reducing our cash flows; |
• | we may find it difficult to, or may be unable to, obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements that would be in our best long-term interests; |
• | we may be required to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our debt, reducing the cash flow available to fund operations and investments; |
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• | we may have reduced flexibility in planning for, or reacting to, changes in our businesses or the industries in which they are conducted; |
• | we may have a competitive disadvantage relative to other companies in our industry that are less leveraged; and |
• | we may be required to sell debt or equity securities or sell some of our core assets, possibly on unfavorable terms, in order to meet payment obligations. |
Our Lennar Financial Services segment and RMF have warehouse facilities that mature in 2015, and if we cannot renew or replace these facilities, we may have to reduce our mortgage lending activities.
Our Lennar Financial Services segment has an aggregate committed and uncommitted amount under four warehouse repurchase credit facilities that totaled $925 million as of November 30, 2014, all of which will mature during 2015. Our Lennar Financial Services segment uses these facilities to finance its mortgage lending activities until the mortgage loans it originates are sold to investors. In addition, RMF, the commercial mortgage lender in our Rialto segment, has an aggregate committed amount under two warehouse repurchase credit facilities that totaled $650 million as of November 30, 2014 both of which will mature during 2015. RMF uses these facilities to finance its mortgage origination activities. We expect these facilities to be renewed or replaced with other facilities when they mature. If we were unable to renew or replace these facilities on favorable terms or at all when they mature, that could seriously impede the activities of our Lennar Financial Services segment and RMF, as applicable, which would have a material adverse impact on our financial results.
We conduct some of our operations through joint ventures with independent third parties and we can be adversely impacted by our joint venture partners' failures to fulfill their obligations or decisions to act contrary to our wishes.
In our Homebuilding and Lennar Multifamily segments, we participate in joint ventures in order to acquire attractive land positions, to manage our risk profile and to leverage our capital base. In certain circumstances, the joint venture participants, including ourselves, are required to provide guarantees of obligations relating to the joint ventures, such as completion and environmental guarantees. If a joint venture partner does not perform its obligations, we may be required to bear more than our proportional share of the cost of fulfilling them. For example, as part of our Lennar Multifamily business, and its joint ventures, we and the other venturers have assumed certain obligations to complete construction of multifamily residential buildings at agreed upon costs, which could make us and the other venture participants responsible for cost overruns. Although all the participants in a venture are normally responsible for sharing the costs of fulfilling obligations of that type, if some of the venture participants are unable or unwilling to meet their share of the obligations, we may be held responsible for some or all of the defaulted payments. In addition, because we do not have a controlling interest in most of the joint ventures in which we participate, we may not be able to sell assets, return invested capital or take other actions without the consent of at least one of our joint venture partners when such action may be in our best interest.
Several of the joint ventures in which we participate will in the relatively near future be required to repay, refinance, renegotiate or extend their loans. If any of those joint ventures are unable to do this, we could be required to provide at least a portion of the funds the joint ventures need to be able to repay the loans and to conduct the activities for which they were formed, which could adversely affect our financial position.
Our new businesses may not be as successful as we anticipate, and could disrupt our ongoing businesses and adversely affect our operations.
We have invested and expect to continue to invest in new business opportunities. In July 2013, we began commercial mortgage loan origination activities through RMF. In addition, during 2012 and 2013, we began our Lennar Multifamily business in which we have invested substantial resources to participate in the development of multifamily rental properties. Further, under our Homebuilding umbrella, we are investing in a solar business and a business focused on the development, investment and management of commercial properties. As with any new businesses, these endeavors, and others we may undertake in the future, are likely to involve significant risks and uncertainties, including significant start-up costs and the possibility that the new businesses will not be profitable or will not generate the expected returns on our investments, and the new businesses may require attention from our senior management that reduces their ability to focus on our core activities.
The loss of the services of members of our senior management or a significant number of our employees could negatively affect our business.
Our success depends to a significant extent upon the performance and active participation of our senior management, many of whom have been with the Company for a significant number of years. If we were to lose members of our senior management, we might not be able to find appropriate replacements on a timely basis and our operations could be negatively affected. Also, the loss of a significant number of operating employees and our inability to hire qualified replacements could have a material adverse effect on our business.
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Our access to capital and our ability to obtain additional financing could be affected by any downgrade of our credit ratings.
Our corporate credit rating and ratings of our senior notes and convertible senior notes affect, among other things, our ability to access new capital, especially debt. A substantial portion of our access to capital is through the issuance of senior notes and convertible senior notes, of which we have $4.3 billion outstanding as of November 30, 2014. Among other things, we rely on proceeds of debt issuances to pay the principal of existing senior notes when they mature. Negative changes in the ratings of our senior notes could make it difficult for us to sell senior notes in the future and could result in more stringent covenants and higher interest rates with regard to new senior notes we issue.
Natural disasters and severe weather conditions could delay deliveries and increase costs of new homes in affected areas, which could harm our sales and results of operations.
Many of our homebuilding operations are conducted in areas that are subject to natural disasters, including hurricanes, earthquakes, droughts, floods, wildfires and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories and lead to shortages of labor and materials in areas affected by the disasters, and can negatively impact the demand for new homes in affected areas. If our insurance does not fully cover business interruptions or losses resulting from these events, our results of operations could be adversely affected.
If our homebuyers are not able to obtain suitable financing, that would reduce demand for our homes and our home sales revenues.
Many purchasers of our homes obtain mortgage loans to finance a substantial portion of the purchase price of the homes they purchase. The uncertainties in the mortgage markets, including the tightening of credit standards and increased government regulation, could adversely affect the ability of potential homebuyers to obtain financing for a home purchase, thus preventing them from purchasing our homes. Changes made by Fannie Mae, Freddie Mac and FHA/VA to sponsored mortgage programs, as well as changes made by private mortgage insurance companies, have reduced the ability of many potential homebuyers to qualify for mortgages. Principal among these have been tighter lending standards such as higher income requirements, larger required down payments, increased reserves and higher required credit scores. In addition, there continues to be substantial uncertainty regarding the future of Fannie Mae and Freddie Mac, including proposals that they reduce or terminate their role as the principal sources of liquidity in the secondary market for mortgage loans. It is not clear how, if Fannie Mae and Freddie Mac curtail their secondary market mortgage loan purchases, the liquidity they provide would be replaced. There is a substantial possibility that substituting an alternate source of liquidity would increase mortgage interest rates, which would increase the buyer's effective cost of the homes we sell, and therefore could reduce demand for our homes and adversely affect our results of operations.
Changes in tax laws can increase the after tax cost of owning a home, and further tax law changes could adversely affect demand for the homes we build.
Under current tax law certain significant expenses of owning a home, including mortgage loan interest costs and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, tax liability. However, the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, resulted in higher income tax rates and limits the amount of mortgage interest individuals can deduct in computing their income tax liability. The limit on deductibility of mortgage interest can increase the after-tax cost of owning a home for some individuals. Any additional increases in personal income tax rates and/or additional tax deduction limits could adversely impact demand for new homes, including homes we build, which could adversely affect our results of operations.
Our Lennar Financial Services segment can be adversely affected by reduced demand for our homes or by a slowdown in mortgage refinancings.
Approximately 57% of the mortgage loans made by our Lennar Financial Services segment in 2014 were made to buyers of homes we built. Therefore, a decrease in the demand for our homes would adversely affect the revenues of this segment of our business. In addition, the revenues of our Lennar Financial Services segment would be adversely affected by a decrease in refinance transactions, such as the decrease that we experienced during the first half of fiscal 2014.
If our ability to sell mortgages into the secondary market is impaired, that could significantly reduce our ability to sell homes unless we are willing to become a long-term investor in loans we originate.
Substantially all of the residential mortgage loans we originate are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. If we became unable to sell loans into the secondary mortgage market or directly to Fannie Mae and Freddie Mac, we would have to either curtail our origination of mortgage loans, which among other things, could significantly reduce our ability to sell homes, or commit our own funds to long term investments in mortgage loans, which, in addition to requiring us to deploy substantial amounts of our own funds, could delay the time when we recognize revenues from home sales on our statements of operations.
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If real estate Rialto acquired through foreclosures is not properly valued when it is acquired, we could be required to take valuation charge-offs, which would reduce our earnings.
When a loan is foreclosed upon and we take title to the property, we obtain a valuation of the property and base its book value on that valuation. The book value of the foreclosed property is periodically compared to its updated market value (or its updated market value less estimated selling costs if the foreclosed property is classified as held-for-sale), and a charge-off is recorded for any excess of the property's book value over its fair value. If the revised valuation we establish for a property proves to be too high, we may have to record additional charge-offs in subsequent periods. Material charge-offs could have an adverse effect on our results of operations, and possibly even on our financial condition.
The ability of our Rialto segment to profit from the investments it makes may depend to a significant extent on its ability to manage resolutions of distressed mortgages and other real estate related assets.
A principal factor in a prospective purchaser's decision regarding the price it will pay for a portfolio of mortgage loans or other real estate related assets is the cash flow the prospective purchaser expects the portfolio to generate. The cash flow a portfolio of distressed mortgage loans and related assets will generate can be affected by the way the assets in the portfolio are managed. We believe the backgrounds and experience of the personnel in our Rialto segment enable the Rialto segment to generate better cash flows from the distressed assets it manages than what is generally expected with regard to similar assets. When Rialto decides whether it or a fund it manages should purchase particular distressed assets and what it or the fund should be willing to pay for them, one consideration is whether, and to what extent, Rialto thinks it will be able to obtain above average returns in resolving the assets. If Rialto is not able to achieve its anticipated returns, it or the fund it manages will not realize the expected return on its investment.
Regulatory Risks
We may be adversely impacted by legal and regulatory changes.
We are subject with regard to almost all of our activities to a variety of federal, state and local laws and regulations. Laws and regulations, and policies under or interpretations of existing laws and regulations, change frequently. Our businesses could be adversely affected by changes in laws, regulations, policies or interpretations or by our inability to comply with them without making significant changes in our businesses.
We may be adversely impacted by laws and regulations directed at the financial industry.
New or modified regulations and related regulatory guidance focused on the financial industry may have adverse effects on aspects of our businesses. For example, in October 2014, final rules were promulgated under the Dodd-Frank Wall Street Reform Act that requires mortgage lenders or third-party B-piece buyers to retain a portion of the credit risk related to securitized loans. We have determined that these rules do not affect our residential mortgage lending operations at this time; however, the new rules may adversely impact our commercial mortgage lending operations in our RMF business. While we are still assessing the impact of the new rules on the market, we believe that the rules may reduce the price of commercial mortgage-backed securities ("CMBS") and limit the overall volume of CMBS related loan purchases, which could impact the financial results of our RMF business. In addition, if our residential mortgage lending operations became subject to these rules in the future, that would substantially increase the amount we would have to invest in our mortgage lending operations and increase our risks with regard to loans we originate and sell in the secondary mortgage market.
Governmental regulations regarding land use and environmental matters could increase the cost and limit the availability of our development and homebuilding projects and adversely affect our business or financial results.
We are subject to extensive and complex laws and regulations that affect the land development, homebuilding and apartment development process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, elevation of properties, water and waste disposal and use of open spaces. These regulations often provide broad discretion to the administering governmental authorities as to the conditions we must meet prior to development or construction being approved, if they are approved at all. We are also subject to determinations by governmental authorities as to the adequacy of water or sewage facilities, roads and other local services with regard to particular residential communities. New housing developments may also be subject to various assessments for schools, parks, streets and other public improvements. In addition, in many markets government authorities have implemented no growth or growth control initiatives. Any of these can limit, delay, or increase the costs of land development or home construction.
We are also subject to a variety of local, state and federal laws and regulations concerning protection of the environment. In some of the markets where we operate, we are required by law to pay environmental impact fees, use energy-saving construction materials and give commitments to municipalities to provide infrastructure such as roads and sewage systems. We generally are required to obtain permits, entitlements and approvals from local authorities to commence and carry out residential development or home construction. These permits, entitlements and approvals may, from time-to-time, be
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opposed or challenged by local governments, environmental advocacy groups, neighboring property owners or other possibly interested parties, adding delays, costs and risks of non-approval to the process. Violations of environmental laws and regulations can result in injunctions, civil penalties, remediation expenses, and other costs. In addition, some environmental laws impose strict liability, which means that we may be held liable for unlawful environmental conditions on property we own which we did not create.
We are also subject to laws and regulations related to workers' health and safety, and there are efforts to subject us to other labor related laws or rules, some of which may make us responsible for things done by our subcontractors over which we have little or no control. In addition, our residential mortgage subsidiary is subject to various state and federal statutes, rules and regulations, including those that relate to lending operations and other areas of mortgage origination and loan servicing. The impact of those statutes, rules and regulations can increase our homebuyers’ costs of financing, and our cost of doing business, as well as restricting our homebuyers’ access to some types of loans.
Our obligation to comply with the laws and regulations under which we operate, and our need to ensure that our associates, subcontractors and other agents comply with these laws and regulations, could result in delays in construction and land development, cause us to incur substantial costs and prohibit or restrict land development and homebuilding activity in certain areas in which we operate. Budget reductions by state and local governmental agencies may increase the time it takes to obtain required approvals and therefore may aggravate the delays we could encounter. Government agencies also routinely initiate audits, reviews or investigations of our business practices to ensure compliance with applicable laws and regulations, which can cause us to incur costs or create other disruptions in our businesses that can be significant.
We can be injured by improper acts of persons over whom we do not have control.
Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable laws, rules and regulations, there may be instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable laws, regulations or governmental guidelines. When we learn of practices that do not comply with applicable laws or regulations, including practices relating to homes, buildings or multifamily rental properties we build or finance, we move actively to stop the non-complying practices as soon as possible and we have taken disciplinary action with regard to associates of ours who were aware of non-complying practices and did not take steps to address them, including in some instances terminating their employment. However, regardless of the steps we take after we learn of practices that do not comply with applicable laws or regulations, we can in some instances be subject to fines or other governmental penalties, and our reputation can be injured, due to the practices' having taken place.
Our ability to collect upon mortgage loans may be limited by the application of state laws.
Our mortgage loans typically permit us to accelerate the debt upon default by the borrower. The courts of all states will enforce acceleration clauses in the event of a material payment default, subject in some cases to a right of the court to revoke the acceleration and reinstate the mortgage loan if a payment default is cured. The equity courts of a state, however, may refuse to allow the foreclosure of a mortgage or to permit the acceleration of the indebtedness in instances in which they decide that the exercise of those remedies would be inequitable or unjust or the circumstances would render an acceleration unconscionable.
Further, the ability to collect upon mortgage loans may be limited by the application of state and federal laws. For example, Nevada has enacted a law providing that if the amount an assignee of a mortgage note paid to acquire the note is less than the face amount of the note, the creditor cannot recover more through a deficiency action than the amount it paid for the note. If the Nevada law is upheld, or similar laws are enacted in other jurisdictions, it could materially and adversely affect our ability and the ability of funds we manage to profit from purchases of distressed debt.
Other Risks
Our results of operations could be adversely affected if legal claims are brought against us and are not resolved in our favor.
In the ordinary course of our business, we are subject to legal claims by homebuyers, borrowers against whom we have instituted foreclosure proceedings, persons with whom we have land purchase contracts and a variety of other persons. We establish reserves against legal claims and we believe that, in general, they will not have a material adverse effect on our business or financial condition. However, if the amounts we are required to pay as a result of claims against us substantially exceed the sums anticipated by our reserves, the need to pay those amounts could have a material adverse effect on our results of operations for the periods when we are required to make the payments.
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Information technology failures and data security breaches could harm our business.
We rely extensively on information technology (IT) systems, including Internet sites, data hosting facilities and other hardware and platforms, some of which are hosted by third parties, to assist in conducting our businesses. Our IT systems, like those of most companies, may be vulnerable to a variety of interruptions, including, but not limited to, natural disasters, telecommunications failures, hackers, and other security issues. Moreover, our computer systems, like those of most companies, are subjected to computer viruses or other malicious codes, and to cyber or phishing-attacks. Although we have implemented administrative and technical controls and taken other actions to minimize the risk of cyber incidents and protect our information technology, computer intrusion efforts are becoming increasingly sophisticated, and even the enhanced controls we have installed might be breached. If our IT systems cease to function properly, we could suffer interruptions in our operations. If our cyber-security is breached, unauthorized persons may gain access to proprietary or confidential information, including information about purchasers of our homes or borrowers from our mortgage lending subsidiaries. This could damage our reputation and require us to incur significant costs to repair or restore the security of our computer systems.
Increases in the rate of cancellations of home sale agreements could have an adverse effect on our business.
Our backlog reflects agreements of sale with our homebuyers for homes that have not yet been delivered. We have received a deposit from our home buyer for each home reflected in our backlog, and generally we have the right to retain the deposit if the home buyer does not complete the purchase. In some cases, however, a home buyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local laws, the home buyer’s inability to obtain mortgage financing, his or her inability to sell his or her current home or our inability to complete and deliver the home within the specified time. If there is a downturn in the housing market, or if mortgage financing becomes even less available than it currently is, more homebuyers may cancel their agreements of sale with us, which would have an adverse effect on our business and results of operations.
Our success depends on our ability to acquire land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.
There is strong competition among homebuilders for land that is suitable for residential development. The future availability of finished and partially finished developed lots and undeveloped land that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density, and other regulatory requirements. Should suitable lots or land become less available, the number of homes we could build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.
Expansion of our services and investments into international markets through our Rialto segment subjects us to risks inherent in international operations.
In December 2014, Fund II, of which our Rialto segment owns an interest and for which it performs asset management services, acquired an interest in a joint venture which holds real estate assets in Spain. Expansion of our services and investments into Spain and any expansion into other international markets in the future, could result in operational problems not typically experienced in the United States. Our activities outside the United States will be subject to risks associated with doing business internationally, including fluctuations in currency exchange rates, changes in a specific country’s or region’s political or economic conditions, and competitive disadvantages due to our need to comply with U.S. anti-bribery laws. There also are tax consequences of doing business outside the U.S., both under U.S. tax laws and under the tax laws of the countries in which we do business.
We could suffer adverse tax and other financial consequences if we are unable to utilize our net operating loss ("NOL") carryforwards.
At November 30, 2014, we had state tax NOL carryforwards totaling $113.8 million that will expire between 2015 and 2034. As of November 30, 2014, state tax NOL carryforwards totaling $2.0 million will expire over the next twelve months, if sufficient taxable income is not generated in the applicable states to utilize the net operating losses. At November 30, 2014, we had a valuation allowance of $8.0 million against our state NOL carryforwards because we believe it is more likely than not that a portion of our state NOL carryforwards will not be realized due to the limited carryforward periods in certain states. If we are unable to use our NOLs, we may have to record charges or reduce our deferred tax assets, which could have an adverse effect on our results of operations.
We experience variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results.
We historically have experienced, and expect to continue to experience, variability in quarterly results. As a result of such variability, our short-term performance may not be a meaningful indicator of future results. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in
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the second half of our fiscal year. Our quarterly results of operations may continue to fluctuate in the future as a result of a variety of factors, including, among others, seasonal home buying patterns, the timing of home closings and land sales and weather-related problems.
We have a stockholder who can exercise significant influence over matters that are brought to a vote of our stockholders.
Stuart A. Miller, our Chief Executive Officer and a Director, has voting control, through personal holdings and holdings by family-owned entities, of Class B, and to a lesser extent Class A, common stock that enables Mr. Miller to cast approximately 44% of the votes that can be cast by the holders of all our outstanding Class A and Class B common stock combined. That effectively gives Mr. Miller the power to control the election of our directors and the approval of matters that are presented to our stockholders. Mr. Miller's voting power might discourage someone from seeking to acquire us or from making a significant equity investment in us, even if we needed the investment to meet our obligations or to operate our business. Also, because of his voting power, Mr. Miller could be able to authorize actions that are contrary to our other stockholders' desires.
The trading price of our Class B common stock normally is lower than that of our Class A common stock.
The only difference between our Class A common stock and our Class B common stock is that the Class B common stock entitles the holders to 10 votes per share, while the Class A common stock entitles holders to only one vote per share. However, the trading price of the Class B common stock on the New York Stock Exchange ("NYSE") normally is lower than the NYSE trading price of our Class A common stock. We believe this is because only a relatively small number of shares of Class B common stock are available for trading, which reduces the liquidity of the market for our Class B common stock to a point where many investors are reluctant to invest in it. The limited liquidity could make it difficult for a holder of a significant number of shares of our Class B common stock to dispose of the stock without materially reducing the trading price of the Class B common stock.
Changes in global or regional environmental conditions and governmental actions in response to such changes may adversely affect us by increasing the costs of or restricting our planned or future growth activities.
There is growing concern from many members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have caused, or will cause, significant changes in weather patterns and increase the frequency and severity of natural disasters. Government mandates, standards or regulations intended to reduce greenhouse gas emissions or projected climate change impacts could result in restrictions on land development in certain areas and increased energy, transportation and raw material costs, or cause us to incur compliance expenses that we will be unable fully to recover, which could reduce our housing gross profit margins and adversely affect our results of operations.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Executive Officers of Lennar Corporation
The following individuals are our executive officers as of January 23, 2015:
Name | Position | Age |
Stuart A. Miller | Chief Executive Officer | 57 |
Richard Beckwitt | President | 55 |
Jonathan M. Jaffe | Vice President and Chief Operating Officer | 55 |
Bruce E. Gross | Vice President and Chief Financial Officer | 56 |
Diane J. Bessette | Vice President and Treasurer | 54 |
Mark Sustana | Secretary and General Counsel | 53 |
David M. Collins | Controller | 45 |
Mr. Miller is one of our Directors and has served as our Chief Executive Officer since 1997. Mr. Miller served as our President from 1997 to April 2011. Before 1997, Mr. Miller held various executive positions with us.
Mr. Beckwitt served as our Executive Vice President from March 2006 to 2011. Since April 2011, Mr. Beckwitt has served as our President. As our Executive Vice President and then our President, Mr. Beckwitt has been involved in all operational aspects of our company. Mr. Beckwitt served on the Board of Directors of D.R. Horton, Inc. from 1993 to November 2003. From 1993 to March 2000, he held various executive officer positions at D.R. Horton, including President of the company.
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Mr. Jaffe has served as Vice President since 1994 and has served as our Chief Operating Officer since December 2004. Before that time, Mr. Jaffe served as a Regional President in our Homebuilding operations. Additionally, prior to his appointment as Chief Operating Officer, Mr. Jaffe was one of our Directors from 1997 through June 2004.
Mr. Gross has served as Vice President and our Chief Financial Officer since 1997. Before that, Mr. Gross was Senior Vice President, Controller and Treasurer of Pacific Greystone Corporation, which we acquired in 1997.
Ms. Bessette joined us in 1995 and served as our Controller from 1997 to 2008. Since February 2008, she has served as our Treasurer. She was appointed a Vice President in 2000.
Mr. Sustana has served as our Secretary and General Counsel since 2005.
Mr. Collins joined us in 1998 and has served as our Controller since February 2008. Before becoming Controller, Mr. Collins served as our Executive Director of Financial Reporting.
Item 2. | Properties. |
We lease and maintain our executive offices in an office complex in Miami, Florida. Our homebuilding, financial services, Rialto and multifamily offices are located in the markets where we conduct business, primarily in leased space. We believe that our existing facilities are adequate for our current and planned levels of operation.
Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. We discuss these properties in the discussion of our homebuilding operations in Item 1 of this Report.
Item 3. | Legal Proceedings. |
We are party to various claims and lawsuits which arise in the ordinary course of business, but we do not consider the volume of our claims and lawsuits unusual given the number of homes we deliver and the fact that the lawsuits often relate to homes delivered several years before the lawsuits are commenced. Although the specific allegations in the lawsuits differ, they most commonly involve claims that we failed to construct homes in particular communities in accordance with plans and specifications or applicable construction codes and seek reimbursement for sums allegedly needed to remedy the alleged deficiencies, assert contract issues or relate to personal injuries. Lawsuits of these types are common within the homebuilding industry. We are a plaintiff in many cases in which we seek contribution from our subcontractors for home repair costs. The costs incurred by us in construction defect lawsuits may be offset by warranty reserves, our third-party insurers, subcontractor insurers and indemnity contributions from subcontractors. We are also a party to various lawsuits involving purchases and sales of real property. These lawsuits include claims regarding representations and warranties made in connection with the transfer of the property and disputes regarding the obligation to purchase or sell the property. We do not believe that the ultimate resolution of these claims or lawsuits will have a material adverse effect on our business or financial position. However, the financial effect of litigation concerning purchases and sales of property may depend upon the value of the subject property, which may have changed from the time the agreement for purchase or sale was entered into. From time-to-time, we also receive notices from environmental agencies or other regulators regarding alleged violations of environmental or other laws. We typically settle these matters before they reach litigation for amounts that are not material to us.
We have been engaged in litigation since 2008 in the United States District Court for the District of Maryland (U.S. Home Corporation v. Settlers Crossing, LLC, et al., Civil Action No. DKC 08-1863) regarding whether we are required by a contract we entered into in 2005 to purchase a property in Maryland. After entering into the contract, we later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In July 2014, the Court ruled that we may be obligated to purchase the property. As a result of changes in zoning for the property during the litigation, the Court ordered further proceedings to determine whether the sellers are entitled to specific performance and, if so, whether a further reduction in the purchase price is required. In January 2015, the Court rendered a decision ordering us to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. We believe the decision is contrary to applicable law and will appeal the decision.
In December 2013, we were awarded by a civil jury $802 million in compensatory damages and $200 million in punitive damages against Nicolas Marsch III and his company, Briarwood Capital LLC, on court findings of defamation and conspiracy to extort money from us in 2008 and 2009 (Lennar Corp. v. Briarwood Capital LLC, 2008-055741-CA-01, Florida Circuit Court, Miami-Dade County). We do not expect to be able to collect the amount awarded to us.
Item 4. | Mine Safety Disclosures. |
Not applicable.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our Class A and Class B common stock are listed on the New York Stock Exchange under the symbols “LEN” and “LEN.B,” respectively. The following table shows the high and low sales prices for our Class A and Class B common stock for the periods indicated, as reported by the NYSE, and cash dividends declared per share:
Class A Common Stock High/Low Prices | Cash Dividends Per Class A Share | ||||||
Fiscal Quarter | 2014 | 2013 | 2014 | 2013 | |||
First | $44.40 - 34.09 | $43.22 - 35.51 | 4¢ | 4¢ | |||
Second | $44.30 - 37.32 | $44.40 - 36.76 | 4¢ | 4¢ | |||
Third | $42.67 - 35.74 | $39.97 - 31.35 | 4¢ | 4¢ | |||
Fourth | $48.00 - 37.50 | $37.84 - 31.09 | 4¢ | 4¢ | |||
Class B Common Stock High/Low Prices | Cash Dividends Per Class B Share | ||||||
Fiscal Quarter | 2014 | 2013 | 2014 | 2013 | |||
First | $36.56 - 28.65 | $34.87 - 28.28 | 4¢ | 4¢ | |||
Second | $36.31 - 31.63 | $34.73 - 28.55 | 4¢ | 4¢ | |||
Third | $35.98 - 30.06 | $31.25 - 25.18 | 4¢ | 4¢ | |||
Fourth | $38.58 - 30.96 | $30.94 - 25.38 | 4¢ | 4¢ | |||
As of December 31, 2014, the last reported sale price of our Class A common stock was $44.81 and the last reported sale price of our Class B common stock was $36.11. As of December 31, 2014, there were approximately 803 and 575 holders of record of our Class A and Class B common stock, respectively.
On January 14, 2015, our Board of Directors declared a quarterly cash dividend of $0.04 per share for both our Class A and Class B common stock, which is payable on February 12, 2015, to holders of record at the close of business on January 29, 2015. Our Board of Directors evaluates each quarter the decision whether to declare a dividend and the amount of the dividend.
The following table provides information about the Company's repurchases of common stock during the three months ended November 30, 2014:
Period: | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that may yet be Purchased under the Plans or Programs (2) | ||||||||
September 1 to September 30, 2014 | — | $ | — | — | 6,218,968 | |||||||
October 1 to October 31, 2014 | — | $ | — | — | 6,218,968 | |||||||
November 1 to November 30, 2014 | 173,858 | $ | 47.24 | — | 6,218,968 | |||||||
(1) | Represents shares of Class A common stock withheld by us to cover withholding taxes due, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due. |
(2) | In June 2001, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to 20 million shares of our outstanding Class A common stock or Class B common stock. This repurchase authorization has no expiration date. |
The information required by Item 201(d) of Regulation S-K is provided in Item 12 of this Report.
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Performance Graph
The following graph compares the five-year cumulative total return of our Class A common stock with the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Total Market Index. The graph assumes $100 invested on November 30, 2009 in our Class A common stock, the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Total Market Index, and the reinvestment of all dividends.
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||
Lennar Corporation | $ | 100 | 121 | 149 | 310 | 293 | 388 | |||||||||||
Dow Jones U.S. Home Construction Index | $ | 100 | 90 | 97 | 177 | 184 | 220 | |||||||||||
Dow Jones U.S. Total Market Index | $ | 100 | 112 | 120 | 139 | 183 | 212 | |||||||||||
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Item 6. | Selected Financial Data. |
The following table sets forth our selected consolidated financial and operating information as of or for each of the years ended November 30, 2010 through 2014. The information presented below is based upon our historical financial statements.
At or for the Years Ended November 30, | |||||||||||||||
(Dollars in thousands, except per share amounts) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
Results of Operations: | |||||||||||||||
Revenues: | |||||||||||||||
Lennar Homebuilding | $ | 7,025,130 | 5,354,947 | 3,581,232 | 2,675,124 | 2,705,639 | |||||||||
Lennar Financial Services | $ | 454,381 | 427,342 | 384,618 | 255,518 | 275,786 | |||||||||
Rialto | $ | 230,521 | 138,060 | 138,856 | 164,743 | 92,597 | |||||||||
Lennar Multifamily | $ | 69,780 | 14,746 | 426 | — | — | |||||||||
Total revenues | $ | 7,779,812 | 5,935,095 | 4,105,132 | 3,095,385 | 3,074,022 | |||||||||
Operating earnings (loss): | |||||||||||||||
Lennar Homebuilding (1) | $ | 1,033,721 | 733,075 | 258,985 | 109,505 | 100,060 | |||||||||
Lennar Financial Services | $ | 80,138 | 85,786 | 84,782 | 20,729 | 31,284 | |||||||||
Rialto | $ | 44,079 | 26,128 | 11,569 | 63,457 | 57,307 | |||||||||
Lennar Multifamily | $ | (10,993 | ) | (16,988 | ) | (5,884 | ) | (461 | ) | — | |||||
Corporate general and administrative expenses | $ | 177,161 | 146,060 | 127,338 | 95,256 | 93,926 | |||||||||
Earnings before income taxes | $ | 969,784 | 681,941 | 222,114 | 97,974 | 94,725 | |||||||||
Net earnings attributable to Lennar (2) | $ | 638,916 | 479,674 | 679,124 | 92,199 | 95,261 | |||||||||
Diluted earnings per share | $ | 2.80 | 2.15 | 3.11 | 0.48 | 0.51 | |||||||||
Cash dividends declared per each - Class A and Class B common stock | $ | 0.16 | 0.16 | 0.16 | 0.16 | 0.16 | |||||||||
Financial Position: | |||||||||||||||
Total assets | $ | 12,958,267 | 11,273,247 | 10,362,206 | 9,154,671 | 8,787,851 | |||||||||
Debt: | |||||||||||||||
Lennar Homebuilding | $ | 4,690,213 | 4,194,432 | 4,005,051 | 3,362,759 | 3,128,154 | |||||||||
Rialto | $ | 623,246 | 441,883 | 574,480 | 765,541 | 752,302 | |||||||||
Lennar Financial Services | $ | 704,143 | 374,166 | 457,994 | 410,134 | 271,678 | |||||||||
Lennar Multifamily | $ | — | 13,858 | — | — | — | |||||||||
Stockholders’ equity | $ | 4,827,020 | 4,168,901 | 3,414,764 | 2,696,468 | 2,608,949 | |||||||||
Total equity | $ | 5,251,302 | 4,627,470 | 4,001,208 | 3,303,525 | 3,194,383 | |||||||||
Shares outstanding (000s) | 205,039 | 204,412 | 191,548 | 188,403 | 186,636 | ||||||||||
Stockholders’ equity per share | $ | 23.54 | 20.39 | 17.83 | 14.31 | 13.98 | |||||||||
Lennar Homebuilding Data (including unconsolidated entities): | |||||||||||||||
Number of homes delivered | 21,003 | 18,290 | 13,802 | 10,845 | 10,955 | ||||||||||
New orders | 22,029 | 19,043 | 15,684 | 11,412 | 10,928 | ||||||||||
Backlog of home sales contracts | 5,832 | 4,806 | 4,053 | 2,171 | 1,604 | ||||||||||
Backlog dollar value | $ | 1,974,328 | 1,619,601 | 1,160,385 | 560,659 | 407,292 | |||||||||
(1) | Lennar Homebuilding operating earnings include $9.9 million, $7.5 million, $15.6 million, $38.0 million and $51.3 million of inventory valuation adjustments for the years ended November 30, 2014, 2013, 2012, 2011 and 2010, respectively. In addition, operating earnings include $4.6 million, $12.1 million, $8.9 million and $10.5 million of our share of valuation adjustments related to assets of unconsolidated entities in which we have investments for the years ended November 30, 2014, 2012, 2011 and 2010, respectively, and $10.5 million and $1.7 million of valuation adjustments to our investments in unconsolidated entities for the years ended November 30, 2011 and 2010, respectively. |
(2) | Net earnings attributable to Lennar for the year ended November 30, 2014 includes $341.1 million tax provision for income taxes related to pre-tax earnings of the period, compared to a $177.0 million net tax provision in the year ended November 30, 2013, which included a tax benefit of $67.1 million for a valuation allowance reversal. Net earnings attributable to Lennar for the year ended November 30, 2012 includes $435.2 million of benefit for income taxes, which includes a reversal of the majority of our deferred tax asset valuation allowance of $491.5 million, partially offset by a tax provision for fiscal year 2012 pre-tax earnings. Net earnings attributable to Lennar for the years ended November 30, 2011 and 2010 include $14.6 million and $25.7 million, respectively, of benefit for income taxes, primarily due to settlements with various taxing authorities. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our audited consolidated financial statements and accompanying notes included elsewhere in this Report.
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements in this annual report include statements regarding: our belief that we are still in the early stages of a protracted slow growth housing recovery, our belief regarding the drivers of such recovery, and our belief that we are well positioned to benefit from the recovery; our belief that the recovery will continue to benefit the rental market; our expectation that will see some margin contraction in 2015; our belief regarding the impact of the decline in oil prices on our Homebuilding operations; our expectation that we will continue to invest in carefully underwritten strategic land acquisitions; our expectation that we will start generating positive cash flows in fiscal 2016; our expectation that our Financial Services segment's earnings will increase in fiscal 2015; our expectation that Rialto's RMF business will begin to generate a more predictable and recurring component of earnings for Rialto; our expectation that the Multifamily segment will complete the construction of its development pipeline over the next four years, that we will sell our rental properties once rents and occupancies have stabilized, and that we will sell another five communities towards the end of fiscal 2015; our expectation that FivePoint Communities will continue to mature as a long-term strategy; our belief that our main driver of earnings will continue to be our homebuilding and Financial Services operations; our belief that we are well positioned to deliver between 23,500 and 24,000 homes with gross margins expected to average about 24% during fiscal 2015; our belief that we are on track to achieve another year of substantial profitability in fiscal 2015; our intent to settle the face value of the 2.75% convertible senior notes due 2020 in cash; our expectation regarding our variability in our quarterly results; our expectations regarding the renewal or replacement of our warehouse facilities; our belief regarding draws upon our bonds or letters of credit, and our belief regarding the impact to the Company if there were such a draw; our expectation that substantially all homes currently in backlog will be delivered in fiscal year 2015; our belief that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity; our belief regarding legal proceedings in which we are involved; and our estimates regarding certain tax matters and accounting valuations, including our expectations regarding the result of anticipated settlements with various taxing authorities.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: a slowdown in the recovery of real estate markets across the nation, or any downturn in such markets; changes in general economic and financial conditions, and demographic trends, in the U.S. leading to decreased demand for our services and homes, lower profit margins and reduced access to credit; unfavorable or unanticipated outcomes in legal proceedings that substantially exceed our expectations; the possibility that we will incur nonrecurring costs that may not have a material adverse effect on our business or financial condition, but may have a material adverse effect on our consolidated financial statements for a particular reporting period; decreased demand for our Multifamily rental properties, and our ability to successfully sell our rental properties once rents and occupancies have stabilized; our ability to acquire land and pursue real estate opportunities at anticipated prices; increased competition for home sales from other sellers of new and resale homes; conditions in the capital, credit and financial markets, including mortgage lending standards, the availability of mortgage financing and mortgage foreclosure rates; changes in interest and unemployment rates, and inflation; a decline in the value of the land and home inventories we maintain or possible future write-downs of the carrying value of our real estate assets; increases in operating costs, including costs related to real estate taxes, construction materials, labor and insurance, and our ability to manage our cost structure, both in our Homebuilding and Multifamily businesses; our inability to maintain anticipated pricing levels and our inability to predict the effect of interest rates on demand; the ability and willingness of the participants in various joint ventures to honor their commitments; our ability to successfully and timely obtain land-use entitlements and construction financing, and address issues that arise in connection with the use and development of our land; natural disasters and other unforeseen damage for which our insurance may not provide adequate coverage; our inability to successfully grow our ancillary businesses; potential liability under environmental or construction laws, or other laws or regulations affecting our business; regulatory changes that adversely affect the profitability of our businesses; our ability to comply with the terms of our debt instruments; and our ability to successfully estimate the impact of certain regulatory, accounting and tax matters.
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Please see “Item 1A-Risk Factors” of this Annual Report for a further discussion of these and other risks and uncertainties which could affect our future results. We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events, except to the extent we are legally required to disclose certain matters in SEC filings or otherwise.
Outlook
We continue to believe that we are still in the early stages of a protracted slow growth housing recovery. The housing market's recovery has continued its progression at a slow and steady pace, moving upward in a fairly narrow channel as we enter fiscal 2015. The recovery has been supported on the downside by the significant production deficit that has resulted from the extremely low volumes of dwellings, both single family and multifamily, that has been built over the past seven years. At the same time, the recovery has been constrained by a limited supply of available homes on the market, limited supply of land available to add to the supply of homes and constrained demand from purchasers who would like to buy but are unable to access the mortgage market. We believe the recovery will also continue to benefit the rental market as first time home purchasers find limited access to the for sale market as a result of high down payments and strict underwriting standards.
Looking back, fiscal 2014 was an excellent year for Lennar, with revenues and pretax earnings attributable to Lennar increasing 31% and 49%, respectively, from 2013. In fiscal 2014, our gross margin increased 50 basis points to 25.4%. This gross margin, combined with our selling, general and administrative expenses of 10.5%, increased our operating margin 60 basis points to 14.9% during fiscal 2014. During fiscal 2014, labor and material costs increased by 7%, which represents a slowing pace of costs increases from the past two years. In addition, we ended the year with a strong sales backlog, up 21% in homes and 22% in dollar value, which gives us a great start for fiscal 2015.
During fiscal 2014, we also had strong performances from our other business segments. Our Financial Services segment produced $80.1 million of pretax earnings. Rialto generated $66.6 million of operating earnings net of earnings attributable to noncontrolling interests, benefiting from the Rialto Mortgage Finance ("RMF") business and earnings from its real estate funds. Our Multifamily rental business continued to grow during fiscal 2014, as it sold two completed rental properties and ended the year with 19 communities under construction, one completed and fully leased, three partially completed and leasing and one under development. Finally, our FivePoint Communities is well positioned, managing the entitlement and development of some of the most desirable real estate assets in Southern and Northern California.
In fiscal 2015, our principal focus in our homebuilding operations will continue to be on generating strong operating margins on the homes we sell by delivering homes from our excellent land positions, although we expect to see some margin contraction due to competitive pressures and the inclusion of some additional previously mothballed land assets being developed. In addition, the significant decline in oil prices may negatively impact our Houston segment in fiscal 2015, however this decline could potentially have offsetting benefits. Thus we cannot project the impact of declining oil prices at this time. We will continue to carefully balance pricing power, sales incentives, brokerage commissions and advertising expenses to maximize our results. In addition, we plan to continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets that we expect will continue to support our homebuilding operations going forward and help us increase operating leverage as our deliveries increase. In fiscal 2014, land purchases were $1.4 billion compared to $1.8 billion in fiscal 2013. For fiscal 2015, we are continuing our pivot towards a land lighter model in homebuilding with the focus of becoming cash flow positive and deleveraging our balance sheet. We expect to start generating positive cash flows in fiscal 2016.
During fiscal 2015, we expect our Financial Services segment's earnings to increase as the segment will continue to benefit as our homebuilding business expands and the number of non-Lennar purchasers using our mortgage company continues to grow in various markets. We are also focused on our multiple platforms including Rialto, Multifamily, and FivePoint. As Rialto continues to grow as a blue chip capital investment management company and commercial real estate capital provider, we expect contributions from Rialto's RMF business will begin to generate a more predictable and recurring component of earnings for Rialto. In fiscal 2015, Rialto will continue its transition into an asset light, fund model. Our Multifamily segment anticipates that the construction of its development pipeline will be completed over the next four years, and as a merchant builder of apartments, we plan to sell our apartments once rents and occupancies have stabilized. We are well positioned and expect to sell another five communities towards the end of fiscal 2015. In addition, we expect FivePoint Communities to continue to mature as a long-term strategy as it develops land in premium California locations to fill the growing demand for well-located approved and developed homesites.
In conclusion, we believe that our Company remains well positioned to benefit from the housing market's recovery. We expect that our Company's main driver of earnings will continue to be our homebuilding and Financial Services operations, as we are currently well positioned to deliver between 23,500 and 24,000 homes with gross margins expected to average about 24% during fiscal 2015. We are also focused on our multiple platforms including Rialto, Multifamily, and FivePoint, as such ancillary business continue to mature and expand their franchises providing longer-term opportunities that we expect will enhance shareholder value. Overall, we are on track to achieve another year of substantial profitability in fiscal 2015, as the
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housing market recovery continues and we will continue to benefit from our strategic land acquisitions and new community openings.
Results of Operations
Overview
Our net earnings attributable to Lennar in 2014 were $638.9 million, or $2.80 per diluted share ($3.12 per basic share), compared to $479.7 million, or $2.15 per diluted share ($2.48 per basic share), in 2013. Our 2014 earnings before taxes were $969.8 million, compared to $681.9 million in 2013.
The following table sets forth financial and operational information for the years indicated related to our operations.
Years Ended November 30, | |||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||
Lennar Homebuilding revenues: | |||||||||
Sales of homes | $ | 6,839,642 | 5,292,072 | 3,492,177 | |||||
Sales of land | 185,488 | 62,875 | 89,055 | ||||||
Total Lennar Homebuilding revenues | 7,025,130 | 5,354,947 | 3,581,232 | ||||||
Lennar Homebuilding costs and expenses: | |||||||||
Cost of homes sold | 5,103,409 | 3,973,812 | 2,698,831 | ||||||
Cost of land sold | 143,797 | 45,834 | 78,808 | ||||||
Selling, general and administrative | 714,823 | 559,462 | 438,727 | ||||||
Total Lennar Homebuilding costs and expenses | 5,962,029 | 4,579,108 | 3,216,366 | ||||||
Lennar Homebuilding operating margins | 1,063,101 | 775,839 | 364,866 | ||||||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities | (355 | ) | 23,803 | (26,672 | ) | ||||
Lennar Homebuilding other income, net | 7,526 | 27,346 | 15,144 | ||||||
Other interest expense | (36,551 | ) | (93,913 | ) | (94,353 | ) | |||
Lennar Homebuilding operating earnings | $ | 1,033,721 | 733,075 | 258,985 | |||||
Lennar Financial Services revenues | $ | 454,381 | 427,342 | 384,618 | |||||
Lennar Financial Services costs and expenses | 374,243 | 341,556 | 299,836 | ||||||
Lennar Financial Services operating earnings | $ | 80,138 | 85,786 | 84,782 | |||||
Rialto revenues | $ | 230,521 | 138,060 | 138,856 | |||||
Rialto costs and expenses | 249,114 | 151,072 | 138,990 | ||||||
Rialto equity in earnings from unconsolidated entities | 59,277 | 22,353 | 41,483 | ||||||
Rialto other income (expense), net | 3,395 | 16,787 | (29,780 | ) | |||||
Rialto operating earnings | $ | 44,079 | 26,128 | 11,569 | |||||
Lennar Multifamily revenues | 69,780 | 14,746 | 426 | ||||||
Lennar Multifamily costs and expenses | 95,227 | 31,463 | 6,306 | ||||||
Lennar Multifamily equity in earnings (loss) from unconsolidated entities | 14,454 | (271 | ) | (4 | ) | ||||
Lennar Multifamily operating loss | $ | (10,993 | ) | (16,988 | ) | (5,884 | ) | ||
Total operating earnings | $ | 1,146,945 | 828,001 | 349,452 | |||||
Corporate general administrative expenses | 177,161 | 146,060 | 127,338 | ||||||
Earnings before income taxes | $ | 969,784 | 681,941 | 222,114 | |||||
Net earnings attributable to Lennar | $ | 638,916 | 479,674 | 679,124 | |||||
Gross margin as a % of revenue from home sales | 25.4 | % | 24.9 | % | 22.7 | % | |||
S,G&A expenses as a % of revenues from home sales | 10.5 | % | 10.6 | % | 12.6 | % | |||
Operating margin as a % of revenues from home sales | 14.9 | % | 14.3 | % | 10.2 | % | |||
Average sales price | $ | 326,000 | 290,000 | 255,000 | |||||
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2014 versus 2013
Revenues from home sales increased 29% in the year ended November 30, 2014 to $6.8 billion from $5.3 billion in 2013. Revenues were higher primarily due to a 15% increase in the number of home deliveries, excluding unconsolidated entities, and a 12% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 20,971 homes in the year ended November 30, 2014 from 18,234 homes last year. There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other, which was primarily driven by an increase in active communities over the last year. The average sales price of homes delivered increased to $326,000 in the year ended November 30, 2014 from $290,000 in the year ended November 30, 2013, primarily due to increased pricing in many of our markets as the market recovery continues. Sales incentives offered to homebuyers were $21,400 per home delivered in the year ended November 30, 2014, or 6.2% as a percentage of home sales revenue, compared to $20,500 per home delivered in the year ended November 30, 2013, or 6.6% as a percentage of home sales revenue. Currently, our biggest competition is from the sales of existing and foreclosed homes. We differentiate our new homes from those homes by issuing new home warranties, updated floor plans, our Everything's Included marketing program, community amenities and in certain markets by emphasizing energy efficiency and new technologies.
Gross margins on home sales were $1.7 billion, or 25.4%, in the year ended November 30, 2014, compared to gross margins on home sales of $1.3 billion, or 24.9%, in the year ended November 30, 2013. Gross margin percentage on home sales improved compared to the year ended November 30, 2013, primarily due to an increase in the average sales price of homes delivered, a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales and $20.9 million of insurance recoveries and other nonrecurring items, partially offset by an increase in materials, labor and land costs.
Gross profits on land sales totaled $41.7 million in the year ended November 30, 2014, compared to $17.0 million in the year ended November 30, 2013. Gross profits on land sales in the year ended November 30, 2013 included a $4.8 million recovery of an option deposit previously written-off.
Selling, general and administrative expenses were $714.8 million in the year ended November 30, 2014, compared to $559.5 million in the year ended November 30, 2013. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 10.5% in the year ended November 30, 2014, from 10.6% in the year ended November 30, 2013.
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($0.4) million in the year ended November 30, 2014, compared to $23.8 million in the year ended November 30, 2013. In the year ended November 30, 2014, Lennar Homebuilding equity in loss from unconsolidated entities related to our share of operating losses of Lennar Homebuilding unconsolidated entities, which included $4.6 million of our share of valuation adjustments related to assets of Lennar Homebuilding unconsolidated entities, partially offset by our share of operating earnings of $4.7 million related to a third-party land sale by one unconsolidated entity. In the year ended November 30, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included our share of operating earnings of $19.8 million primarily related to sales of homesites to third parties by one unconsolidated entity for approximately $204 million resulting in a gross profit of approximately $67 million.
Lennar Homebuilding other income, net, totaled $7.5 million in the year ended November 30, 2014, compared to $27.3 million in the year ended November 30, 2013. In the year ended November 30, 2013, Lennar Homebuilding other income, net was primarily due to management fees and the sale of a rental operating property by one of our consolidated joint ventures that resulted in a gain of $14.4 million (the transaction resulted in a net loss of $3.2 million after considering the impact of noncontrolling interests totaling $17.6 million), partially offset by other expenses.
Lennar Homebuilding interest expense was $201.5 million in the year ended November 30, 2014 ($161.4 million was included in cost of homes sold, $3.6 million in cost of land sold and $36.6 million in other interest expense), compared to $214.3 million in the year ended November 30, 2013 ($117.8 million was included in cost of homes sold, $2.6 million in cost of land sold and $93.9 million in other interest expense). Interest expense decreased due to an increase in qualifying assets eligible for interest capitalization, partially offset by an increase in our outstanding debt and home deliveries.
Operating earnings for our Lennar Financial Services segment were $80.1 million in the year ended November 30, 2014, compared to operating earnings of $85.8 million in the year ended November 30, 2013. The decrease in profitability was primarily due to a more competitive environment as a result of a significant decrease in refinance transactions, which resulted in lower profit per transaction in the segment's mortgage operations.
Operating earnings for our Rialto segment were $66.6 million in the year ended November 30, 2014 (which included $44.1 million of operating earnings and an add back of $22.5 million of net loss attributable to noncontrolling interests), compared to operating earnings of $19.9 million (which included $26.1 million of operating earnings, partially offset by $6.2 million of net earnings attributable to noncontrolling interests) in the year ended November 30, 2013.
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Rialto revenues were $230.5 million in the year ended November 30, 2014, compared to revenues of $138.1 million in the year ended November 30, 2013. Revenues increased primarily due to the receipt of a $34.7 million advanced distribution with regard to Rialto's carried interest in Rialto Real Estate Fund, LP (“Fund I”) in order to cover the income tax obligation which resulted from allocations of taxable income due to Rialto’s general partner interest in Fund I. In addition, revenues increased due to an increase in securitization revenue and interest income from Rialto Mortgage Finance (“RMF”), partially offset by a decrease in interest income associated with Rialto’s portfolio of real estate loans.
Rialto expenses were $249.1 million in the year ended November 30, 2014, compared to expenses of $151.1 million in the year ended November 30, 2013. Expenses increased primarily due to an increase in loan impairments of $41.0 million due to changes in estimated cash flows expected to be collected on the segment’s loan portfolios and the change from the accretable yield income method to a cost recovery basis method in the fourth quarter of 2014. We made this determination in order to better reflect the performance of the loan portfolios due to the uncertainty in estimating the timing and amount of future cash flows. In addition, expenses increased due to an increase in interest expense and other general administrative expenses.
Rialto equity in earnings from unconsolidated entities was $59.3 million and $22.4 million in the years ended November 30, 2014 and 2013, respectively, primarily related to our share of earnings from the Rialto real estate funds. The higher equity in earnings related to increases in fair value and recognition of gains related to certain assets in the Rialto real estate funds.
In the year ended November 30, 2014, Rialto other income, net was $3.4 million, which consisted primarily of net realized gains on the sale of real estate owned ("REO") of $43.7 million and rental and other income, partially offset by expenses related to owning and maintaining REO, $19.3 million of impairments on REO and other expenses. In the year ended November 30, 2013, Rialto other income, net, was $16.8 million, which consisted primarily of net realized gains on the sale of REO of $48.8 million, a gain of $8.5 million related to a bargain purchase acquisition, which included cash and a loan receivable as consideration, and rental income, partially offset by expenses related to owning and maintaining REO and $16.1 million of impairments on REO.
Operating loss for our Lennar Multifamily segment was $11.0 million in the year ended November 30, 2014, compared to $17.0 million in the year ended November 30, 2013. In the year ended November 30, 2014, the operating loss in Lennar Multifamily primarily related to general and administrative expenses, partially offset by the segment's share of gains of $14.7 million as a result of the sale of two operating properties by Lennar Multifamily unconsolidated entities and management fee income. In the year ended November 30, 2013, the operating loss in Lennar Multifamily primarily related to general and administrative expenses, partially offset by gross profit on a land sale and management fee income.
Corporate general and administrative expenses were $177.2 million, or 2.3% as a percentage of total revenues, in the year ended November 30, 2014, compared to $146.1 million, or 2.5% as a percentage of total revenues, in the year ended November 30, 2013. As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings (loss) attributable to noncontrolling interests were ($10.2) million and $25.3 million in the years ended November 30, 2014 and 2013, respectively. Net loss attributable to noncontrolling interests in the year ended November 30, 2014 was primarily due to a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC, partially offset by a strategic transaction by one of our Lennar Homebuilding's consolidated joint ventures that impacted noncontrolling interests by $5.6 million. In the year ended November 30, 2013, net earnings attributable to noncontrolling interests were primarily attributable to a transaction by one of our consolidated joint ventures that decreased noncontrolling interests by $17.6 million.
During the year ended November 30, 2014, we had a $341.1 million tax provision related to pre-tax earnings of the period, compared to a $177.0 million net tax provision in the year ended November 30, 2013, which included a tax benefit of $67.1 million for a valuation allowance reversal. Our overall effective tax rates were 34.80% and 26.96% for the years ended November 30, 2014 and 2013, respectively. The difference in effective tax rates was primarily related to the reversal of our valuation allowance in the year ended November 30, 2013.
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2013 versus 2012
Revenues from home sales increased 52% in the year ended November 30, 2013 to $5.3 billion from $3.5 billion in 2012. Revenues were higher primarily due to a 33% increase in the number of home deliveries, excluding unconsolidated entities, and a 14% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 18,234 homes in the year ended November 30, 2013 from 13,707 homes in the year ended November 30, 2012. There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other. The average sales price of homes delivered increased to $290,000 in the year ended November 30, 2013 from $255,000 in the year ended November 30, 2012, driven primarily by an increase in the average sales price of home deliveries in all of our Homebuilding segments, primarily due to increased pricing in many of our markets as the market recovery continued. Sales incentives offered to homebuyers were $20,500 per home delivered in the year ended November 30, 2013, or 6.6% as a percentage of home sales revenue, compared to $28,300 per home delivered in the year ended November 30, 2012, or 10.0% as a percentage of home sales revenue.
Gross margins on home sales were $1,318.3 million, or 24.9%, in the year ended November 30, 2013, compared to gross margins on home sales of $793.3 million, or 22.7%, in the year ended November 30, 2012. Gross margin percentage on home sales improved in the year ended November 30, 2013 compared to the year ended November 30, 2012, primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales, an increase in the average sales price of homes delivered and a greater percentage of deliveries from our new higher margin communities (communities where land was acquired subsequent to November 30, 2008) which made up 61% of our 2013 deliveries, partially offset by an increase in materials, labor and land costs.
Gross profits on land sales totaled $17.0 million in the year ended November 30, 2013, compared to gross profits on land sales of $10.2 million in the year ended November 30, 2012.
Selling, general and administrative expenses were $559.5 million in the year ended November 30, 2013, compared to selling, general and administrative expenses of $438.7 million in the year ended November 30, 2012. Selling, general and administrative expenses as a percentage of revenues from home sales improved to 10.6% in the year ended November 30, 2013, from 12.6% in 2012, due to improved operating leverage as a result of increased absorption per community and more active communities.
Lennar Homebuilding equity in earnings from unconsolidated entities was $23.8 million in the year ended November 30, 2013, related to our share of operating earnings of Lennar Homebuilding unconsolidated entities, primarily as a result of sales of approximately 500 homesites to third parties by one unconsolidated entity for approximately $204 million, resulting in a gross profit of approximately $67 million. Our share of equity in earnings for the year ended November 30, 2013 related to the sales of those homesites was $19.8 million. This compared to Lennar Homebuilding equity in loss of $26.7 million in the year ended November 30, 2012, primarily related to our share of operating losses of Lennar Homebuilding unconsolidated entities, which included $12.1 million of valuation adjustments primarily related to strategic asset sales at Lennar Homebuilding's unconsolidated entities.
Lennar Homebuilding other income, net, totaled $27.3 million in the year ended November 30, 2013, primarily due to management fees and the sale of an operating property by one of our consolidating homebuilding joint ventures that resulted in a $14.4 million of other income (the transaction resulted in a net loss of $3.2 million after considering the impact of noncontrolling interests totaling $17.6 million), partially offset by other expenses. This compared to Lennar Homebuilding other income, net, of $15.1 million in the year ended November 30, 2012, which included a $15.0 million gain on the sale of an operating property, partially offset by a pre-tax loss of $6.5 million related to the repurchase of $204.7 million aggregate principal amount of our 5.95% senior notes due 2013 through a tender offer.
Homebuilding interest expense was $214.3 million in the year ended November 30, 2013 ($117.8 million was included in cost of homes sold, $2.6 million in cost of land sold and $93.9 million in other interest expense), compared to $181.4 million in the year ended November 30, 2012 ($85.1 million was included in cost of homes sold, $1.9 million in cost of land sold and $94.4 million in other interest expense). Interest expense increased due to an increase in our weighted average outstanding debt and an increase in deliveries, partially offset by a lower weighted average interest rate compared to the year ended November 30, 2012.
Operating earnings for our Lennar Financial Services segment were $85.8 million in the year ended November 30, 2013, compared to operating earnings of $84.8 million in the year ended November 30, 2012. The operating earnings were consistent year over year, which was driven by an increase in profit in the title operations as a result of a higher profit per transaction, offset by a slight decrease in profitability in the mortgage operations.
In the year ended November 30, 2013, operating earnings attributable to Lennar for the Rialto segment were $19.9 million (which included $26.1 million of operating earnings, offset by $6.2 million of net earnings attributable to noncontrolling interests), compared to operating earnings attributable to Lennar of $26.0 million (which was comprised of
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$11.6 million of operating earnings and an add back of $14.4 million of net loss attributable to noncontrolling interests) in the year ended November 30, 2012.
In the year ended November 30, 2013, revenues in the Rialto segment were $138.1 million, which consisted primarily of accretable interest income associated with the segment’s portfolio of real estate loans, gains from securitization transactions and interest income from the new RMF business and fees for managing and servicing assets, compared to revenues of $138.9 million in the year ended November 30, 2012. Revenues decreased primarily due to lower interest income as a result of a decrease in the segment's portfolio of loans, offset by gains from securitization transactions and interest income from Rialto's new RMF business.
In the year ended November 30, 2013, expenses in the Rialto segment were $151.1 million, which consisted primarily of costs related to its portfolio operations, the new RMF business, loan impairments of $16.1 million primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests) and other general and administrative expenses, compared to expenses of $139.0 million in the year ended November 30, 2012, which consisted primarily of costs related to its portfolio operations, loan impairments of $28.0 million primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests), and other general and administrative expenses.
In the year ended November 30, 2013, the Rialto segment also had equity in earnings from unconsolidated entities of $22.4 million, which primarily included $21.9 million of equity in earnings related to our share of earnings from the Rialto real estate funds. This compared to equity in earnings from unconsolidated entities of $41.5 million in the year ended November 30, 2012, which primarily included $17.0 million of net gains primarily related to realized gains from the sale of investments in the portfolio underlying the the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”), $6.1 million of interest income earned by the AB PPIP fund and $21.0 million of equity in earnings related to our share of earnings from Rialto Real Estate Fund, LP, a real estate investments fund managed by the Rialto segment.
In the year ended November 30, 2013, Rialto other income, net was $16.8 million, which consisted primarily of net realized gains on the sale of REO of $48.8 million, an $8.5 million gain related to a bargain purchase acquisition which included cash and a loan receivable as consideration, and rental income, partially offset by expenses related to owning and maintaining REO and impairments on REO of $16.1 million. In the year ended November 30, 2012, Rialto other expense, net, was $29.8 million, which consisted primarily of expenses related to owning and maintaining REO and impairments on REO, partially offset by net realized gains from sales of REO of $21.6 million and rental income.
Our Lennar Multifamily segment had a start-up operating loss of $17.0 million in the year ended November 30, 2013, compared to an operating loss of $5.9 million in the year ended November 30, 2012. The operating loss in Lennar Multifamily primarily relates to general and administrative expenses of the segment, partially offset by gross profit on a land sale and management fee income.
In the year ended November 30, 2013, corporate general and administrative expenses were $146.1 million, or 2.5% as a percentage of total revenues, compared to $127.3 million, or 3.1% as a percentage of total revenues, in the year ended November 30, 2012. As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings (loss) attributable to noncontrolling interests were $25.3 million and ($21.8) million in the years ended November 30, 2013 and 2012, respectively. Net earnings attributable to noncontrolling interests for the year ended November 30, 2013 was primarily attributable to a transaction by one of our homebuilding consolidated joint ventures that decreased noncontrolling interests by $17.6 million. Net loss attributable to noncontrolling interests for the year ended November 30, 2012 was primarily related to our homebuilding operations and the FDIC's interest in the portfolio of real estate loans.
During the years ended November 30, 2013 and 2012, we concluded that it was more likely than not that the majority of our deferred tax assets would be utilized. In 2013, additional positive evidence included actual and forecasted profitability, as well as generating cumulative pre-tax earnings over a rolling four year period including the pre-tax earnings achieved during 2013. Accordingly, for the year ended November 30, 2013, we reversed $67.1 million of our valuation allowance primarily against our state deferred tax assets. This reversal was offset by a tax provision of $244.1 million, primarily related to pre-tax earnings during the year ended November 30, 2013, resulting in a $177.0 million provision for income taxes for the year ended November 30, 2013. As of November 30, 2013, our remaining valuation allowance against our deferred tax assets was $12.7 million, which is primarily related to state net operating loss carryforwards that are expected to expire due to short carryforward periods. For the year ended November 30, 2012, we reversed $491.5 million of our valuation allowance against our deferred tax assets. This reversal was partially offset by a tax provision of $25.9 million, primarily related to pre-tax earnings during the year ended November 30, 2012, resulting in a $435.2 million benefit for income taxes for the year ended November 30, 2012. Our overall effective tax rates were 26.96% and (178.43%) for the years ended November 30, 2013 and 2012, respectively. The low effective tax rate and the negative effective tax rate were primarily related to the reversal of our valuation allowance and special tax credits taken in the years ended November 30, 2013 and 2012, respectively.
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During the year ended November 30, 2013, we had significant transactions involving three of our consolidated joint ventures. In the first joint venture transaction, we bought out our 50% partners for $82.3 million, paying $18.8 million in cash and financing the remainder with a short-term note. Our consolidated joint venture then contributed certain assets to a new unconsolidated joint venture and brought in a new, long-term partner for $125 million, or a 31.25% interest. Additionally, if the new unconsolidated entity meets certain cash flow thresholds, the partner's equity interest in the unconsolidated entity could be decreased to 16.25% or increased to 46.25% with a corresponding increase or decrease in our equity interest percentage. During the year ended November 30, 2013, the new unconsolidated joint venture subsequently distributed $125 million of cash to us as a return of capital.
In the second joint venture transaction, we purchased our partner's interest for $153.2 million and the inventories are now wholly-owned assets, which we plan to develop and build homes. During the year ended November 30, 2013, there was a third joint venture transaction where we paid off the bank debt of the consolidated joint venture and assumed the partner's interest, resulting in the entity becoming wholly-owned.
These transactions did not impact our net earnings for the year ended November 30, 2013 but our consolidated balance sheet as of November 30, 2013 was affected as follows: cash was reduced by approximately $47 million, inventory decreased by approximately $225 million, investments in unconsolidated entities increased by $98 million, deferred tax assets were increased by $40 million, additional paid-in capital (equity) was reduced by $62 million, net of tax, and non-controlling interests were reduced by $134 million.
Homebuilding Segments
Our Homebuilding operations construct and sell homes primarily for first-time, move-up and active adult homebuyers primarily under the Lennar brand name. In addition, our homebuilding operations purchase, develop and sell land to third parties. In certain circumstances, we diversify our operations through strategic alliances and attempt to minimize our risks by investing with third parties in joint ventures.
As of and for the year ended November 30, 2014, we have grouped our homebuilding activities into five reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida and Homebuilding Houston. Information about homebuilding activities in states in which our homebuilding activities are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment. Reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.
At November 30, 2014, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2)
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1) | Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment. |
(2) | Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment. |
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The following tables set forth selected financial and operational information related to our homebuilding operations for the years indicated:
Selected Financial and Operational Data
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues: | |||||||||
East: | |||||||||
Sales of homes | $ | 2,228,469 | 1,828,543 | 1,283,441 | |||||
Sales of land | 19,212 | 13,619 | 16,539 | ||||||
Total East | 2,247,681 | 1,842,162 | 1,299,980 | ||||||
Central: | |||||||||
Sales of homes | 908,195 | 736,557 | 487,317 | ||||||
Sales of land | 28,745 | 6,918 | 19,071 | ||||||
Total Central | 936,940 | 743,475 | 506,388 | ||||||
West: | |||||||||
Sales of homes | 1,761,762 | 1,160,842 | 683,267 | ||||||
Sales of land | 34,613 | 490 | 14,022 | ||||||
Total West | 1,796,375 | 1,161,332 | 697,289 | ||||||
Southeast Florida: | |||||||||
Sales of homes | 686,994 | 502,175 | 353,841 | ||||||
Sales of land | 5,904 | — | 13,800 | ||||||
Total Southeast Florida | 692,898 | 502,175 | 367,641 | ||||||
Houston: | |||||||||
Sales of homes | 675,927 | 604,212 | 449,580 | ||||||
Sales of land | 37,186 | 36,949 | 22,043 | ||||||
Total Houston | 713,113 | 641,161 | 471,623 | ||||||
Other | |||||||||
Sales of homes | 578,295 | 459,743 | 234,731 | ||||||
Sales of land | 59,828 | 4,899 | 3,580 | ||||||
Total Other | 638,123 | 464,642 | 238,311 | ||||||
Total homebuilding revenues | $ | 7,025,130 | 5,354,947 | 3,581,232 | |||||
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Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Operating earnings (loss): | |||||||||
East: | |||||||||
Sales of homes | $ | 341,461 | 279,561 | 137,231 | |||||
Sales of land | 5,193 | 1,255 | 2,472 | ||||||
Equity in earnings from unconsolidated entities | 2,254 | 678 | 542 | ||||||
Other income (expense), net | 2,867 | (5,354 | ) | (166 | ) | ||||
Other interest expense | (11,667 | ) | (25,023 | ) | (26,082 | ) | |||
Total East | 340,108 | 251,117 | 113,997 | ||||||
Central: | |||||||||
Sales of homes (1) | 81,182 | 68,743 | 39,388 | ||||||
Sales of land | 6,911 | 773 | 909 | ||||||
Equity in loss from unconsolidated entities | (131 | ) | (87 | ) | (514 | ) | |||
Other expense, net (2) | (6,971 | ) | (1,809 | ) | (1,529 | ) | |||
Other interest expense | (5,406 | ) | (12,417 | ) | (13,427 | ) | |||
Total Central | 75,585 | 55,203 | 24,827 | ||||||
West: | |||||||||
Sales of homes | 286,393 | 190,582 | 39,941 | ||||||
Sales of land | 11,851 | 3,442 | 388 | ||||||
Equity in earnings (loss) from unconsolidated entities (3) | (1,647 | ) | 22,039 | (25,415 | ) | ||||
Other income, net (4) | 7,652 | 27,832 | 2,393 | ||||||
Other interest expense | (11,530 | ) | (32,740 | ) | (31,334 | ) | |||
Total West | 292,719 | 211,155 | (14,027 | ) | |||||
Southeast Florida: | |||||||||
Sales of homes | 158,951 | 107,733 | 65,745 | ||||||
Sales of land | 3,967 | (188 | ) | (354 | ) | ||||
Equity in loss from unconsolidated entities | (576 | ) | (152 | ) | (961 | ) | |||
Other income, net (5) | 2,318 | 7,778 | 15,653 | ||||||
Other interest expense | (2,697 | ) | (8,282 | ) | (9,026 | ) | |||
Total Southeast Florida | 161,963 | 106,889 | 71,057 | ||||||
Houston: | |||||||||
Sales of homes (6) | 99,066 | 73,024 | 43,423 | ||||||
Sales of land | 10,202 | 10,749 | 6,182 | ||||||
Equity in earnings (loss) from unconsolidated entities | 121 | 2,079 | (35 | ) | |||||
Other income (expense), net | (201 | ) | (503 | ) | 1,328 | ||||
Other interest expense | (1,566 | ) | (4,530 | ) | (4,623 | ) | |||
Total Houston | 107,622 | 80,819 | 46,275 | ||||||
Other: | |||||||||
Sales of homes | 54,357 | 39,155 | 28,891 | ||||||
Sales of land (7) | 3,567 | 1,010 | 650 | ||||||
Equity in loss from unconsolidated entities | (376 | ) | (754 | ) | (289 | ) | |||
Other income (expense), net | 1,861 | (598 | ) | (2,535 | ) | ||||
Other interest expense | (3,685 | ) | (10,921 | ) | (9,861 | ) | |||
Total Other | 55,724 | 27,892 | 16,856 | ||||||
Total homebuilding operating earnings | $ | 1,033,721 | 733,075 | 258,985 | |||||
(1) | Sales of homes for the year ended November 30, 2014 included $6.4 million of insurance recoveries and other nonrecurring items. |
(2) | Other expense, net for the year ended November 30, 2014 included $2.0 million in write-offs of other receivables. |
(3) | Lennar Homebuilding equity in loss for the year ended November 30, 2014 included our share of operating losses of Lennar Homebuilding unconsolidated entities, which included $4.6 million of our share of valuation adjustments related to assets of Lennar Homebuilding's unconsolidated entities, partially offset by our share of operating earnings of $4.7 million related to third-party land sales |
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by one unconsolidated entity. For the year ended November 30, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included our share of operating earnings of $19.8 million primarily related to the sales of approximately 500 homesites to third parties by one unconsolidated entity for approximately $204 million, resulting in a gross profit of approximately $67 million. Equity in earnings recognized by us related to the sale of land by our unconsolidated entities may vary significantly from period to period depending on the timing of those land sales and other transactions entered into by our unconsolidated entities in which we have investments. For the year ended November 30, 2012, equity in loss from unconsolidated entities included $12.1 million of our share of valuation adjustments primarily related to strategic asset sales at Lennar Homebuilding unconsolidated entities.
(4) | Other income, net for the year ended November 30, 2013, included a $14.4 million gain on the sale of an operating property. |
(5) | Other income, net for the year ended November 30, 2014 included $1.0 million of valuation adjustments to other assets. Other income, net for the year ended November 30, 2012, included a $15.0 million gain on the sale of an operating property. |
(6) | Sales of homes for the year ended November 30, 2014 included a $5.5 million insurance recovery. |
(7) | Sales of land for the year ended November 30, 2014 included $1.5 million in write-offs of option deposits and pre-acquisition costs. |
Summary of Homebuilding Data
Deliveries:
Years Ended November 30, | ||||||||
Homes | ||||||||
2014 | 2013 | 2012 | ||||||
East | 7,824 | 6,941 | 5,440 | |||||
Central | 3,156 | 2,814 | 2,154 | |||||
West | 4,141 | 3,323 | 2,301 | |||||
Southeast Florida | 2,086 | 1,741 | 1,314 | |||||
Houston | 2,482 | 2,266 | 1,917 | |||||
Other | 1,314 | 1,205 | 676 | |||||
Total | 21,003 | 18,290 | 13,802 | |||||
Of the total home deliveries above, 32, 56 and 95 represent deliveries from unconsolidated entities for the years ended November 30, 2014, 2013 and 2012, respectively.
Years Ended November 30, | |||||||||||||||||||
Dollar Value (In thousands) | Average Sales Price | ||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
East | $ | 2,234,086 | 1,834,794 | 1,290,549 | $ | 286,000 | 264,000 | 237,000 | |||||||||||
Central | 908,195 | 736,558 | 487,317 | 288,000 | 262,000 | 226,000 | |||||||||||||
West | 1,775,587 | 1,190,385 | 728,092 | 429,000 | 358,000 | 316,000 | |||||||||||||
Southeast Florida | 686,994 | 502,175 | 353,841 | 329,000 | 288,000 | 269,000 | |||||||||||||
Houston | 675,927 | 604,212 | 449,580 | 272,000 | 267,000 | 235,000 | |||||||||||||
Other | 578,295 | 459,743 | 234,731 | 440,000 | 382,000 | 347,000 | |||||||||||||
Total | $ | 6,859,084 | 5,327,867 | 3,544,110 | $ | 327,000 | 291,000 | 257,000 | |||||||||||
Of the total dollar value of home deliveries above, $19.4 million, $35.8 million and $51.9 million represent the dollar value of home deliveries from unconsolidated entities for the years ended November 30, 2014, 2013 and 2012, respectively. The home deliveries from unconsolidated entities had an average sales price of $608,000, $639,000 and $547,000 for the years ended November 30, 2014, 2013 and 2012, respectively.
Sales Incentives (1):
Years Ended November 30, | |||||||||
(In thousands) | |||||||||
2014 | 2013 | 2012 | |||||||
East | $ | 176,726 | 163,039 | 169,779 | |||||
Central | 71,533 | 51,557 | 49,028 | ||||||
West | 59,148 | 29,542 | 48,341 | ||||||
Southeast Florida | 54,529 | 47,504 | 41,529 | ||||||
Houston | 62,935 | 64,216 | 62,497 | ||||||
Other | 24,286 | 17,230 | 17,050 | ||||||
Total | $ | 449,157 | 373,088 | 388,224 | |||||
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Years Ended November 30, | ||||||||||||||||||
Average Sales Incentives Per Home Delivered | Sales Incentives as a % of Revenue | |||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||
East | $ | 22,600 | 23,600 | 31,300 | 7.4 | % | 8.2 | % | 11.7 | % | ||||||||
Central | 22,700 | 18,300 | 22,800 | 7.3 | % | 6.5 | % | 9.1 | % | |||||||||
West | 14,300 | 9,000 | 21,700 | 3.2 | % | 2.5 | % | 6.6 | % | |||||||||
Southeast Florida | 26,100 | 27,300 | 31,600 | 7.4 | % | 8.6 | % | 10.5 | % | |||||||||
Houston | 25,400 | 28,300 | 32,600 | 8.5 | % | 9.6 | % | 12.2 | % | |||||||||
Other | 18,500 | 14,300 | 25,200 | 4.0 | % | 3.6 | % | 6.8 | % | |||||||||
Total | $ | 21,400 | 20,500 | 28,300 | 6.2 | % | 6.6 | % | 10.0 | % | ||||||||
(1) | Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities. |
New Orders (2):
Years Ended November 30, | ||||||||
Homes | ||||||||
2014 | 2013 | 2012 | ||||||
East | 8,068 | 7,533 | 5,868 | |||||
Central | 3,473 | 2,805 | 2,498 | |||||
West | 4,516 | 3,231 | 2,711 | |||||
Southeast Florida | 2,055 | 1,879 | 1,617 | |||||
Houston | 2,643 | 2,419 | 2,078 | |||||
Other | 1,274 | 1,176 | 912 | |||||
Total | 22,029 | 19,043 | 15,684 | |||||
Of the new orders above, 95, 55 and 98 represent new orders from unconsolidated entities for the years ended November 30, 2014, 2013 and 2012, respectively.
Years Ended November 30, | |||||||||||||||||||
Dollar Value (In thousands) | Average Sales Price | ||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
East | $ | 2,303,916 | 2,066,065 | 1,438,268 | $ | 286,000 | 274,000 | 245,000 | |||||||||||
Central | 1,021,839 | 763,895 | 591,677 | 294,000 | 272,000 | 237,000 | |||||||||||||
West | 1,956,157 | 1,243,831 | 834,426 | 433,000 | 385,000 | 308,000 | |||||||||||||
Southeast Florida | 685,536 | 576,781 | 441,311 | 334,000 | 307,000 | 273,000 | |||||||||||||
Houston | 720,453 | 649,472 | 505,579 | 273,000 | 268,000 | 243,000 | |||||||||||||
Other | 522,411 | 485,699 | 333,232 | 410,000 | 413,000 | 365,000 | |||||||||||||
Total | $ | 7,210,312 | 5,785,743 | 4,144,493 | $ | 327,000 | 304,000 | 264,000 | |||||||||||
Of the total dollar value of new orders above, $56.8 million, $34.8 million and $54.4 million represent the dollar value of new orders from unconsolidated entities for the years ended November 30, 2014, 2013 and 2012, respectively. The new orders from unconsolidated entities had an average sales price of $598,000, $632,000 and $556,000 for the years ended November 30, 2014, 2013 and 2012, respectively.
(2) | New orders represent the number of new sales contracts executed by homebuyers, net of cancellations, during the years ended November 30, 2014, 2013 and 2012. |
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Backlog:
November 30, | ||||||||
Homes | ||||||||
2014 | 2013 | 2012 | ||||||
East | 2,212 | 1,968 | 1,376 | |||||
Central | 961 | 644 | 653 | |||||
West | 991 | 616 | 708 | |||||
Southeast Florida | 576 | 607 | 469 | |||||
Houston | 830 | 669 | 516 | |||||
Other | 262 | 302 | 331 | |||||
Total | 5,832 | 4,806 | 4,053 | |||||
Of the total homes in backlog above, 67, 4 and 5 represent homes in backlog from unconsolidated entities at November 30, 2014, 2013 and 2012, respectively.
November 30, | |||||||||||||||||||
Dollar Value (In thousands) | Average Sales Price | ||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
East | $ | 672,204 | 600,257 | 368,361 | $ | 304,000 | 305,000 | 268,000 | |||||||||||
Central | 310,726 | 195,762 | 168,912 | 323,000 | 304,000 | 259,000 | |||||||||||||
West | 437,492 | 257,498 | 202,959 | 441,000 | 418,000 | 287,000 | |||||||||||||
Southeast Florida | 214,606 | 215,988 | 141,146 | 373,000 | 356,000 | 301,000 | |||||||||||||
Houston | 225,737 | 180,665 | 135,282 | 272,000 | 270,000 | 262,000 | |||||||||||||
Other | 113,563 | 169,431 | 143,725 | 433,000 | 561,000 | 434,000 | |||||||||||||
Total | $ | 1,974,328 | 1,619,601 | 1,160,385 | $ | 339,000 | 337,000 | 286,000 | |||||||||||
Of the total dollar value of homes in backlog above, $39.8 million, $2.5 million and $3.5 million represent the dollar value of homes in backlog from unconsolidated entities at November 30, 2014, 2013 and 2012, respectively. The homes in backlog from unconsolidated entities had an average sales price of $595,000, $624,000 and $704,000 at November 30, 2014, 2013 and 2012, respectively.
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.
We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:
Years Ended November 30, | ||||||||
2014 | 2013 | 2012 | ||||||
East | 17 | % | 16 | % | 18 | % | ||
Central | 20 | % | 18 | % | 18 | % | ||
West | 14 | % | 15 | % | 17 | % | ||
Southeast Florida | 13 | % | 12 | % | 12 | % | ||
Houston | 24 | % | 21 | % | 23 | % | ||
Other | 13 | % | 13 | % | 8 | % | ||
Total | 17 | % | 16 | % | 17 | % | ||
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Active Communities:
November 30, | ||||||||
2014 | 2013 | 2012 | ||||||
East | 233 | 197 | 167 | |||||
Central | 117 | 101 | 74 | |||||
West | 111 | 80 | 61 | |||||
Southeast Florida | 32 | 30 | 31 | |||||
Houston | 78 | 79 | 70 | |||||
Other | 54 | 50 | 56 | |||||
Total | 625 | 537 | 459 | |||||
Of the total active communities listed above, 3 communities represent active communities being developed by unconsolidated entities as of November 30, 2014. Of the total active communities listed above, 2 communities represent active communities being developed by unconsolidated entities as of both November 30, 2013 and 2012.
Deliveries from New Higher Margin Communities (3):
Years Ended November 30, | ||||||||
Homes | ||||||||
2014 | 2013 | 2012 | ||||||
East | 5,533 | 4,781 | 3,014 | |||||
Central | 2,313 | 1,356 | 884 | |||||
West | 2,871 | 2,090 | 1,375 | |||||
Southeast Florida | 1,666 | 1,137 | 933 | |||||
Houston | 1,177 | 756 | 330 | |||||
Other | 1,076 | 962 | 343 | |||||
Total | 14,636 | 11,082 | 6,879 | |||||
Years Ended November 30, | |||||||||||||||||||
Dollar Value (In thousands) | Average Sales Price | ||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | ||||||||||||||
East | $ | 1,591,060 | 1,265,141 | 687,361 | $ | 288,000 | 265,000 | 228,000 | |||||||||||
Central | 654,860 | 346,917 | 201,334 | 283,000 | 256,000 | 228,000 | |||||||||||||
West | 1,101,430 | 649,675 | 411,833 | 384,000 | 311,000 | 300,000 | |||||||||||||
Southeast Florida | 593,798 | 374,420 | 271,978 | 356,000 | 329,000 | 292,000 | |||||||||||||
Houston | 356,971 | 222,641 | 75,884 | 303,000 | 294,000 | 230,000 | |||||||||||||
Other | 431,537 | 353,496 | 134,127 | 401,000 | 367,000 | 391,000 | |||||||||||||
Total | $ | 4,729,656 | 3,212,290 | 1,782,517 | $ | 323,000 | 290,000 | 259,000 | |||||||||||
(3) | Deliveries from new higher margin communities represent deliveries from communities where land was acquired subsequent to November 30, 2008, and is a subset of the deliveries included in the preceding deliveries table. |
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The following table details our gross margins on home sales for the years ended November 30, 2014, 2013 and 2012 for each of our reportable homebuilding segments and Homebuilding Other:
Years Ended November 30, | ||||||||||
(In thousands) | 2014 | 2013 | 2012 | |||||||
East: | ||||||||||
Sales of homes | $ | 2,228,469 | 1,828,543 | 1,283,441 | ||||||
Cost of homes sold | 1,639,328 | 1,353,048 | 979,219 | |||||||
Gross margins on home sales | 589,141 | 26.4% | 475,495 | 26.0% | 304,222 | 23.7% | ||||
Central: | ||||||||||
Sales of homes | 908,195 | 736,557 | 487,317 | |||||||
Cost of homes sold | 721,494 | 591,611 | 390,823 | |||||||
Gross margins on home sales | 186,701 | 20.6% | 144,946 | 19.7% | 96,494 | 19.8% | ||||
West: | ||||||||||
Sales of homes | 1,761,762 | 1,160,842 | 683,267 | |||||||
Cost of homes sold | 1,305,208 | 840,619 | 540,982 | |||||||
Gross margins on home sales | 456,554 | 25.9% | 320,223 | 27.6% | 142,285 | 20.8% | ||||
Southeast Florida: | ||||||||||
Sales of homes | 686,994 | 502,175 | 353,841 | |||||||
Cost of homes sold | 473,146 | 352,684 | 256,672 | |||||||
Gross margins on home sales | 213,848 | 31.1% | 149,491 | 29.8% | 97,169 | 27.5% | ||||
Houston: | ||||||||||
Sales of homes | 675,927 | 604,212 | 449,580 | |||||||
Cost of homes sold | 504,144 | 464,612 | 354,981 | |||||||
Gross margins on home sales | 171,783 | 25.4% | 139,600 | 23.1% | 94,599 | 21.0% | ||||
Other | ||||||||||
Sales of homes | 578,295 | 459,743 | 234,731 | |||||||
Cost of homes sold | 460,089 | 371,238 | 176,154 | |||||||
Gross margins on home sales | 118,206 | 20.4% | 88,505 | 19.3% | 58,577 | 25.0% | ||||
Total gross margins on home sales | $ | 1,736,233 | 25.4% | 1,318,260 | 24.9% | 793,346 | 22.7% | |||
2014 versus 2013
East: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries in all the states of the segment, except New Jersey and an increase in the average sales price of homes delivered in all the states of the segment, except Georgia. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. The decrease in home deliveries in New Jersey was primarily due to the timing of deliveries in certain communities. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continues. The decrease in the average sales price of homes delivered in Georgia was primarily driven by a change in product mix due to the timing of deliveries in certain of our communities. Gross margin percentage on homes increased, compared to last year, primarily due to an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an 8% increase in direct construction and land costs per home due to an increase in labor, materials and land costs.
Central: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states of the segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered as the market recovery continues. Gross margin percentage on homes increased, compared to last year, primarily due to an increase in the average sales price of homes delivered and $6.4 million of insurance recoveries and other nonrecurring items, partially offset by an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales and a 12% increase in direct construction and land costs per home due to increases in labor, material and land costs.
West: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states of the segment. The increase in the number of
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deliveries was primarily driven by an increase in active communities over the last year. The increase in the average sales price of homes delivered was primarily a result of a change in product mix due to the timing of deliveries and because we have been able to increase the sales price of homes delivered as the market recovery continues. Gross margin percentage on homes decreased, compared to last year, primarily due to a 20% increase in direct construction costs per home as a result of a change in product mix due to the timing of deliveries and increases in labor, material and land costs, and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales. This was partially offset by an increase in the average sales price of homes delivered.
Southeast Florida: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in this segment. The increase in the number of deliveries was primarily driven by a lower mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continues. Gross margin percentage on homes sales increased, compared to last year, primarily due to an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by a 6% increase in direct construction and land costs per home due to increases in labor, material and land costs.
Houston: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries in this segment. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. Gross margin percentage on homes sales increased, compared to last year, primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales and a $5.5 million insurance recovery, partially offset by a 2% increase in direct construction and land costs per home due to increases in labor, material and land costs.
Other: Homebuilding revenues increased in 2014, compared to 2013, primarily due to an increase in the number of home deliveries in Oregon and Tennessee, which the latter is a new operation, partially offset by a decrease in the number of home deliveries in Washington. Homebuilding revenues also increased due to an increase in the average sales price of homes delivered in all the states of Homebuilding Other. The increase in the number of home deliveries in Oregon was primarily driven by higher demand as the number of home deliveries per active community increased. The decrease in the number of home deliveries in Washington was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered in certain of our communities as the market recovery continues. Gross margin percentage on homes sales increased, compared to last year, primarily due to an increase in the average sales price of homes delivered, partially offset by an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales and a 14% increase in direct construction and land costs per home due to increases in labor, material and land costs.
2013 versus 2012
East: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states of the segment. The increase in the number of deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on homes increased, compared to 2012, primarily due to a greater percentage of deliveries from our new higher margin communities, a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales and lower valuation adjustments, partially offset by a 9% increase in direct construction and land costs per home due to an increase in labor, materials and land costs.
Central: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states of the segment. The increase in the number of deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on homes decreased slightly, compared to 2012, primarily due to a 15% increase in direct construction and land costs per home due to increases in labor, material and land costs, partially offset by a greater percentage of deliveries from our new higher margin communities and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
West: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states of the segment. The increase in the number of
37
deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on homes increased, compared to 2012, primarily due to a greater percentage of deliveries from our new higher margin communities and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales and lower valuation adjustments, partially offset by a 7% increase in direct construction costs per home due to increases in labor and material costs.
Southeast Florida: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in this segment. The increase in the number of home deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on homes sales increased, compared to 2012, primarily due to greater gross margin percentage in our new higher margin communities and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by a 4% net increase in direct construction and land costs per home due to increases in labor and material costs.
Houston: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price in this segment. The increase in the number of deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on homes sales increased, compared to 2012, primarily due to a greater percentage of deliveries from our new higher margin communities and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by a 12% increase in direct construction and land costs per home due to increases in labor, material and land costs.
Other: Homebuilding revenues increased in 2013, compared to 2012, primarily due to an increase in the number of home deliveries and in the average sales price in all the states of Homebuilding Other, except for Illinois, which had insignificant activity and Oregon where the average sales price was flat year over year. The increase in the number of deliveries was primarily driven by an increase in our backlog demand as demand continued to outpace supply, which is constrained by limited land availability and fewer competing homebuilders. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market recovery continued. Gross margin percentage on home sales decreased, compared to 2012, due to a 15% increase in direct construction and land costs per home due to increases in labor, material and land costs, partially offset by a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales and lower valuation adjustments.
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Lennar Financial Services Segment
Our Lennar Financial Services reportable segment provides mortgage financing, title insurance and closing services for both buyers of our homes and others. Our Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements.
The following table sets forth selected financial and operational information relating to our Lennar Financial Services segment:
Years Ended November 30, | |||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 454,381 | 427,342 | 384,618 | |||||
Costs and expenses | 374,243 | 341,556 | 299,836 | ||||||
Operating earnings | $ | 80,138 | 85,786 | 84,782 | |||||
Dollar value of mortgages originated | $ | 5,950,000 | 5,282,000 | 4,431,000 | |||||
Number of mortgages originated | 23,300 | 22,300 | 19,700 | ||||||
Mortgage capture rate of Lennar homebuyers | 78 | % | 77 | % | 77 | % | |||
Number of title and closing service transactions | 90,700 | 101,200 | 108,200 | ||||||
Number of title policies issued | 220,400 | 192,400 | 149,300 | ||||||
Rialto Segment
Our Rialto reportable segment is a commercial real estate investment, investment management, and finance company focused on raising, investing and managing third-party capital, originating and selling into securitizations commercial mortgage loans as well as investing our own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities as well as providing strategic real estate capital. Rialto's primary focus is to manage third-party capital and to originate and sell into securitizations commercial mortgage loans. Rialto has commenced the workout and/or oversight of billions of dollars of real estate assets across the United States, including commercial and residential real estate loans and properties as well as mortgage backed securities with the objective of generating superior, risk-adjusted returns. To date, many of the investment and management opportunities have arisen from the dislocation in the United States real estate markets and the restructuring and recapitalization of those markets.
Rialto's operating earnings were as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 230,521 | 138,060 | 138,856 | |||||
Costs and expenses (1) | 249,114 | 151,072 | 138,990 | ||||||
Rialto equity in earnings from unconsolidated entities | 59,277 | 22,353 | 41,483 | ||||||
Rialto other income (expense), net | 3,395 | 16,787 | (29,780 | ) | |||||
Operating earnings (2) | $ | 44,079 | 26,128 | 11,569 | |||||
(1) | Costs and expenses for the years ended November 30, 2014, 2013 and 2012 included loan impairments of $57.1 million, $16.1 million and $28.0 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). |
(2) | Operating earnings for the years ended November 30, 2014, 2013 and 2012 included ($22.5) million, $6.2 million and ($14.4) million, respectively, of net earnings (loss) attributable to noncontrolling interests. |
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The following is a detail of Rialto other income (expense), net:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Realized gains on REO sales, net | $ | 43,671 | 48,785 | 21,649 | |||||
Unrealized losses on transfer of loans receivable to REO and impairments, net | (26,107 | ) | (16,517 | ) | (11,160 | ) | |||
REO and other expenses | (58,067 | ) | (44,282 | ) | (56,745 | ) | |||
Rental and other income | 43,898 | 20,269 | 16,476 | ||||||
Gain on bargain purchase acquisition | — | 8,532 | — | ||||||
Rialto other income (expense), net | $ | 3,395 | 16,787 | (29,780 | ) | ||||
Loans Receivable
In February 2010, our Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC, which retained 60% equity interest in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when our Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, our equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60% / 40% with the FDIC. During the years ended November 30, 2014 and 2013, the LLCs distributed $184.9 million and $46.7 million, respectively, of which $110.9 million and $28.4 million, respectively, was distributed to the FDIC and $74.0 million and $18.3 million, respectively, was distributed to Rialto, the parent company.
The LLCs meet the accounting definition of VIEs and since we were determined to be the primary beneficiary, we consolidated the LLCs. We were determined to be the primary beneficiary because we have the power to direct the activities of the LLCs that most significantly impact the LLCs’ performance through Rialto's management and servicer contracts. At November 30, 2014, these consolidated LLCs had total combined assets and liabilities of $508.4 million and $21.5 million, respectively. At November 30, 2013, these consolidated LLCs had total combined assets and liabilities of $727.1 million and $20.2 million, respectively.
In September 2010, our Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. We paid $310.0 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions. As of November 30, 2014 and 2013, there was $60.6 million and $90.9 million outstanding, respectively.
Rialto Mortgage Finance
In 2013, RMF was formed and began originating and selling into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. This business has become a significant contributor to the Rialto segment's revenues.
During the year ended November 30, 2014, RMF had originated loans with a total principal balance of $1.6 billion and sold $1.3 billion of loans into eight separate securitizations. During the year ended November 30, 2013, RMF had originated loans with a principal balance of $690.3 million and sold $537.0 million of loans into three separate securitizations. As of November 30, 2014 and 2013, $147.2 million and $109.3 million, respectively, of these originated loans were sold into a securitization trust but not settled and thus were included as receivables, net on the Rialto segment's consolidated balance sheet.
Investments
Rialto is the sponsor of and an investor in private equity vehicles that invest in and manage real estate related assets. This includes:
• | Rialto Real Estate Fund, LP ("Fund I") that was formed in 2010 to invest in distressed real estate assets and other related investments to which investors have committed and contributed a total of $700 million of equity (including $75 million by us); |
• | Rialto Real Estate Fund II, LP ("Fund II") that was formed in 2012 to invest in distressed real estate assets and other related investments to which investors have committed $1.3 billion (including $100 million by us); and |
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• | Rialto Mezzanine Partners Fund (the "Mezzanine Fund") that was formed in 2013 with a target of raising $300 million in capital (including $27 million committed by us) to invest in performing mezzanine commercial loans that have expected durations of one to two years and are secured by equity interests in the borrowing entity owning the real estate assets. |
Rialto also earns fees for its role as a manager of these vehicles and for providing asset management and other services to those vehicles and other third parties.
Rialto's share of earnings from unconsolidated entities was as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Rialto Real Estate Fund, LP | $ | 30,612 | 19,391 | 21,026 | |||||
Rialto Real Estate Fund II, LP | 15,929 | 2,523 | — | ||||||
Rialto Mezzanine Partners Fund | 1,913 | 354 | — | ||||||
Other investments | 10,823 | 85 | 20,457 | ||||||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
In 2010, our Rialto segment invested in non-investment grade commercial mortgage-backed securities (“CMBS”) at a 55% discount to par value. The carrying value of the investment securities at November 30, 2014 and 2013 was $17.3 million and $16.1 million, respectively. Our Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
Lennar Multifamily Segment
We have been actively involved, primarily through unconsolidated entities, in the development of multifamily rental properties. Our Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
As of November 30, 2014 and 2013, our balance sheet had $268.0 million and $147.1 million, respectively, of assets related to our Lennar Multifamily segment, which includes investments in unconsolidated entities of $105.7 million and $46.3 million, respectively. Our net investment in the Lennar Multifamily segment as of November 30, 2014 and 2013 was $203.7 million and $105.6 million, respectively. During 2014, our Lennar Multifamily segment sold two operating properties through unconsolidated entities resulting in $14.7 million Lennar Multifamily's share of gains included in Lennar Multifamily equity in earnings (loss) from unconsolidated entities. Our Lennar Multifamily segment had 26 and 13, unconsolidated entities as of November 30, 2014 and 2013, respectively. As of November 30, 2014, our Lennar Multifamily segment had interests in 24 communities with development costs of approximately $1.5 billion, of which one community was completed and operating, three communities were partially completed and leasing, 19 communities were under construction and one was under development. Our Lennar Multifamily segment had a pipeline of future projects totaling $4.3 billion in assets across a number of states that will be developed by unconsolidated entities.
Financial Condition and Capital Resources
At November 30, 2014, we had cash and cash equivalents related to our homebuilding, financial services, Rialto and multifamily operations of $1.3 billion, compared to $970.5 million and $1.3 billion at November 30, 2013 and 2012, respectively.
We finance all of our activities including Homebuilding, financial services, Rialto, multifamily and general operating needs primarily with cash generated from our operations, debt issuances and equity offerings as well as cash borrowed under our warehouse lines of credit and our credit facility.
Operating Cash Flow Activities
During 2014, 2013 and 2012, cash used in operating activities totaled $788.5 million, $807.7 million and $424.6 million, respectively. During 2014, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases and land development costs, an increase in Lennar Financial Services loans held-for-sale due to increased home deliveries towards the end of 2014 compared to 2013 and an increase in receivables, partially offset by our net earnings and an increase in accounts payable and other liabilities.
During 2013, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases and an increase in Rialto loans held-for-sale related to RMF, partially offset by our increased revenues, an increase in accounts payable and other liabilities and a decrease in Lennar Financial Services loans held-for-sale.
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During 2012, cash used in operating activities was impacted by an increase in Lennar Financial Services loans held-for-sale due to increased home deliveries towards the end of 2012 and an increase in inventories due to strategic land purchases, partially offset by our net earnings (net of our deferred income tax benefit).
Investing Cash Flow Activities
During 2014, 2013 and 2012, cash provided by investing activities totaled $438.4 million, $689.2 million and $245.3 million, respectively. During 2014, we received $269.7 million of proceeds from the sales of REO, $143.5 million of distributions of capital from Lennar Homebuilding unconsolidated entities, $66.9 million of distributions of capital from Lennar Multifamily unconsolidated entities, $68.9 million of distributions of capital from Rialto unconsolidated entities comprised of $32.5 million distributed by Fund I, $9.0 million distributed by Fund II, $16.5 million distributed by Mezzanine Fund and $10.9 million distributed by other investments, $43.9 million of proceeds from the sale of a Lennar Homebuilding operating property and $51.9 million of proceeds from the sales of Lennar Homebuilding investments available-for-sale. This was partially offset by $87.5 million of cash contributions to Lennar Homebuilding unconsolidated entities primarily for working capital, $41.5 million of cash contributions to Rialto unconsolidated entities comprised of $7.6 million contributed to Fund II, $18.1 million contributed to the Mezzanine Fund and $15.8 million contributed to other investments, $30.8 million of cash contributions to Lennar Multifamily unconsolidated entities primarily for working capital and $21.3 million for purchases of Lennar Homebuilding investment available-for-sale.
During 2013, our cash provided by investing activities was primarily related to the receipt of $239.2 million of proceeds from the sale of REO and $66.8 million of principal payments on Rialto loans receivable. In addition, cash provided by investing activities increased due to $158.1 million of distributions of capital from Lennar Homebuilding unconsolidated entities, primarily related to a distribution from a new unconsolidated joint venture, $42.6 million of distributions of capital from Rialto unconsolidated entities, primarily related to Fund I, a $223.8 million decrease in Rialto's defeasance cash by two consolidated minority-owned LLCs to repay a loan from the FDIC, and $140.6 million of proceeds from the sale of a Lennar Homebuilding operating property. This was partially offset by $57.1 million of cash contributions to Lennar Homebuilding unconsolidated entities primarily for working capital and $67.0 million of cash contributions to Rialto unconsolidated entities comprised of $50.6 million contributed to Fund II and $16.4 million contributed to the Mezzanine Fund.
During 2012, our cash provided by investing activities was primarily related to the receipt of $183.9 million of proceeds from the sale of REO, $81.6 million of principal payments on Rialto loans receivable and $34.0 million of distributions of capital from Lennar Homebuilding unconsolidated entities. This was offset by $72.6 million of cash contributions to Lennar Homebuilding unconsolidated entities primarily for working capital and debt reduction, $43.6 million of cash contributions to Rialto unconsolidated entities and $51.1 million for Lennar Financial Services purchases of held-to-maturity investment securities that mature at various dates within one year.
We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness for cash or equity, the acquisition of homebuilders and other companies, the sale of our assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or pursuing other financing alternatives. In connection with some of our more recently formed businesses, such as Rialto and Multifamily, and our consolidated joint venture FivePoint Communities, we may also consider other types of transactions such as restructurings, joint ventures, spin-offs or initial public offerings. We are exploring opportunities to create a fund, which we would manage and in which we would make an investment, to provide funding for the rental communities we develop. If any of these transactions are implemented, they could materially impact the amount and composition of our indebtedness outstanding, increase our interest expense, dilute our existing stockholders and/or affect the book value of our assets. At November 30, 2014, we had no agreements or understandings regarding any significant transactions.
Financing Cash Flow Activities
During 2014, 2013 and 2012, our cash provided by (used in) financing activities totaled $661.4 million, ($221.8) million and $326.5 million, respectively. During 2014, our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the sale of $500 million aggregate principal amount of 4.500% senior notes due June 2019, proceeds related to the sale of $350 million aggregate principal amount of 4.50% senior notes due November 2019, proceeds related to the sale of $100 million aggregate principal amount of Rialto's 7.00% senior notes due 2018 (the "7.00% Senior Notes"), $94.4 million of proceeds related to the issuance of Rialto's structured note offering (the "Structured Notes") and net borrowings under our Lennar Financial Services' 364-day warehouse repurchase facilities and our Rialto's warehouse repurchase facilities. The cash provided by financing activities was partially offset by the $250.0 million redemption of our 5.50% senior notes due 2014, $299.7 million of principal payments on other borrowings and $155.6 million of payments related to noncontrolling interests.
During 2013, our cash used in financing activities was attributed to $471.3 million of principal payments of our Rialto notes payable, $83.8 million of net repayments under our Lennar Financial Services' 364-day warehouse repurchase facilities,
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$287.4 million of principal payments on other borrowings, the $63.8 million redemption of our 5.95% senior notes due 2013 and $201.7 million of payments related to buyouts of our partners' noncontrolling interests, primarily related to two of our consolidated joint ventures. This was partially offset by the receipt of proceeds related to the sale of $275 million aggregate principal amount of our 4.125% senior notes due 2018, the sale of an additional $225 million aggregate principal amount of our 4.750% senior notes due 2022 and the sale of $250 million aggregate principal amount of Rialto's 7.00% senior notes, $76.0 million of net borrowings under Rialto's warehouse repurchase facilities related to RMF and $92.6 million of proceeds from other borrowings.
During 2012, our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the sale of $400 million of 4.75% senior notes due 2017, $350 million of 4.750% senior notes due 2022 and the sale of an additional $50 million aggregate principal amount of our 3.25% convertible senior notes due 2021 that the initial purchasers acquired to cover over-allotments. This was partially offset by the partial redemption of our 5.95% senior notes due 2013, principal repayments on Rialto's notes payable and principal payments on other borrowings.
During 2013, we exercised certain land option contracts from a land investment venture to which we had sold land in 2007, reducing the liabilities reflected on our consolidated balance sheet related to consolidated inventory not owned by $28.9 million. Due to our continuing involvement, the 2007 transaction did not qualify as a sale under GAAP; thus, the inventory remained on our balance sheet in consolidated inventory not owned. In 2014, we entered into a new agreement with the joint venture, which required $155.0 million of inventory assets to remain consolidated due to the existence of option contracts on substantially all of the homesites and were reclassified into land and land under development. The remaining $70.3 million of inventory assets no longer under option by us were deconsolidated.
Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Lennar Homebuilding operations. Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital were calculated as follows:
November 30, | ||||||
(Dollars in thousands) | 2014 | 2013 | ||||
Lennar Homebuilding debt | $ | 4,690,213 | 4,194,432 | |||
Stockholders’ equity | 4,827,020 | 4,168,901 | ||||
Total capital | $ | 9,517,233 | 8,363,333 | |||
Lennar Homebuilding debt to total capital | 49.3 | % | 50.2 | % | ||
Lennar Homebuilding debt | $ | 4,690,213 | 4,194,432 | |||
Less: Lennar Homebuilding cash and cash equivalents | 885,729 | 695,424 | ||||
Net Lennar Homebuilding debt | $ | 3,804,484 | 3,499,008 | |||
Net Lennar Homebuilding debt to total capital (1) | 44.1 | % | 45.6 | % | ||
(1) | Net Lennar Homebuilding debt to total capital is a non-GAAP financial measure defined as net Lennar Homebuilding debt (Lennar Homebuilding debt less Lennar Homebuilding cash and cash equivalents) divided by total capital (net Lennar Homebuilding debt plus stockholders' equity). We believe the ratio of net Lennar Homebuilding debt to total capital is relevant and a useful financial measure to investors in understanding the leverage employed in our Lennar Homebuilding operations. However, because net Lennar Homebuilding debt to total capital is not calculated in accordance with GAAP, this financial measure should not be considered in isolation or as an alternative to financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement the our GAAP results. |
At November 30, 2014, Lennar Homebuilding debt to total capital was lower compared to the prior year period, primarily as a result of an increase in stockholder’s equity primarily related to our net earnings, partially offset by an increase in Lennar Homebuilding debt due to the issuance of senior notes.
In addition to the use of capital in our homebuilding, financial services, Rialto and multifamily operations, we actively evaluate various other uses of capital. This may include acquisitions of, or investments in, other entities, the payment of dividends or repurchases of our outstanding common stock or debt. These activities may be funded through any combination of our credit facility, warehouse lines of credit, cash generated from operations, sales of assets or the issuance into capital markets of debt, common stock or preferred stock.
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The following table summarizes our Lennar Homebuilding senior notes and other debts payable:
November 30, | ||||||
(Dollars in thousands) | 2014 | 2013 | ||||
5.60% senior notes due 2015 | $ | 500,272 | 500,527 | |||
6.50% senior notes due 2016 | 249,923 | 249,886 | ||||
12.25% senior notes due 2017 | 396,278 | 395,312 | ||||
4.75% senior notes due 2017 | 399,250 | 399,250 | ||||
6.95% senior notes due 2018 | 248,485 | 248,167 | ||||
4.125% senior notes due 2018 | 274,995 | 274,995 | ||||
4.500% senior notes due 2019 | 500,477 | — | ||||
4.50% senior notes due 2019 | 350,000 | — | ||||
2.75% convertible senior notes due 2020 | 431,042 | 416,041 | ||||
3.25% convertible senior notes due 2021 | 400,000 | 400,000 | ||||
4.750% senior notes due 2022 | 571,439 | 571,012 | ||||
5.50% senior notes due 2014 | — | 249,640 | ||||
Mortgages notes on land and other debt | 368,052 | 489,602 | ||||
$ | 4,690,213 | 4,194,432 | ||||
Our Lennar Homebuilding average debt outstanding was $4.7 billion with an average rate for interest incurred of 5.2% for the year ended November 30, 2014, compared to $4.4 billion with an average rate for interest incurred of 5.1% for the year ended November 30, 2013. Interest incurred related to Lennar Homebuilding debt for the year ended November 30, 2014 was $273.4 million, compared to $261.5 million in 2013. The majority of our short-term financing needs, including financings for land acquisition and development activities and general operating needs, are met with cash generated from operations, proceeds from debt, as well as borrowings under our unsecured revolving credit facility (the "Credit Facility").
The terms of each of our senior and convertible senior notes outstanding at November 30, 2014 were as follows:
Senior and Convertible Senior Notes Outstanding (1) | Principal Amount | Net Proceeds (2) | Price | Dates Issued | |||||||||
(Dollars in thousands) | |||||||||||||
5.60% senior notes due 2015 | $ | 500,000 | $ | 501,400 | (3) | April 2005, July 2005 | |||||||
6.50% senior notes due 2016 | 250,000 | 248,900 | 99.873 | % | April 2006 | ||||||||
12.25% senior notes due 2017 | 400,000 | 386,700 | 98.098 | % | April 2009 | ||||||||
4.75% senior notes due 2017 | 400,000 | 395,900 | 100 | % | July 2012, August 2012 | ||||||||
6.95% senior notes due 2018 | 250,000 | 243,900 | 98.929 | % | May 2010 | ||||||||
4.125% senior notes due 2018 (4) | 275,000 | 271,718 | 99.998 | % | February 2013 | ||||||||
4.500% senior notes due 2019 | 500,000 | 495,725 | (5) | February 2014 | |||||||||
4.50% senior notes due 2019 | 350,000 | 347,016 | 100 | % | November 2014 | ||||||||
2.75% convertible senior notes due 2020 | 446,000 | 436,400 | 100 | % | November 2010 | ||||||||
3.25% convertible senior notes due 2021 | 400,000 | 391,600 | 100 | % | November 2011, December 2011 | ||||||||
4.750% senior notes due 2022 (4) | 575,000 | 567,585 | (6) | October 2012, February 2013, April 2013 | |||||||||
(1) | Interest is payable semi-annually for each of the series of senior and convertible senior notes. The senior and convertible senior notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries. |
(2) | We generally use the net proceeds of the sales for working capital and general corporate purposes, which can include the repayment or repurchase of other outstanding senior notes. |
(3) | We issued $300 million aggregate principal amount at a price of 99.771% and $200 million aggregate principal amount at a price of 101.407%. |
(4) | During 2013, we incurred additional interest with respect to the 4.125% senior notes due 2018 and to the 4.750% senior notes due 2022 because the registration statements relating to the notes did not became effective by, and the exchange offers were not consummated by, the dates specified in the Registration Rights Agreement related to such notes. |
(5) | We issued $400 million aggregate principal amount at a price of 100% and $100 million aggregate principal amount at a price of 100.5%. |
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(6) | We issued $350 million aggregate principal amount at a price of 100%, $175 million aggregate principal amount at a price of 98.073% and $50 million aggregate principal amount at a price of 98.250%. |
In September 2014, we retired our $250 million 5.50% senior notes due September 2014 for 100% of the outstanding principal amount, plus accrued and unpaid interest as of the maturity date.
The 3.25% convertible senior notes due 2021 (the "3.25% Convertible Senior Notes") are convertible into shares of Class A common stock at any time prior to maturity or redemption at the initial conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of the 3.25% Convertible Senior Notes or 17,022,200 shares of Class A common stock if all the 3.25% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $23.50 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. Holders of the 3.25% Convertible Senior Notes have the right to require us to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest on November 15, 2016. We have the right to redeem the 3.25% Convertible Senior Notes at any time on or after November 20, 2016 for 100% of their principal amount, plus accrued but unpaid interest.
The 2.75% convertible senior notes due 2020 (the "2.75% Convertible Senior Notes") are convertible into cash, shares of Class A common stock or a combination of both, at our election. However, it is our intent to settle the face value of the 2.75% Convertible Senior Notes in cash. Holders may convert the 2.75% Convertible Senior Notes at the initial conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount or 20,150,012 shares of Class A common stock if all the 2.75% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $22.13 per share of Class A common stock, subject to anti-dilution adjustments. For the years ended November 30, 2014 and 2013, our volume weighted average stock price was $39.96 and $37.06, respectively, which exceeded the conversion price, thus 9.0 million shares and 8.2 million shares, respectively, were included in the calculation of diluted earnings per share.
Holders of the 2.75% Convertible Senior Notes have the right to convert them, during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day. Holders of the 2.75% Convertible Senior Notes have the right to require us to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on December 15, 2015. We have the right to redeem the 2.75% Convertible Senior Notes at any time on or after December 20, 2015 for 100% of their principal amount, plus accrued but unpaid interest.
For our 2.75% Convertible Senior Notes, we will be required to pay contingent interest with regard to any interest period beginning with the interest period commencing December 20, 2015 and ending June 14, 2016, and for each subsequent six-month period commencing on an interest payment date to, but excluding, the next interest payment date, if the average trading price of the 2.75% Convertible Senior Notes during the five consecutive trading days ending on the second trading day immediately preceding the first day of the applicable interest period exceeds 120% of the principal amount of the 2.75% Convertible Senior Notes. The amount of contingent interest payable per $1,000 principal amount of notes during the applicable interest period will equal 0.75% per year of the average trading price of such $1,000 principal amount of 2.75% Convertible Senior Notes during the five trading day reference period.
Certain provisions under Accounting Standards Codification (“ASC”) 470, Debt, require the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. We have applied these provisions to our 2.75% Convertible Senior Notes. At issuance, we estimated the fair value of the 2.75% Convertible Senior Notes using similar debt instruments that did not have a conversion feature and allocated the residual value to an equity component that represented the estimated fair value of the conversion feature at issuance. The debt discount of the 2.75% Convertible Senior Notes is being amortized over five years and the annual effective interest rate is 7.1% after giving effect to the amortization of the discount and deferred financing costs. At both November 30, 2014 and 2013, the principal amount of the 2.75% Convertible Senior Notes was $446.0 million. At November 30, 2014 and 2013, the carrying amount of the equity component included in stockholders’ equity was $15.0 million and $30.0 million, respectively, and the net carrying amount of the 2.75% Convertible Senior Notes included in Lennar Homebuilding senior notes and other debts payable was $431.0 million and $416.0 million, respectively. During the years ended November 30, 2014 and 2013, the amount of interest recognized relating to both the contractual interest and amortization of the discount was $27.3 million and $26.5 million, respectively.
Currently, substantially all of our 100% owned homebuilding subsidiaries are guaranteeing all our Senior Notes (the “Guaranteed Notes”). The guarantees are full and unconditional. The principal reason our 100% owned homebuilding subsidiaries are guaranteeing the Guaranteed Notes is so holders of the Guaranteed Notes will have rights at least as great with regard to our subsidiaries as any other holders of a material amount of our unsecured debt. Therefore, the guarantees of the Guaranteed Notes will remain in effect only while the guarantor subsidiaries guarantee a material amount of the debt of Lennar Corporation, as a separate entity, to others. At any time when a guarantor subsidiary is no longer guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes, either directly or by guaranteeing other subsidiaries’
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obligations as guarantors of Lennar Corporation’s debt, the guarantor subsidiary’s guarantee of the Guaranteed Notes will be suspended. Therefore, if the guarantor subsidiaries cease guaranteeing Lennar Corporation’s obligations under our Credit Facility and our letter of credit facilities and are not guarantors of any new debt, the guarantor subsidiaries’ guarantees of the Guaranteed Notes will be suspended until such time, if any, as they again are guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes.
If our guarantor subsidiaries are guaranteeing revolving credit lines totaling at least $75 million, we will treat the guarantees of the Guaranteed Notes as remaining in effect even during periods when Lennar Corporation’s borrowings under the revolving credit lines are less than $75 million. In addition, a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
At November 30, 2014, we had a $1.5 billion Credit Facility, which includes a $248 million accordion feature, subject to additional commitments, with certain financial institutions that matures in June 2018. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The Credit Facility agreement also provides that up to $500 million in commitments may be used for letters of credit. As of both November 30, 2014 and 2013, we had no outstanding borrowings under the Credit Facility. We may from time to time, borrow from and repay the Credit Facility. Consequently, the amount outstanding under the Credit Facility at the end of the period may not be reflective of the total amounts outstanding during the period. We believe that we were in compliance with our debt covenants at November 30, 2014. In addition, we had $125 million letter of credit facilities with a financial institution and a $140 million letter of credit facility with a different financial institution.
Our performance letters of credit outstanding were $234.1 million and $160.6 million at November 30, 2014 and 2013, respectively. Our financial letters of credit outstanding were $190.4 million and $212.8 million at November 30, 2014 and 2013, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral.
Under the amended Credit Facility agreement executed in June 2014 (the "Credit Agreement"), as of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately $1.5 billion plus the sum of 50% of the cumulative consolidated net income from February 29, 2012, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 29, 2012. We are required to maintain a leverage ratio that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar quarters. The leverage ratio will have a floor of 60%. If our interest coverage ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar quarters, the leverage ratio we will be required to maintain will be increased by 2.5% per quarter to a maximum of 65%. As of the end of each fiscal quarter, we are also required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio equal to or greater than 1.50:1.00 for the last twelve months then ended.
The following are computations of our compliance with the minimum net worth test, maximum leverage ratio, and liquidity test, as calculated per the Credit Agreement as of November 30, 2014:
(Dollars in thousands) | Covenant Level | Level Achieved as of November 30, 2014 | ||||
Minimum net worth test (1) | $ | 2,248,047 | 4,099,856 | |||
Maximum leverage ratio (2) | 65.0 | % | 44.2 | % | ||
Liquidity test (3) | 1.00 | 3.31 | ||||
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The terms of the minimum net worth test, maximum leverage ratio and liquidity test used in the Credit Agreement are specifically calculated per the Credit Agreement and differ in specified ways from comparable GAAP or common usage terms. Our minimum net worth test, maximum leverage ratio and liquidity test were calculated for purposes of the Credit Agreement as of November 30, 2014 as follows:
(1) | The minimum consolidated tangible net worth and the consolidated tangible net worth as calculated per the Credit Agreement were as follows: |
Minimum consolidated tangible net worth | |||
(In thousands) | As of November 30, 2014 | ||
Stated minimum consolidated tangible net worth per the Credit Agreement | $ | 1,459,657 | |
Plus: 50% of cumulative consolidated net income as calculated per the Credit Agreement, if positive | 788,390 | ||
Required minimum consolidated tangible net worth per the Credit Agreement | $ | 2,248,047 | |
Consolidated tangible net worth | |||
(In thousands) | As of November 30, 2014 | ||
Total equity | $ | 5,251,302 | |
Less: Intangible assets (a) | (51,246 | ) | |
Tangible net worth as calculated per the Credit Agreement | 5,200,056 | ||
Less: Consolidated equity of mortgage banking, Rialto and other designated subsidiaries (b) | (972,494 | ) | |
Less: Lennar Homebuilding and Lennar Multifamily noncontrolling interests | (127,706 | ) | |
Consolidated tangible net worth as calculated per the Credit Agreement | $ | 4,099,856 | |
(a)Intangible assets represent the Financial Services segment's title operations goodwill and title plant assets.
(b) | Consolidated equity of mortgage banking subsidiaries represents the equity of the Lennar Financial Services segment's mortgage banking operations. Consolidated equity of other designated subsidiaries represents the equity of certain subsidiaries included within the Lennar Financial Services segment's title operations that are prohibited from being guarantors under the Credit Agreement. The consolidated equity of Rialto, as calculated per the Credit Agreement, represents Rialto's total assets minus Rialto's total liabilities as disclosed in Note 8 of the notes to our consolidated financial statements as of November 30, 2014. The consolidated equity of mortgage banking subsidiaries, Rialto and other designated subsidiaries are included in equity in our consolidated balance sheet as of November 30, 2014. |
(2) | The leverage ratio as calculated per the Credit Agreement was as follows: |
Leverage ratio: | |||
(Dollars in thousands) | As of November 30, 2014 | ||
Lennar Homebuilding senior notes and other debts payable | $ | 4,690,213 | |
Less: Debt of Lennar Homebuilding consolidated entities (a) | (80,351 | ) | |
Funded debt as calculated per the Credit Agreement | 4,609,862 | ||
Plus: Financial letters of credit (b) | 190,491 | ||
Plus: Lennar's recourse exposure related to Lennar Homebuilding unconsolidated/consolidated entities, net (c) | 43,281 | ||
Consolidated indebtedness as calculated per the Credit Agreement | 4,843,634 | ||
Less: Unrestricted cash and cash equivalents in excess of required liquidity per the Credit Agreement (d) | (892,291 | ) | |
Numerator as calculated per the Credit Agreement | $ | 3,951,343 | |
Denominator as calculated per the Credit Agreement | $ | 8,943,490 | |
Leverage ratio (e) | 44.2 | % | |
(a) | Debt of our Lennar Homebuilding consolidated joint ventures is included in Lennar Homebuilding senior notes and other debts payable in our consolidated balance sheet as of November 30, 2014. |
(b) | As of November 30, 2014, our financial letters of credit outstanding include $190.4 million disclosed in Note 6 of the notes to our consolidated financial statements and $0.1 million of financial letters of credit related to the Financial Services segment's title operations. |
(c) | Lennar's recourse exposure related to the Lennar Homebuilding unconsolidated and consolidated entities, net includes $24.5 million of net recourse exposure related to Lennar Homebuilding unconsolidated entities and $18.8 million of recourse exposure related to Lennar Homebuilding consolidated entities, which is included in Lennar Homebuilding senior notes and other debts payable in our consolidated balance sheet as of November 30, 2014. |
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(d) | As of November 30, 2014, unrestricted cash and cash equivalents include $885.7 million of Lennar Homebuilding cash and cash equivalents, $2.2 million of Lennar Multifamily cash and cash equivalents and $14.4 million of Lennar Financial Services cash and cash equivalents, excluding cash and cash equivalents from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services segment. |
(e) | Leverage ratio consists of the numerator as calculated per the Credit Agreement divided by the denominator as calculated per the Credit Agreement (consolidated indebtedness as calculated per the Credit Agreement, plus consolidated tangible net worth as calculated per the Credit Agreement). |
(3) | Liquidity as calculated per the Credit Agreement was as follows: |
Liquidity test | |||
(Dollars in thousands) | As of November 30, 2014 | ||
Unrestricted cash and cash equivalents as calculated per the Credit Agreement (a) | $ | 890,545 | |
Consolidated interest incurred as calculated per the Credit Agreement (b) | $ | 269,131 | |
Liquidity (c) | 3.31 | ||
(a) | Unrestricted cash and cash and cash equivalents at November 30, 2014 for the liquidity test calculation includes $885.7 million of Lennar Homebuilding cash and cash equivalents, plus $2.2 million of Lennar Multifamily cash and cash equivalents, plus $14.4 million of Lennar Financial Services cash and cash equivalents, excluding cash and cash equivalents from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services segment, minus $11.7 million of cash and cash equivalents of Lennar Homebuilding and Multifamily consolidated joint ventures. |
(b) | Consolidated interest incurred as calculated per the Credit Agreement for the twelve months ended November 30, 2014 includes Lennar Homebuilding interest incurred of $273.4 million, plus Lennar Financial Services interest incurred, excluding interest incurred from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services operations, minus (1) interest incurred related to our partner's share of Lennar Homebuilding consolidated joint ventures included within Lennar Homebuilding interest incurred, (2) Lennar Homebuilding interest income included within Lennar Homebuilding other income, net, and (3) Lennar Financial Services interest income, excluding interest income from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services operations. |
(c) | We are only required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended. Although we are in compliance with our debt covenants for both calculations, we have only disclosed the detailed calculation of our liquidity test. |
Our Financial Services segment's warehouse facilities at November 30, 2014, were as follows:
(In thousands) | Maximum Aggregate Commitment | ||
364-day warehouse repurchase facility that matures December 2014 (1) | $ | 325,000 | |
364-day warehouse repurchase facility that matures January 2015 (2) | 300,000 | ||
364-day warehouse repurchase facility that matures February 2015 | 150,000 | ||
364-day warehouse repurchase facility that matures June 2015 (3) | 150,000 | ||
Total | $ | 925,000 | |
(1) | In December 2014, our Lennar Financial Services segment amended its 364-day warehouse repurchase facility that matured in December 2014 increasing the maximum aggregate commitment from $325 million to $350 million through the second quarter of fiscal 2015 and to $450 million for the third and fourth quarter of fiscal 2015. The maturity date was extended to December 2015. |
(2) | Maximum aggregate commitment includes a $100 million accordion feature that is usable 10 days prior to fiscal quarter-end through 20 days after fiscal quarter-end. |
(3) | Maximum aggregate commitment includes a $50 million accordion feature that is available beginning on the tenth (10th) calendar day immediately preceding the first day of a fiscal quarter through 20 days after fiscal quarter-end. |
Our Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $698.4 million and $374.2 million, at November 30, 2014 and 2013, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $732.1 million and $452.5 million, at November 30, 2014 and 2013, respectively. The combined effective interest rate on the facilities at November 30, 2014 was 2.5%. Without the facilities, our Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities. Since our Lennar Financial Services segment’s borrowings under the warehouse repurchase facilities are generally repaid with the proceeds from the sale of mortgage loans and receivables on loans that secure those borrowings, the facilities are not likely to be a call on our current cash or future cash resources. If the facilities are not renewed or replaced, the
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borrowings under the lines of credit will be paid off by selling mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid.
As of November 30, 2014 and 2013, RMF had two warehouse repurchase financing agreements that mature in fiscal year 2015 with commitments totaling $650 million and $500 million, respectively, to help finance the loans it makes. Rialto uses these warehouse repurchase financing agreements to finance five, seven and ten year commercial first mortgage loans that are originated by RMF, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. Borrowings under these facilities were $141.3 million and $76.0 million as of November 30, 2014 and 2013, respectively.
In November 2013, our Rialto segment issued $250 million aggregate principal amount of the 7.00% Senior Notes, at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were approximately $245 million. Rialto used a majority of the net proceeds of the sale of the 7.00% Senior Notes as working capital for RMF and used $100 million to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes at a price of 102.25% of their face value in a private placement. Proceeds from the offering, after payment of expenses, were approximately $102 million. Rialto used the net proceeds of the offering to provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. Interest on the 7.00% Senior Notes is due semi-annually. At November 30, 2014 and 2013, the carrying amount of the 7.00% Senior Notes was $351.9 million and $250.0 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to, or enter into transactions with, Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. We believe Rialto was in compliance with its debt covenants at November 30, 2014.
In May 2014, Rialto issued $73.8 million principal amount of the Structured Notes collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserve, were $69.1 million. In November 2014, Rialto issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is December 15, 2015. As of November 30, 2014, there was $58.0 million outstanding related to the Structured Notes.
Changes in Capital Structure
We have a stock repurchase program adopted in 2006, which originally authorized us to purchase up to 20 million shares of our outstanding common stock. During the years ended November 30, 2014, 2013 and 2012, there were no share repurchases of common stock under the stock repurchase program. As of November 30, 2014, the remaining authorized shares that can be purchased under the stock repurchase program were 6.2 million shares of common stock.
During the year ended November 30, 2014, treasury stock decreased by 11.6 million shares of Class A common stock primarily due to the retirement of 11.7 million shares of Class A common stock authorized by our Board of Directors, partially offset by activity related to our equity compensation plan. During the year ended November 30, 2013, treasury stock decreased by 0.4 million shares of Class A common stock due to activity related to our equity compensation plan.
During the years ended November 30, 2014, 2013 and 2012, our Class A and Class B common stockholders received a per share annual dividend of $0.16.
Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.
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Off-Balance Sheet Arrangements
Lennar Homebuilding - Investments in Unconsolidated Entities
At November 30, 2014, we had equity investments in 35 homebuilding and land unconsolidated entities (of which 5 had recourse debt, 6 had non-recourse debt and 24 had no debt), compared to 36 homebuilding and land unconsolidated entities at November 30, 2013. Historically, we invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, enabled us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners.
Although the strategic purposes of our joint ventures and the nature of our joint ventures partners vary, the joint ventures are generally designed to acquire, develop and/or sell specific assets during a limited life-time. The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint venture. In many cases, our risk is limited to our equity contribution and potential future capital contributions. Additionally, most joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of their communities. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, capital calls relating to the repayment of joint venture debt under payment or maintenance guarantees generally is required.
Under the terms of our joint venture agreements, we generally have the right to share in earnings and distributions of the entities on a pro-rata basis based on our ownership percentage. Some joint venture agreements provide for a different allocation of profit and cash distributions if and when the cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). Lennar Homebuilding equity in earnings (loss) from unconsolidated entities excludes our pro-rata share of joint ventures’ earnings resulting from land sales to our homebuilding divisions. Instead, we account for those earnings as a reduction of our costs of purchasing the land from the joint ventures. This in effect defers recognition of our share of the joint ventures’ earnings related to these sales until we deliver a home and title passes to a third-party homebuyer.
In many instances, we are designated as the manager of a venture under the direction of a management committee that has shared power amongst the partners of the unconsolidated entity and we receive fees for such services. In addition, we often enter into option and purchase contracts to acquire properties from our joint ventures, generally for market prices at specified dates in the future. Option contracts generally require us to make deposits using cash or irrevocable letters of credit toward the exercise price. These option deposits are generally negotiated on a case by case basis.
We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. Joint ventures in which we have investments may be subject to a variety of financial and non-financial debt covenants related primarily to equity maintenance, fair value of collateral and minimum homesite takedown or sale requirements. We monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment.
Our arrangements with joint ventures generally do not restrict our activities or those of the other participants. However, in certain instances, we agree not to engage in some types of activities that may be viewed as competitive with the activities of these ventures in the localities where the joint ventures do business.
As discussed above, the joint ventures in which we invest generally supplement equity contributions with third-party debt to finance their activities. In some instances, the debt financing is non-recourse, thus neither we nor the other equity partners are a party to the debt instruments. In other cases, we and the other partners agree to provide credit support in the form of repayment or maintenance guarantees.
Material contractual obligations of our unconsolidated joint ventures primarily relate to the debt obligations described above. The joint ventures generally do not enter into lease commitments because the entities are managed either by us, or another of the joint venture participants, who supply the necessary facilities and employee services in exchange for market-based management fees. However, they do enter into management contracts with the participants who manage them. Some joint
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ventures also enter into agreements with developers, which may be us or other joint venture participants, to develop raw land into finished homesites or to build homes.
The joint ventures often enter into option or purchase agreements with buyers, which may include us or other joint venture participants, to deliver homesites or parcels in the future at market prices. Option deposits are recorded by the joint ventures as liabilities until the exercise dates at which time the deposit and remaining exercise proceeds are recorded as revenue. Any forfeited deposit is recognized as revenue at the time of forfeiture. Our unconsolidated joint ventures generally do not enter into off-balance sheet arrangements.
As described above, the liquidity needs of joint ventures in which we have investments vary on an entity-by-entity basis depending on each entity’s purpose and the stage in its life cycle. During formation and development activities, the entities generally require cash, which is provided through a combination of equity contributions and debt financing, to fund acquisition and development of properties. As the properties are completed and sold, cash generated is available to repay debt and for distribution to the joint venture’s members. Thus, the amount of cash available for a joint venture to distribute at any given time is primarily a function of the scope of the joint venture’s activities and the stage in the joint venture’s life cycle.
We track our share of cumulative earnings and cumulative distributions of our joint ventures. For purposes of classifying distributions received from joint ventures in our statements of cash flows, cumulative distributions are treated as returns on capital to the extent of cumulative earnings and included in our consolidated statements of cash flows as cash flow from operating activities. Cumulative distributions in excess of our share of cumulative earnings are treated as returns of capital and included in our consolidated statements of cash flows as cash flows from investing activities.
Summarized financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statement of Operations and Selected Information | |||||||||
Years Ended November 30, | |||||||||
(Dollars in thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 263,395 | 570,910 | 353,902 | |||||
Costs and expenses | 291,993 | 425,282 | 418,905 | ||||||
Other income | — | 14,602 | 10,515 | ||||||
Net earnings (loss) of unconsolidated entities | $ | (28,598 | ) | 160,230 | (54,488 | ) | |||
Our share of net earnings (loss) | $ | (1,323 | ) | 32,815 | (27,206 | ) | |||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1) | $ | (355 | ) | 23,803 | (26,672 | ) | |||
Our cumulative share of net earnings - deferred at November 30 | $ | 6,593 | 13,191 | 1,621 | |||||
Our investments in unconsolidated entities | $ | 656,837 | 716,949 | 562,234 | |||||
Equity of the unconsolidated entities | $ | 2,278,941 | 2,513,329 | 2,111,173 | |||||
Our investment % in the unconsolidated entities | 29 | % | 29 | % | 27 | % | |||
(1) | For the year ended November 30, 2014, Lennar Homebuilding equity in loss from unconsolidated entities related primarily to our share of operating losses of our Lennar Homebuilding unconsolidated entities, which included $4.6 million of valuation adjustments related to assets of Lennar Homebuilding's unconsolidated entities, partially offset by $4.7 million of equity in earnings as a result of third-party land sales by one unconsolidated entity. For the year ended November 30, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $19.8 million of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity. For the year ended November 30, 2012, Lennar Homebuilding equity in loss included $12.1 million of valuation adjustments primarily related to strategic asset sales at Lennar Homebuilding's unconsolidated entities. |
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Balance Sheets | ||||||
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 243,597 | 184,521 | |||
Inventories | 2,889,267 | 2,904,795 | ||||
Other assets | 155,470 | 147,410 | ||||
$ | 3,288,334 | 3,236,726 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 271,638 | 272,940 | |||
Debt | 737,755 | 450,457 | ||||
Equity | 2,278,941 | 2,513,329 | ||||
$ | 3,288,334 | 3,236,726 | ||||
As of November 30, 2014 and 2013, our recorded investments in Lennar Homebuilding unconsolidated entities were $656.8 million and $716.9 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of November 30, 2014 and 2013 was $722.6 million and $829.5 million, respectively. The basis difference is primarily as a result of us buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.
In fiscal 2007, we sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which we have a 20% ownership interest and 50% voting rights. Due to the nature of our continuing involvement, the transaction did not qualify as a sale under GAAP; thus, the inventory remained on our consolidated balance sheet in consolidated inventory not owned. As of November 30, 2013, the portfolio of land (including land development costs) of $241.8 million was also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities above. In 2014, we entered into a new agreement with the joint venture, which required $155.0 million of inventory assets to remain consolidated due to the existence of option contracts on substantially all of the homesites and were reclassified into land and land under development. The remaining $70.3 million of inventory assets no longer under option by us were deconsolidated.
The Lennar Homebuilding unconsolidated entities in which we have investments usually finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities.
Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:
November 30, | ||||||
(Dollars in thousands) | 2014 | 2013 | ||||
Debt | $ | 737,755 | 450,457 | |||
Equity | 2,278,941 | 2,513,329 | ||||
Total capital | $ | 3,016,696 | 2,963,786 | |||
Debt to total capital of our unconsolidated entities | 24.5 | % | 15.2 | % | ||
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Land development | $ | 535,960 | 537,548 | |||
Homebuilding | 120,877 | 179,401 | ||||
Total investments | $ | 656,837 | 716,949 | |||
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Indebtedness of an unconsolidated entity is secured by its own assets. Some unconsolidated entities own multiple properties and other assets. There is no cross collateralization of debt of different unconsolidated entities. We also do not use our investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among Lennar Homebuilding unconsolidated entities.
In connection with loans to a Lennar Homebuilding unconsolidated entity, we and our partners often guarantee to a lender, either jointly and severally or on a several basis, any or all of the following: (i) the completion of the development, in whole or in part, (ii) indemnification of the lender from environmental issues, (iii) indemnification of the lender from “bad boy acts” of the unconsolidated entity (or full recourse liability in the event of an unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan to cost will not exceed a certain percentage (maintenance or remargining guarantee) or that a percentage of the outstanding loan will be repaid (repayment guarantee).
In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we sometimes have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the joint and several guarantee.
The total debt of Lennar Homebuilding unconsolidated entities in which we have investments, including Lennar's maximum recourse exposure, were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Lennar’s net recourse exposure | $ | 24,481 | 27,496 | |||
Reimbursement agreements from partners | — | 13,500 | ||||
Lennar’s maximum recourse exposure | $ | 24,481 | 40,996 | |||
Non-recourse bank debt and other debt (partner’s share of several recourse) | $ | 56,573 | 61,008 | |||
Non-recourse land seller debt or other debt | 4,022 | 20,454 | ||||
Non-recourse debt with completion guarantees | 442,854 | 245,821 | ||||
Non-recourse debt without completion guarantees | 209,825 | 82,178 | ||||
Non-recourse debt to Lennar | 713,274 | 409,461 | ||||
Total debt | $ | 737,755 | 450,457 | |||
Lennar’s maximum recourse exposure as a % of total JV debt | 3 | % | 9 | % | ||
During the year ended November 30, 2014, our maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $16.5 million, as a result of $1.5 million paid by us primarily through capital contributions to unconsolidated entities and $15.0 million primarily related to the joint ventures selling assets.
The recourse debt exposure in the previous table represents our maximum exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay debt or to reimburse us for any payments on our guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of the Lennar Homebuilding unconsolidated entities with recourse debt were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets | $ | 1,669,285 | 1,656,065 | |||
Liabilities | $ | 557,261 | 470,975 | |||
Equity | $ | 1,112,024 | 1,185,090 | |||
In addition, in most instances in which we have guaranteed debt of a Lennar Homebuilding unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. Historically, we have had repayment guarantees and maintenance guarantees. In a repayment guarantee, we and our venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if our venture partner does not have adequate financial resources to meet its obligation under our reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum recourse exposure, which is the full amount covered by the joint and several guarantee. As of both November 30, 2014 and 2013, we did not have any maintenance guarantees related to our Lennar Homebuilding unconsolidated entities. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance.
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In connection with many of the loans to Lennar Homebuilding unconsolidated entities, we and our joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
If we are required to make a payment under any guarantee, the payment would generally constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes.
As of November 30, 2014, the fair values of the repayment guarantees and completion guarantees were not material. We believe that as of November 30, 2014, in the event we become legally obligated to perform under a guarantee of an obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or we and our partners would contribute additional capital into the venture. In certain instances, we placed performance letters of credit and surety bonds with municipalities for our joint ventures (see Note 6 of the notes to our consolidated financial statements).
In view of recent credit market conditions, it is not uncommon for lenders to real estate developers, including joint ventures in which we have interests, to assert non-monetary defaults (such as failure to meet construction completion deadlines or declines in the market value of collateral below required amounts) or technical monetary defaults against the real estate developers. In most instances, those asserted defaults are resolved by modifications of the loan terms, additional equity investments or other concessions by the borrowers. In addition, in some instances, real estate developers, including joint ventures in which we have interests, are forced to request temporary waivers of covenants in loan documents or modifications of loan terms, which are often, but not always obtained. However, in some instances developers, including joint ventures in which we have interests, are not able to meet their monetary obligations to lenders, and are thus declared in default. Because we sometimes guarantee all or portions of the obligations to lenders of joint ventures in which we have interests, when these joint ventures default on their obligations, lenders may or may not have claims against us. Normally, we do not make payments with regard to guarantees of joint venture obligations while the joint ventures are contesting assertions regarding sums due to their lenders. When it is determined that a joint venture is obligated to make a payment that we have guaranteed and the joint venture will not be able to make that payment, we accrue the amounts probable to be paid by us as a liability. Although we generally fulfill our guarantee obligations within a reasonable time after we determine that we are obligated with regard to them, at any point in time it is likely that we will have some balance of unpaid guarantee liability. At both November 30, 2014 and 2013, we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our consolidated balance sheets.
The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities (“JVs”) debt as per current debt arrangements as of November 30, 2014 and does not necessarily reflect estimates of future cash payments that will be made to reduce debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.
Principal Maturities of Unconsolidated JVs by Period | |||||||||||||||||||
(In thousands) | Total JV Debt | 2015 | 2016 | 2017 | Thereafter | Other Debt (1) | |||||||||||||
Maximum recourse debt exposure to Lennar | $ | 24,481 | 1,320 | 1,629 | 10,276 | 11,256 | — | ||||||||||||
Debt without recourse to Lennar | 713,274 | 11,853 | 112,585 | 41,655 | 542,890 | 4,291 | |||||||||||||
Total | $ | 737,755 | 13,173 | 114,214 | 51,931 | 554,146 | 4,291 | ||||||||||||
(1) | Represents land seller debt and other debt |
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The table below indicates the assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of November 30, 2014:
(Dollars in thousands) | Lennar’s Investment | Total JV Assets | Maximum Recourse Debt Exposure to Lennar | Total Debt Without Recourse to Lennar | Total JV Debt | Total JV Equity | JV Debt to Total Capital Ratio | ||||||||||||||
Top Ten JVs (1): | |||||||||||||||||||||
Heritage Fields El Toro | $ | 182,252 | 1,503,865 | 11,256 | 386,608 | 397,864 | 1,004,910 | 28 | % | ||||||||||||
Central Park West Holdings | 60,683 | 57,649 | — | — | — | 52,969 | — | ||||||||||||||
Newhall Land Development | 60,657 | 467,417 | — | 340 | 340 | 353,187 | — | ||||||||||||||
Runkle Canyon | 56,152 | 113,653 | — | — | — | 112,304 | — | ||||||||||||||
Shipyard Communities (Hunters Point) | 48,618 | 399,528 | — | 221,071 | 221,071 | 150,242 | 60 | % | |||||||||||||
Ballpark Village | 42,381 | 140,983 | — | 47,000 | 47,000 | 92,972 | 34 | % | |||||||||||||
Treasure Island Community Development | 28,690 | 63,174 | — | — | — | 57,411 | — | ||||||||||||||
MS Rialto Residential Holdings | 23,208 | 88,157 | — | — | — | 82,581 | — | ||||||||||||||
Krome Grove Land Trust | 21,326 | 90,622 | 9,276 | 19,761 | 29,037 | 58,759 | 33 | % | |||||||||||||
Willow Springs Properties | 18,960 | 34,098 | — | — | — | 32,187 | — | ||||||||||||||
10 largest JV investments | 542,927 | 2,959,146 | 20,532 | 674,780 | 695,312 | 1,997,522 | 26 | % | |||||||||||||
Other JVs | 113,910 | 329,188 | 3,949 | 34,203 | 38,152 | 281,419 | 12 | % | |||||||||||||
Total | $ | 656,837 | 3,288,334 | 24,481 | 708,983 | 733,464 | 2,278,941 | 24 | % | ||||||||||||
Land seller debt and other debt | — | 4,291 | 4,291 | ||||||||||||||||||
Total JV debt | 24,481 | 713,274 | 737,755 | ||||||||||||||||||
(1) | All of the joint ventures presented in the table above operate in our Homebuilding West segment except for Krome Groves Land Trust, which operates in our Homebuilding Southeast Florida segment and Willow Springs Properties, which operates in our Homebuilding Central segment. |
The table below indicates the percentage of assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of November 30, 2014:
% of Total JV Assets | % of Maximum Recourse Debt Exposure to to Lennar | % of Total Debt Without Recourse to Lennar | % of Total JV Equity | ||||||||
10 largest JVs | 90 | % | 84 | % | 95 | % | 88 | % | |||
Other JVs | 10 | % | 16 | % | 5 | % | 12 | % | |||
Total | 100 | % | 100 | % | 100 | % | 100 | % | |||
Rialto - Investments in Unconsolidated Entities
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
November 30, 2014 | November 30, 2014 | November 30, 2013 | ||||||||||||||||||||||
(Dollars in thousands) | Inception Year | Equity Commitments | Equity Commitments Called | Commitment to fund by the Company | Funds contributed by the Company | Investment | ||||||||||||||||||
Rialto Real Estate Fund, LP | 2010 | $ | 700,006 | $ | 700,006 | $ | 75,000 | $ | 75,000 | $ | 71,831 | 75,729 | ||||||||||||
Rialto Real Estate Fund II, LP | 2012 | 1,305,000 | 760,058 | 100,000 | 58,242 | 67,652 | 53,103 | |||||||||||||||||
Rialto Mezzanine Partners Fund | 2013 | 251,100 | 188,600 | 27,299 | 20,504 | 20,226 | 16,724 | |||||||||||||||||
Other investments | 15,991 | 9,017 | ||||||||||||||||||||||
$ | 175,700 | 154,573 | ||||||||||||||||||||||
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Rialto's share of earnings from unconsolidated entities was as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Rialto Real Estate Fund, LP | $ | 30,612 | 19,391 | 21,026 | |||||
Rialto Real Estate Fund II, LP | 15,929 | 2,523 | — | ||||||
Rialto Mezzanine Partners Fund | 1,913 | 354 | — | ||||||
Other investments | 10,823 | 85 | 20,457 | ||||||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
As manager of Fund I, we are entitled to receive additional revenue through a carried interest if Fund I meets certain performance thresholds. If Fund I had ceased operations and liquidated all its investments at their estimated fair values on November 30, 2014, we would have received $110.0 million with regard to our carried interest. However, Fund I did not cease operations and liquidate its investments on November 30, 2014, and therefore the ultimate sum we will receive with regard to our carried interest in Fund I may be substantially higher or lower than $110.0 million. During the year ended November 30, 2014, Rialto received a $34.7 million advanced tax distribution with regard to its carried interest in order to cover the income tax obligation, which resulted from allocations of taxable income to Rialto's general partner interest.
In addition to the acquisition and management of the FDIC and Bank portfolios, an affiliate in the Rialto segment was a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor received management fees for sub-advisory services. At the end of 2012, the AB PPIP fund finalized the last sales of the underlying securities in the fund and made substantially all of the final liquidating distributions to the partners, including us. As our role as sub-advisor to the AB PPIP fund has been completed, no further management fees will be received for these services. During the year ended November 30, 2012, we contributed $1.9 million and received distributions of $87.6 million. Of the distributions received during the year ended November 30, 2012, $83.5 million related to the unwinding of the AB PPIP fund's operations. During the year ended November 30, 2013, we also earned $9.1 million in fees from the segment's role as a sub-advisor to the AB PPIP fund, which were included in Rialto revenues.
Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheet
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 141,609 | 332,968 | |||
Loans receivable | 512,034 | 523,249 | ||||
Real estate owned | 378,702 | 285,565 | ||||
Investment securities | 795,306 | 381,555 | ||||
Investments in partnerships | 311,037 | 149,350 | ||||
Other assets | 45,451 | 191,624 | ||||
$ | 2,184,139 | 1,864,311 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 20,573 | 108,514 | |||
Notes payable | 395,654 | 398,445 | ||||
Partner loans | — | 163,940 | ||||
Equity | 1,767,912 | 1,193,412 | ||||
$ | 2,184,139 | 1,864,311 | ||||
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Statements of Operations
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 150,452 | 251,533 | 414,027 | |||||
Costs and expenses | 95,629 | 252,563 | 243,483 | ||||||
Other income, net (1) | 479,929 | 187,446 | 713,710 | ||||||
Net earnings of unconsolidated entities | $ | 534,752 | 186,416 | 884,254 | |||||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
(1) | Other income, net for the year ended November 30, 2014 included Fund I, Fund II, Mezzanine Fund and other investments realized and unrealized gains on investments as well as other income from REO. Other income, net for the year ended November 30, 2013 included Fund I, Fund II and other investments realized and unrealized gains on investments as well as other income from REO. Other income, net for the year ended November 30, 2012 included the AB PPIP Fund’s mark-to-market unrealized gains and losses, and realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, all of which the Company's portion was a small percentage. |
In 2010, the Rialto segment invested in non-investment grade CMBS at a 55% discount to par value. The carrying value of the investment securities at November 30, 2014 and 2013 was $17.3 million and $16.1 million, respectively. These securities bear interest at a coupon rate of 4% and have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In January 2014, the Rialto segment acquired 100% of the loan servicing business segment of a financial services company (the “Servicer Provider”) in which a subsidiary of Rialto had an approximately 5% investment, in exchange for its investment interest. The Servicer Provider has a business segment that provides service and infrastructure to the residential home loan market, which provides loan servicing support for all of Rialto's owned and managed portfolios and asset management services for Rialto's small balance loan program. At acquisition date, the fair value of the assets acquired was $20.8 million, the goodwill recorded was $5.1 million and the fair value of the liabilities assumed was $17.6 million. As of November 30, 2013, the carrying value of the investment in the Servicer Provider was $8.3 million.
Lennar Multifamily - Investments in Unconsolidated Entities
At November 30, 2014 and 2013, we had equity investments in 26 and 13 unconsolidated entities, respectively, (all of which had non-recourse debt). We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners’ capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners.
The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint venture except for cost overruns relating to the construction of the project. In all cases, we have been required to provide guarantees of completion and cost over-runs to the lenders and partners. These completion guarantees may require us to complete the improvements for which the financing was obtained. Therefore, our risk is limited to our equity contribution, draws on letters of credit and potential future payments under the guarantees of completion and cost over-runs. In certain instances, payments made under the cost over-run guarantee is considered a capital contribution.
Additionally, the joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of the rental projects. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, the joint venture debt does not have payment or maintenance guarantees. Neither we nor the other equity partners are a party to the debt instruments. In some cases, we agree to provide credit support in the form of a letter of credit provided to the bank.
We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. All of the joint ventures were in compliance with their debt covenants at November 30, 2014.
Under the terms of our joint venture agreements, we generally have the right to share in earnings and distributions of the entities on a pro-rata basis based on our ownership percentages. Most joint venture agreements provide for a different
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allocation of profit and cash distributions if and when the cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return).
In many instances, we are designated as the development manager and/or the general contractor of the unconsolidated entity and receive fees for such services. In addition, we do not plan to enter into option and purchase contracts to acquire properties from our joint ventures.
Our arrangements with joint ventures generally do not restrict our activities or those of the other participants. However, in certain instances, we agree not to engage in some types of activities that may be viewed as competitive with the activities of these ventures in the localities where the joint ventures do business.
Material contractual obligations of our unconsolidated joint ventures primarily relate to the debt obligations described above. The joint ventures generally do not enter into lease commitments because the entities are managed either by us or the other partners, who supply the necessary facilities and employee services in exchange for market-based management fees. However, they do enter into management contracts with the participants who manage them.
As described above, the liquidity needs of joint ventures in which we have investments vary on an entity-by-entity basis depending on each entity’s purpose and the stage in its life cycle. During formation and development activities, the entities generally require cash, which is provided through a combination of equity contributions and debt financing, to fund acquisition, development and construction of multifamily rental properties. As the properties are completed and sold, cash generated will be available to repay debt and for distribution to the joint venture’s members. Thus, the amount of cash available for a joint venture to distribute at any given time is primarily a function of the scope of the joint venture’s activities and the stage in the joint venture’s life cycle.
We track our share of cumulative earnings and cumulative distributions of our joint ventures. For purposes of classifying distributions received from joint ventures in our statements of cash flows, cumulative distributions are treated as returns on capital to the extent of cumulative earnings and included in our consolidated statements of cash flows as cash flows from operating activities. Cumulative distributions in excess of our share of cumulative earnings are treated as returns of capital and included in our consolidated statements of cash flows as cash flows from investing activities.
Summarized financial information on a combined 100% basis related to Lennar Multifamily’s unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheet
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 25,319 | 5,800 | |||
Operating properties and equipment | 637,259 | 236,528 | ||||
Other assets | 14,742 | 3,460 | ||||
$ | 677,320 | 245,788 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 87,151 | 11,147 | |||
Notes payable | 163,376 | 51,604 | ||||
Equity | 426,793 | 183,037 | ||||
$ | 677,320 | 245,788 | ||||
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Statements of Operations and Selected Information
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 4,855 | — | — | |||||
Costs and expenses | 7,435 | 1,493 | 29 | ||||||
Other income, net (1) | 35,068 | — | — | ||||||
Net earnings (loss) of unconsolidated entities | $ | 32,488 | (1,493 | ) | (29 | ) | |||
Lennar Multifamily equity in earnings (loss) from unconsolidated entities (2) | $ | 14,454 | (271 | ) | (4 | ) | |||
Our investments in unconsolidated entities | $ | 105,674 | 46,301 | 3,126 | |||||
Equity of the unconsolidated entities | $ | 426,793 | 183,037 | 18,872 | |||||
Our investment % in the unconsolidated entities | 25 | % | 25 | % | 17 | % | |||
(1) | Other income, net, included the gains related to the sale of two operating properties during the year ended November 30, 2014. |
(2) | For the year ended November 30, 2014, Lennar Multifamily equity in earnings from unconsolidated entities included Lennar Multifamily's share of gains totaling $14.7 million related to the sale of two operating properties by unconsolidated entities. Our share of profits and cash distributions from the sales of the two operating properties was higher compared to our ownership interests in the two unconsolidated entities due to the achievement of specified internal rate of return milestones. |
Option Contracts
We have access to land through option contracts, which generally enables us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the option.
A majority of our option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. Until recently, these option deposits generally have approximated 10% of the exercise price. Sometimes, we are required to undertake property development during the option period, which increases the amounts we lose if we do no exercise particular options. Our option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on fair value at the time of takedown. The exercise periods of our option contracts generally range from one to ten years.
Our investments in option contracts are recorded at cost unless those investments are determined to be impaired, in which case our investments are written down to fair value. We review option contracts for indicators of impairment during each reporting period. The most significant indicator of impairment is a decline in the fair value of the optioned property such that the purchase and development of the optioned property would no longer meet our targeted return on investment. Such declines could be caused by a variety of factors including increased competition, decreases in demand or changes in local regulations that adversely impact the cost of development. Changes in any of these factors would cause us to re-evaluate the likelihood of exercising our land options.
Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, we are not required to purchase land in accordance with those take-down schedules. In substantially all instances, we have the right and ability to not exercise our option and forfeit our deposit without further penalty, other than termination of the option and loss of any unapplied portion of our deposit and pre-acquisition costs. Therefore, in substantially all instances, we do not consider the take-down price to be a firm contractual obligation.
When we intend not to exercise an option, we write-off any deposit and pre-acquisition costs associated with the option contract. For the years ended November 30, 2014, 2013 and 2012, we wrote-off $4.6 million, $1.9 million and $2.4 million, respectively, of option deposits and pre-acquisition costs related to homesites under option that we do not intend to purchase.
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The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties (“optioned”) or unconsolidated JVs (i.e., controlled homesites) at November 30, 2014 and 2013:
Controlled Homesites | ||||||||||||||
November 30, 2014 | Optioned | JVs | Total | Owned Homesites | Total Homesites | |||||||||
East | 9,649 | 93 | 9,742 | 45,489 | 55,231 | |||||||||
Central | 5,582 | 1,135 | 6,717 | 20,704 | 27,421 | |||||||||
West | 2,867 | 5,358 | 8,225 | 38,222 | 46,447 | |||||||||
Southeast Florida | 2,860 | 446 | 3,306 | 9,507 | 12,813 | |||||||||
Houston | 1,746 | 3 | 1,749 | 11,788 | 13,537 | |||||||||
Other | 2,151 | — | 2,151 | 6,969 | 9,120 | |||||||||
Total homesites | 24,855 | 7,035 | 31,890 | 132,679 | 164,569 | |||||||||
Controlled Homesites | ||||||||||||||
November 30, 2013 | Optioned | JVs | Total | Owned Homesites | Total Homesites | |||||||||
East | 6,364 | 172 | 6,536 | 41,660 | 48,196 | |||||||||
Central | 6,837 | 1,135 | 7,972 | 20,297 | 28,269 | |||||||||
West | 2,794 | 5,471 | 8,265 | 35,609 | 43,874 | |||||||||
Southeast Florida | 1,270 | 326 | 1,596 | 8,757 | 10,353 | |||||||||
Houston | 2,035 | 63 | 2,098 | 12,075 | 14,173 | |||||||||
Other | 1,666 | — | 1,666 | 7,245 | 8,911 | |||||||||
Total homesites | 20,966 | 7,167 | 28,133 | 125,643 | 153,776 | |||||||||
We evaluate all option contracts for land to determine whether they are VIEs and, if so, whether we are the primary beneficiary of certain of these option contracts. Although we do not have legal title to the optioned land, if we are deemed to be the primary beneficiary or make a significant deposit for optioned land, we may need to consolidate the land under option at the purchase price of the optioned land. Due to the new agreement with Morgan Stanley & Co., Inc., $155.0 million of consolidated inventory not owned was reclassified to land and land under development and $70.3 million of consolidated inventory not owned was deconsolidated during the year ended November 30, 2014.
In addition to this transaction, during the year ended November 30, 2014, consolidated inventory not owned decreased by $182.4 million with a corresponding decrease to liabilities related to consolidated inventory not owned in the accompanying consolidated balance sheet as of November 30, 2014. The decrease was primarily due to the purchase of land that was the subject of a previously consolidated option contract. To reflect the purchase price of the inventory consolidated, we had a net reclass related to option deposits from consolidated inventory not owned to land under development in the accompanying consolidated balance sheet as of November 30, 2014. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and our cash deposits.
Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our non-refundable option deposits and pre-acquisition costs totaling $85.6 million and $129.2 million at November 30, 2014 and 2013, respectively. Additionally, we had posted $34.5 million and $29.9 million of letters of credit in lieu of cash deposits under certain option contracts as of November 30, 2014 and 2013, respectively.
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Contractual Obligations and Commercial Commitments
The following table summarizes certain of our contractual obligations at November 30, 2014:
Payments Due by Period | |||||||||||||||
(In thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | ||||||||||
Lennar Homebuilding - Senior notes and other debts payable (1) | $ | 4,690,213 | 659,378 | 829,906 | 1,776,470 | 1,424,459 | |||||||||
Lennar Financial Services - Notes and other debts payable | 704,143 | 698,446 | 5,697 | — | — | ||||||||||
Rialto - Notes and other debts payable (2) | 623,246 | 144,665 | 125,467 | 353,114 | — | ||||||||||
Interest commitments under interest bearing debt (3) | 1,016,560 | 259,522 | 412,249 | 217,886 | 126,903 | ||||||||||
Operating leases | 137,114 | 34,358 | 52,219 | 33,879 | 16,658 | ||||||||||
Other contractual obligations (4) | 162,553 | 162,553 | — | — | — | ||||||||||
Total contractual obligations (5) | $ | 7,333,829 | 1,958,922 | 1,425,538 | 2,381,349 | 1,568,020 | |||||||||
(1) | Some of the senior notes and other debts payable are convertible senior notes, which have been included in this table based on maturity dates, but they are putable to, or callable by, us at earlier dates than the maturity dates disclosed in this table. The puts are described in the detail description of each of the convertible senior notes in the financial condition and capital resources section of this M,D&A. |
(2) | Amount includes notes payable and other debts payable of $351.9 million related to Rialto's 7.00% Senior Notes, $60.6 million related to Rialto's 5-year senior unsecured note, $141.3 million related to the RMF warehouse repurchase financing agreements and $58.0 million related to Rialto's Structured Notes with an estimated final payment date of December 15, 2015. |
(3) | Interest commitments on variable interest-bearing debt are determined based on the interest rate as of November 30, 2014. |
(4) | Amount includes $41.8 million of commitments to fund Rialto's Fund II, $6.8 million of commitments to fund Rialto's Mezzanine Fund, $44.0 million of commitments to fund loans to RMF and $70.0 million of remaining commitments to fund a homebuilding unconsolidated entity that was formed in 2013 for further expenses up until the unconsolidated entity obtains permanent financing. |
(5) | Total contractual obligations excludes our gross unrecognized tax benefits and accrued interest and penalties totaling $38.7 million as of November 30, 2014, because we are unable to make reasonable estimates as to the period of cash settlement with the respective taxing authorities. |
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our options. This reduces our financial risk associated with land holdings. At November 30, 2014, we had access to 31,890 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At November 30, 2014, we had $85.6 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $34.5 million of letters of credit in lieu of cash deposits under certain option contracts.
At November 30, 2014, we had letters of credit outstanding in the amount of $424.6 million (which included the $34.5 million of letters of credit discussed above). These letters of credit are generally posted either with regulatory bodies to guarantee our performance of certain development and construction activities, or in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at November 30, 2014, we had outstanding performance and surety bonds related to site improvements at various projects (including certain projects of our joint ventures) of $923.3 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all of the development and construction activities are completed. As of November 30, 2014, there were approximately $363.7 million, or 39%, of costs to complete related to these site improvements. We do not presently anticipate any draws upon these bonds, but if any such draws occur, we do not believe they would have a material effect on our financial position, results of operations or cash flows.
Our Lennar Financial Services segment had a pipeline of loan applications in process of $1.5 billion at November 30, 2014. Loans in process for which interest rates were committed to the borrowers totaled approximately $395.2 million as of November 30, 2014. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements.
Our Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference
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between the contract price and fair value of the MBS forward commitments and option contracts. At November 30, 2014, we had open commitments amounting to $771.0 million to sell MBS with varying settlement dates through February 2015.
The following sections discuss market and financing risk, seasonality and interest rates and changing prices that may have an impact on our business:
Market and Financing Risk
We finance our contributions to JVs, land acquisition and development activities, construction activities, financial services activities, Rialto activities, Lennar Multifamily activities and general operating needs primarily with cash generated from operations, debt and equity issuances, as well as borrowings under our Credit Facility and warehouse repurchase facilities. We also purchase land under option agreements, which enables us to control homesites until we have determined whether to exercise the option. We tried to manage the financial risks of adverse market conditions associated with land holdings by what we believed to be prudent underwriting of land purchases in areas we viewed as desirable growth markets, careful management of the land development process and, until recent years, limitation of risks by using partners to share the costs of purchasing and developing land as well as obtaining access to land through option contracts. Although we believed our land underwriting standards were conservative, we did not anticipate the severe decline in land values and the sharply reduced demand for new homes encountered from 2007 to 2010.
Seasonality
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in the second half of our fiscal year. However, periods of economic downturn in the industry, such as we have experienced in previous years, will typically alter seasonal patterns.
Interest Rates and Changing Prices
Inflation can have a long-term impact on us because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Rising interest rates as well as increased materials and labor costs, may reduce gross margins. An increase in material and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.
New Accounting Pronouncements
See Note 1 of the notes to our consolidated financial statements for a comprehensive list of new accounting pronouncements.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. As discussed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements. Listed below are those policies and estimates that we believe are critical and require the use of significant judgment in their application.
Valuation of Deferred Tax Assets
We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. Interest related to unrecognized tax benefits is recognized in the financial statements as a component of income tax expense.
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A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed each reporting period by us based on the consolidation of all available positive and negative evidence using a "more-likely-than-not" standard with respect to whether deferred tax assets will be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring unused and tax planning alternatives.
We believe that the accounting estimate for the valuation of deferred tax assets is a critical accounting estimate because of the judgment required in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax results and future business results, which may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents our best estimate of future events.
Goodwill
At November 30, 2014 and 2013, our goodwill was $44.3 million and $34.0 million. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Evaluating goodwill for impairment involves the determination of the fair value of our reporting units in which we have recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by management on a regular basis. Inherent in the determination of fair value of our reporting units are certain estimates and judgments, including the interpretation of current economic indicators and market valuations as well as our strategic plans with regard to our operations. To the extent additional information arises or our strategies change, it is possible that our conclusion regarding goodwill impairment could change, which could have a material effect on our financial position and results of operations. For these reasons, we believe that the accounting estimate related to goodwill impairment is a critical accounting estimate.
We review goodwill annually (or whenever indicators of impairment exist) for impairment. We evaluated the carrying value of our Lennar Financial Services and Rialto segments' goodwill in the fourth quarter of 2014. We estimated the fair value of our Lennar Financial Services title and and mortgage operations and Rialto operations based on the income approach and concluded that a goodwill impairment was not required for 2014. During the years ended November 30, 2014, 2013 and 2012, we did not record goodwill impairment charges.
The income approach establishes fair value by methods which discount or capitalize earnings and/or cash flow by a discount or capitalization rate that reflects market rate of return expectations, market conditions and the risk of the relative investment. We used a discounted cash flow method when applying the income approach. This analysis includes operating income, interest expense, taxes and incremental working capital as well as other factors. The projections used in the analysis are for a five-year period and represent what we consider to be normalized earnings.
In determining the fair value of our Lennar Financial Services title and mortgage operations and Rialto operations under the income approach, our expected cash flows are affected by various assumptions. The most significant assumptions affecting our expected cash flows are the discount rate, projected revenue growth rate and operating profit margin. The impact of a change in any of our significant underlying assumptions +/- 1% would not result in a materially different fair value.
As of both November 30, 2014 and 2013, there were no significant identifiable intangible assets, other than goodwill.
Lennar Homebuilding and Lennar Multifamily Operations
Lennar Homebuilding Revenue Recognition
Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowner, the new homeowner’s initial and continuing investment is adequate to demonstrate a commitment to pay for the home, the new homeowner’s receivable is not subject to future subordination and we do not have a substantial continuing involvement with the new home. Revenues from sales of land are recognized when a significant down payment is received, the earnings process is complete, title passes and collectability of the receivable is reasonably assured. We believe that the accounting policy related to revenue recognition is a critical accounting policy because of the significance of revenue.
Lennar Multifamily Revenue Recognition
Our Lennar Multifamily segment provides management services with respect to the development, construction and management of rental projects in joint ventures in which we have investments. As a result, our Lennar Multifamily segment earns and receives fees, which are based upon a stated percentage of development and construction costs. These fees are included in Lennar Multifamily revenue and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. In addition, our Lennar Multifamily segment provides general contractor
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services for the construction of some of its rental projects and recognizes the revenue over the period in which the services are performed under the percentage of completion method. We believe that the accounting policy related to Lennar Multifamily revenue recognition is a critical accounting policy because it represents a significant portion of our Lennar Multifamily's revenues and is expected to continue to grow in the future as the segment construct more rental properties.
Inventories
Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes, deposits on land purchase contracts and interest related to development and construction. We review our inventory for indicators of impairment by evaluating each community during each reporting period. The inventory within each community is categorized as finished homes and construction in progress or land under development based on the development state of the community. There were 622 and 535 active communities, excluding unconsolidated entities, as of November 30, 2014 and 2013, respectively. If the undiscounted cash flows expected to be generated by a community are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such community to its estimated fair value.
In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales, and the estimated fair value of the land itself. We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales price and/or margins are trending downward and are anticipated to continue to trend downward. From this review, we identify communities whose carrying values exceed their undiscounted cash flows. For the year ended November 30, 2014, revenues and gross margins have increased for all of our homebuilding segments and Homebuilding Other, except for the gross margins of our Lennar Homebuilding West segment, compared to the year ended November 30, 2013, primarily due to an increase in home deliveries and an increase in the average sales price of homes delivered .
We estimate the fair value of our communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above. For example, during the downturn in the housing market, we found ways to reduce our construction costs in many communities, and this reduction in construction costs in addition to changes in product type in many communities impacted future estimated cash flows.
Each of the homebuilding markets in which we operate is unique, as homebuilding has historically been a local business driven by local market conditions and demographics. Each of our homebuilding markets has specific supply and demand relationships reflective of local economic conditions. Our projected cash flows are impacted by many assumptions. Some of the most critical assumptions in our cash flow models are our projected absorption pace for home sales, sales prices and costs to build and deliver our homes on a community by community basis.
In order to arrive at the assumed absorption pace for home sales included in our cash flow models, we analyze our historical absorption pace in the community as well as other comparable communities in the geographical area. In addition, we consider internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics, unemployment rates and availability of competing product in the geographic area where the community is located. When analyzing our historical absorption pace for home sales and corresponding internal and external market studies, we place greater emphasis on more current metrics and trends such as the absorption pace realized in our most recent quarters as well as forecasted population demographics, unemployment rates and availability of competing product. Generally, if we notice a variation from historical results over a span of two fiscal quarters, we consider such variation to be the establishment of a trend and adjust our historical information accordingly in order to develop assumptions on the projected absorption pace in the cash flow model for a community.
In order to determine the assumed sales prices included in our cash flow models, we analyze the historical sales prices realized on homes we delivered in the community and other comparable communities in the geographical area as well as the sales prices included in our current backlog for such communities. In addition, we consider internal and external market studies and trends, which generally include, but are not limited to, statistics on sales prices in neighboring communities and sales prices on similar products in non-neighboring communities in the geographic area where the community is located. When analyzing our historical sales prices and corresponding market studies, we also place greater emphasis on more current metrics and trends such as future forecasted sales prices in neighboring communities as well as future forecasted sales prices for similar product in non-neighboring communities. Generally, if we notice a variation from historical results over a span of two fiscal quarters, we
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consider such variation to be the establishment of a trend and adjust our historical information accordingly in order to develop assumptions on the projected sales prices in the cash flow model for a community.
In order to arrive at our assumed costs to build and deliver our homes, we generally assume a cost structure reflecting contracts currently in place with our vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. Those costs assumed are used in our cash flow models for our communities.
Since the estimates and assumptions included in our cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead to us incurring additional impairment charges in the future.
Using all the available information, we calculate our best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate we believe a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. We generally use a discount rate of approximately 20%, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory.
We estimate the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or our assumptions change. For example, market deterioration or changes in our assumptions may lead us to incur additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired, but for which indicators of impairment may arise if market deterioration occurs.
We also have access to land inventory through option contracts, which generally enables us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our option. A majority of our option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. Our option contracts are recorded at cost. In determining whether to walk-away from an option contract, we evaluate the option primarily based upon the expected cash flows from the property under option. If we intend to walk-away from an option contract, we record a charge to earnings in the period such decision is made for the deposit amount and any related pre-acquisition costs associated with the option contract.
We believe that the accounting related to inventory valuation and impairment is a critical accounting policy because: (1) assumptions inherent in the valuation of our inventory are highly subjective and susceptible to change and (2) the impact of recognizing impairments on our inventory has been and could continue to be material to our consolidated financial statements. Our evaluation of inventory impairment, as discussed above, includes many assumptions. The critical assumptions include the timing of the home sales within a community, management’s projections of selling prices and costs and the discount rate applied to estimate the fair value of the homesites within a community on the balance sheet date. Our assumptions on the timing of home sales are critical because the homebuilding industry has historically been cyclical and sensitive to changes in economic conditions such as interest rates, credit availability, unemployment levels and consumer sentiment. Changes in these economic conditions could materially affect the projected sales price, costs to develop the homesites and/or absorption rate in a community. Our assumptions on discount rates are critical because the selection of a discount rate affects the estimated fair value of the homesites within a community. A higher discount rate reduces the estimated fair value of the homesites within the community, while a lower discount rate increases the estimated fair value of the homesites within a community. Because of changes in economic and market conditions and assumptions and estimates required of management in valuing inventory during changing market conditions, actual results could differ materially from management’s assumptions and may require material inventory impairment charges to be recorded in the future.
Product Warranty
Although we subcontract virtually all aspects of construction to others and our contracts call for the subcontractors to repair or replace any deficient items related to their trades, we are primarily responsible to homebuyers to correct any deficiencies. Additionally, in some instances, we may be held responsible for the actions of or losses incurred by subcontractors. Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based upon historical data and trends with respect to similar product types and geographical areas. We believe the accounting estimate related to the reserve for warranty costs is a critical accounting estimate because the estimate requires a large degree of judgment.
At November 30, 2014, the reserve for warranty costs was $115.9 million, which included $12.7 million of adjustments to pre-existing warranties from changes in estimates during the current year primarily related to specific claims
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related to certain of our homebuilding communities and other adjustments. While we believe that the reserve for warranty costs is adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Additionally, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve.
Lennar Homebuilding and Lennar Multifamily Investments in Unconsolidated Entities
We strategically invest in unconsolidated entities that acquire and develop land (1) for our homebuilding operations or for sale to third parties, (2) for construction of homes for sale to third-party homebuyers or (3) for the construction of multifamily rental properties. Our Lennar Homebuilding partners generally are unrelated homebuilders, land owners/developers and financial or other strategic partners. Our Lennar Multifamily partners are all financial partners.
Most of the unconsolidated entities through which we acquire and develop land are accounted for by the equity method of accounting because we are not the primary beneficiary, and we have a significant, but less than controlling, interest in the entities. We record our investments in these entities in our consolidated balance sheets as “Lennar Homebuilding or Lennar Multifamily Investments in Unconsolidated Entities” and our pro-rata share of the entities’ earnings or losses in our consolidated statements of operations as “Lennar Homebuilding or Lennar Multifamily Equity in Earnings (Loss) from Unconsolidated Entities,” as described in Note 4 and Note 9 of the notes to our consolidated financial statements. For most unconsolidated entities, we generally have the right to share in earnings and distributions on a pro-rata basis based upon ownership percentages. However, certain Lennar Homebuilding unconsolidated entities and all of our Lennar Multifamily unconsolidated entities provide for a different allocation of profit and cash distributions if and when cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). Advances to these entities are included in the investment balance.
Management looks at specific criteria and uses its judgment when determining if we are the primary beneficiary of, or have a controlling interest in, an unconsolidated entity. Factors considered in determining whether we have significant influence or we have control include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and continuing involvement. The accounting policy relating to the use of the equity method of accounting is a critical accounting policy due to the judgment required in determining whether we are the primary beneficiary or have control or significant influence.
As of November 30, 2014, we believe that the equity method of accounting is appropriate for our investments in unconsolidated entities where we are not the primary beneficiary and we do not have a controlling interest, but rather share control with our partners. At November 30, 2014, the Lennar Homebuilding unconsolidated entities in which we had investments had total assets of $3.3 billion and total liabilities of $1.0 billion. At November 30, 2014, the Lennar Multifamily unconsolidated entities in which we had investments had total assets of $677.3 million and total liabilities of $250.5 million.
We evaluate our investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the fair value of our investment in the unconsolidated entity below its carrying amount has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value.
The evaluation of our investment in unconsolidated entities includes certain critical assumptions: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors.
Our assumptions on the projected future distributions from the Lennar Homebuilding unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the Lennar Homebuilding unconsolidated entities or assets by Lennar Multifamily unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The review for inventory impairment performed by the unconsolidated entities is materially consistent with our process, as discussed above, for evaluating our own inventory as of the end of a reporting period. The unconsolidated entities generally also use a discount rate of approximately 20% in their reviews for impairment, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, our proportionate share is reflected in our Lennar Homebuilding or Lennar Multifamily equity in earnings (loss) from unconsolidated entities with a corresponding decrease to our Lennar Homebuilding or Lennar Multifamily investment in unconsolidated entities. In certain instances, we may be required to record additional losses relating to our investment in unconsolidated entities; if our investment in the unconsolidated entity, or a portion thereof, is deemed to be other than temporarily impaired. These losses are included in Lennar Homebuilding other income (expense), net or Lennar Multifamily costs and expenses. We believe our assumptions on the projected future distributions from the unconsolidated entities are critical because the operating results of the unconsolidated entities from which the projected distributions are derived are dependent on the status of the homebuilding industry, which has historically been cyclical and sensitive to changes in economic conditions such as interest rates, credit availability, unemployment levels and consumer sentiment. Changes in these economic conditions could materially affect the projected operational results of the unconsolidated entities from which the distributions are derived.
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Additionally, we consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, intent and ability for us to recover our investment in the entity, financial condition and long-term prospects of the unconsolidated entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investments, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners and banks. If we believe that the decline in the fair value of the investment is temporary, then no impairment is recorded.
In addition, we believe our assumptions on discount rates are critical accounting policies because the selection of the discount rates affects the estimated fair value of our investments in unconsolidated entities. A higher discount rate reduces the estimated fair value of our investments in unconsolidated entities, while a lower discount rate increases the estimated fair value of our investments in unconsolidated entities. Because of changes in economic conditions, actual results could differ materially from management’s assumptions and may require material valuation adjustments to our investments in unconsolidated entities to be recorded in the future.
Consolidation of Variable Interest Entities
GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Our variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management services and development agreements between us and a VIE, (4) loans provided by us to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. We examine specific criteria and use our judgment when determining if we are the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s) and contracts to purchase assets from VIEs.
Generally, all major decision making in our joint ventures is shared among all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by us are nominal and believed to be at market and there is no significant economic disproportionality between us and other partners. Generally, we purchase less than a majority of the JV’s assets and the purchase prices under our option contracts are believed to be at market.
Generally, our Lennar Homebuilding unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, we continue to fund operations and debt paydowns through partner loans or substituted capital contributions. The accounting policy relating to variable interest entities is a critical accounting policy because the determination whether an entity is a VIE and, if so, whether we are primary beneficiary may require us to exercise significant judgment.
Lennar Financial Services Operations
Revenue Recognition
Title premiums on policies issued directly by us are recognized as revenue on the effective date of the title policies and escrow fees and loan origination revenues are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. Revenues from title policies issued by independent agents are recognized as revenue when notice of issuance is received from the agent, which is generally when cash payment is received by us. Expected gains and losses from the sale of loans and their related servicing rights are included in the measurement of all written loan commitments that are accounted for at fair value through earnings at the time of commitment. Interest income on loans held-for-sale and loans held-for-investment is recognized as earned over the terms of the mortgage loans based on the contractual interest rates. We believe that the accounting policy related to revenue recognition is a critical accounting policy because of the significance of revenue.
Loan Origination Liabilities
Substantially all of the loans our Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties related to loan sales. During recent years there has been an increased industry-wide effort by purchasers to defray their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements.
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Our mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. We establish reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While we believe that we have adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our expectations, additional recourse expense may be incurred. This allowance requires management’s judgment and estimate. For these reasons, we believe that the accounting estimate related to the loan origination losses is a critical accounting estimate.
Rialto Operations
Management Fees Revenue
Our Rialto segment provides services to a variety of legal entities and investment vehicles such as funds, joint ventures, co-invests, and other private equity structures to manage their respective investments. As a result, Rialto earns and receives management fees, underwriting fees and due diligence fees. These fees related to our Rialto segment are included in Rialto revenues and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. Rialto receives investment management fees from investment vehicles based on 1) a percentage of committed capital during the commitment period and after the commitment period ends and 2) a percentage of of invested capital less the portion of such invested capital utilized to acquire investments that have been sold (in whole or in part) or liquidated. Fees earned for underwriting and due diligence services are based on actual costs incurred. In certain situations, Rialto may earn additional fees when the return on assets managed exceeds contractually established thresholds. Such revenue is only booked when the contract terms are met, the contract is at, or near, completion and the amounts are known and collectability is reasonably assured. Since such revenue is recognized at the end of the life of the investment vehicle, after substantially all of the assets have been sold and investment gains and losses realized, the possibility of claw backs is limited. We believe the way we record Rialto management fees revenue is a significant accounting policy because it represents a significant portion of our Rialto segment's revenues and is expected to continue to grow in the future as the segment manages more assets.
Loans Receivable - Revenue Recognition
All of the acquired loans for which (1) there was evidence of credit quality deterioration since origination and (2) for which it was deemed probable that we would be unable to collect all contractually required principal and interest payments were accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”). For loans accounted for under ASC 310-30, management determined upon acquisition the loan’s value based on due diligence regarding each of the loans, the underlying properties and the borrowers. We determined fair value by discounting the cash flows expected to be collected adjusted for factors that a market participant would consider when determining fair value. Factors considered in the valuation were projected cash flows for the loans, type of loan and related collateral, classification status and current discount rates. Since the estimates are based on projections, all estimates are subjective and can change due to unexpected changes in economic conditions or loan performance.
Under ASC 310-30, loans were pooled together according to common risk characteristics. A pool is then accounted for as a single asset with a single component interest rate and as aggregate expectation of cash flows. The excess of the cash flows expected to be collected over the cost of the loans acquired is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the effective yield method. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on our consolidated balance sheets. Changes in the expected cash flows of loans receivable from the date of acquisition will either impact the accretable yield or result in a charge to the provision for loan losses in the period in which the changes become probable. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of contractually required payments such that the nonaccretable difference is not affected. Subsequent significant decreases to the expected cash flows will generally result in a charge to the provision for loan losses, resulting in an increase to the allowance for loan losses, and a reclassification from accretable yield to nonaccretable difference. Subsequent probable and significant increases in the cash flows will result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield. Amounts related to the ASC 310-30 loans are estimates and may change as we obtain additional information related to the respective loans and the inherent uncertainty associated with estimating the amount and timing of the expected cash flows associated with distressed residential and commercial real estate loans. The timing and amount of expected cash flows and related accretable yield can also be impacted by disposal of loans, loan payoffs or expected foreclosures, which result in removal of the loans from the pools. Since the cash flows are based on projections, they are subjective and can change due to unexpected changes in economic conditions and loan performance. During the fourth quarter of 2014, in an effort to better reflect the performance of the loan portfolios, we changed from recording accretable yield income on a loan pool basis to recording income on a cost
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recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. At November 30, 2014, these loans were classified as nonaccrual loans.
We believe that the accounting related to loans with deteriorated credit quality and that the accounting for accretable yield are critical accounting policies because of the significant judgment involved.
Nonaccrual Loans - Revenue Recognition and Impairment
For loans in which forecasted principal and interest could not be reasonably estimated at the loan acquisition date, management classified these loans as nonaccrual and accounts for these assets in accordance with ASC 310-10, Receivables, (“ASC 310-10”). When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events; it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.
A provision for loan losses is recognized when the recorded investments in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral less estimated costs to sell.
We believe that the accounting for nonaccrual loans is a critical accounting estimate because of the significant judgment involved.
As described above, during the fourth quarter of 2014, in an effort to better reflect the performance of the loan portfolios accounted under ASC 310-30, we changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonable estimated. At November 30, 2014, those loans that were accounted under ASC 310-30 were classified as nonaccrual loans.
Real Estate Owned
REO represents real estate that our Rialto segment has taken control or has effective control of in partial or full satisfaction of loans receivable. At the time of acquisition of a property through foreclosure of a loan, REO is recorded at fair value less estimated costs to sell if classified as held-for-sale or at fair value if classified as held-and-used, which becomes the property’s new basis. The fair values of these assets are determined in part by placing reliance on third-party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity. The third-party appraisals and internally developed analyses are significantly impacted by the local market economy, market supply and demand, competitive conditions and prices on comparable properties, adjusted for date of sale, location, property size, and other factors. Each REO is unique and is analyzed in the context of the particular market where the property is located. In order to establish the significant assumptions for a particular REO, we analyze historical trends, including trends achieved by our local homebuilding operations, if applicable, and current trends in the market and economy impacting the REO. Using available trend information, we then calculate our best estimate of fair value, which can include projected cash flows discounted at a rate we believe a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams.
Changes in economic factors, consumer demand and market conditions, among other things, could materially impact estimates used in the third-party appraisals and/or internally prepared analyses of recent offers or prices on comparable properties. Thus, estimates can differ significantly from the amounts ultimately realized by our Rialto segment from disposition of these assets. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain on foreclosure in our consolidated statement of operations. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is initially recorded as an impairment in our consolidated statement of operations.
Subsequent to obtaining REO via foreclosure or directly from a financial institution, management periodically performs valuations using the methodologies described above such that the real estate is carried at the lower of its carrying value or current fair value, less estimated costs to sell if classified as held-for-sale. Held-and-used assets are tested for recoverability whenever changes in circumstances indicate that the carrying value may not be recoverable, and impairment losses are recorded for any amount by which the carrying value exceeds its fair value. Any subsequent impairment losses, operating expenses or income, and gains and losses on disposition of such properties are also recognized in our Rialto other income (expense), net. REO assets classified as held-and-used are depreciated using a useful life of forty years for commercial properties and twenty seven and a half years for residential properties. REO assets classified as held-for-sale are not depreciated. Occasionally an asset will require certain improvements to yield a higher return. In accordance with ASC 970-340-25, Real Estate, construction costs incurred prior to acquisition or during development of the asset may be capitalized.
We believe that the accounting related to REO is a critical accounting policy because of the significant judgment required in the third-party appraisals and/or internally prepared analysis of recent offers or prices of comparable properties in the proximate vicinity used to estimate the fair value of REOs.
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Rialto Mortgage Finance - Loans Held-for Sale
The originated mortgage loans are classified as loans held-for-sale on the consolidated balance sheets and are recorded at fair value. We elected the fair value option for RMF's loans held-for-sale in accordance with ASC 825, Financial Instruments, which permits entities to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Changes in fair values of the loans are reflected in our Rialto revenues in the accompanying consolidated statements of operations. Interest income on these loans is calculated based on the interest rate of the loan and is recorded within Rialto revenues in the accompanying consolidated statements of operations. Substantially all of the mortgage loans originated are sold within a short period of time in a securitization on a servicing released, non-recourse basis; although, we remain liable for certain limited industry-standard representations and warranties related to loan sales. We recognize revenue on the sale of loans into securitizations trusts when control of the loans has been relinquished.
We believe this is a critical accounting policy due to the significant judgment involved in estimating the fair values of loans held-for-sale during the period between time the loan is originated and the time the loan is sold and of its significance to our Rialto segment.
Consolidations of Variable Interest Entities
In 2010, our Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. We determined that each of the LLCs met the definition of a variable interest entity (“VIE”) and we were the primary beneficiary. In accordance with ASC 810-10-65-2, Consolidations, (“ASC 810-10-65-2”), we identified the activities that most significantly impact the LLCs’ economic performance and determined that we have the power to direct those activities. The economic performance of the LLCs is most significantly impacted by the performance of the LLCs’ portfolios of assets, which consist primarily of distressed residential and commercial mortgage loans. Thus, the activities that most significantly impact the LLCs’ economic performance are the servicing and disposition of mortgage loans and real estate obtained through foreclosure of loans, restructuring of loans, or other planned activities associated with the monetizing of loans.
The FDIC does not have the unilateral power to terminate our role in managing the LLCs and servicing the loan portfolios. While the FDIC has the right to prevent certain types of transactions (i.e., bulk sales, selling assets with recourse back to the selling entity, selling assets with representations and warranties and financing the sales of assets without the FDIC’s approval), the FDIC does not have full voting or blocking rights over the LLCs’ activities, making their voting rights protective in nature, not substantive participating voting rights. Other than as described in the preceding sentence, which are not the primary activities of the LLCs, we can cause the LLCs to enter into both the disposition and restructuring of loans without any involvement of the FDIC. Additionally, the FDIC has no voting rights with regard to the operation/management of the operating properties that are acquired upon foreclosure of loans (e.g. REO) and no voting rights over the business plans of the LLCs. The FDIC can make suggestions regarding the business plans, but we can decide not to follow the FDIC’s suggestions and not to incorporate them in the business plans. Since the FDIC’s voting rights are protective in nature and not substantive participating voting rights, we have the power to direct the activities that most significantly impact the LLCs’ economic performance.
In accordance with ASC 810-10-65-2, we determined that we had an obligation to absorb losses of the LLCs that could potentially be significant to the LLCs or the right to receive benefits from the LLCs that could potentially be significant to the LLCs based on the following factors:
• | Rialto/Lennar owns 40% of the equity of the LLCs and has the power to direct the activities of the LLCs that most significantly impact their economic performance through loan resolutions and the sale of REO. |
• | Rialto/Lennar has a management/servicer contract under which we earn a 0.5% servicing fee. |
• | Rialto/Lennar has guaranteed, as the servicer, its obligations under the servicing agreement up to $10 million. |
We are aware that the FDIC, as the owner of 60% of the equity of each of the LLCs, may also have an obligation to absorb losses of the LLCs that could potentially be significant to the LLCs. However, in accordance with ASC 810-10-25-38A, only one enterprise, if any, is expected to be identified as the primary beneficiary of a VIE.
Since both criteria for consolidation in ASC 810-10-65-2 are met, we consolidated the LLCs. We believe that our assessment that we are the primary beneficiary of the LLCs is a critical accounting policy because of the significant judgment required in evaluating all of the key factors and circumstances in determining the primary beneficiary.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
We are exposed to market risks related to fluctuations in interest rates on our investments, debt obligations, loans held-for-sale and loans held-for-investment. We utilize forward commitments and option contracts to mitigate the risks associated with our mortgage loan portfolio. The table below provides information at November 30, 2014 about our significant financial instruments that are sensitive to changes in interest rates. For loans held-for-sale, loans held-for-investment, net and investments held-to-maturity, senior notes and other debts payable and notes and other debts payable, the table presents
70
principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair values at November 30, 2014. Weighted average variable interest rates are based on the variable interest rates at November 30, 2014. Rialto loans receivable, net are not included in the table below because these loans were acquired having deteriorated credit quality, thus, we believe they are not sensitive to changes in interest rates. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1 and 15 of the notes to consolidated financial statements in Item 8 for a further discussion of these items and our strategy of mitigating our interest rate risk.
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
November 30, 2014
Years Ending November 30, | Fair Value at November 30, | |||||||||||||||||||||||
(Dollars in millions) | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | 2014 | ||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Rialto: | ||||||||||||||||||||||||
Investments held-to-maturity: | ||||||||||||||||||||||||
Fixed rate | $ | — | — | — | — | — | 17.3 | 17.3 | 17.2 | |||||||||||||||
Average interest rate | — | — | — | — | — | 4.0 | % | 4.0 | % | — | ||||||||||||||
Loans held-for-sale: | ||||||||||||||||||||||||
Fixed rate | $ | — | — | — | — | — | 113.6 | 113.6 | 113.6 | |||||||||||||||
Average interest rate | — | — | — | — | — | 4.7 | % | 4.7 | % | — | ||||||||||||||
Lennar Financial Services: | ||||||||||||||||||||||||
Loans held-for-sale: | ||||||||||||||||||||||||
Fixed rate | $ | — | — | — | — | — | 676.2 | 676.2 | 676.2 | |||||||||||||||
Average interest rate | — | — | — | — | — | 4.1 | % | 4.1 | % | — | ||||||||||||||
Variable rate | $ | — | — | — | — | — | 62.2 | 62.2 | 62.2 | |||||||||||||||
Average interest rate | — | — | — | — | — | 3.2 | % | 3.2 | % | — | ||||||||||||||
Loans held-for-investment, net and investments held-to-maturity: | ||||||||||||||||||||||||
Fixed rate | $ | 20.2 | 13.3 | 6.2 | 0.8 | 1.8 | 26.2 | 68.5 | 68.3 | |||||||||||||||
Average interest rate | 1.2 | % | 1.2 | % | 2.0 | % | 5.5 | % | 3.6 | % | 5.3 | % | 3.0 | % | — | |||||||||
Variable rate | $ | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 2.9 | 3.4 | 3.5 | |||||||||||||||
Average interest rate | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | — | |||||||||
LIABILITIES | ||||||||||||||||||||||||
Lennar Homebuilding: | ||||||||||||||||||||||||
Senior notes and other debts payable: | ||||||||||||||||||||||||
Fixed rate | $ | 614.0 | 294.9 | 401.2 | 651.0 | 1,125.5 | 1,424.4 | 4,511.0 | 5,576.1 | |||||||||||||||
Average interest rate | 5.4 | % | 6.1 | % | 12.1 | % | 5.6 | % | 4.4 | % | 3.8 | % | 5.3 | % | — | |||||||||
Variable rate | $ | 45.4 | 122.9 | 10.9 | — | — | — | 179.2 | 184.0 | |||||||||||||||
Average interest rate | 3.3 | % | 2.2 | % | 2.5 | % | — | — | — | 2.5 | % | — | ||||||||||||
Rialto: | ||||||||||||||||||||||||
Notes and other debts payable: | ||||||||||||||||||||||||
Fixed rate | $ | 3.4 | 63.7 | 1.1 | 353.1 | — | — | 421.3 | 441.7 | |||||||||||||||
Average interest rate | 7.3 | % | 3.8 | % | 5.9 | % | 5.2 | % | — | — | 5.0 | % | — | |||||||||||
Variable rate | $ | 141.3 | 30.3 | 30.3 | — | — | — | 201.9 | 198.6 | |||||||||||||||
Average interest rate | 2.5 | % | 4.5 | % | 4.5 | % | — | — | — | 3.1 | % | — | ||||||||||||
Lennar Financial Services: | ||||||||||||||||||||||||
Notes and other debts payable: | ||||||||||||||||||||||||
Variable rate | $ | 698.4 | — | 5.7 | — | — | — | 704.1 | 704.1 | |||||||||||||||
Average interest rate | 2.5 | % | — | 10.0 | % | — | — | — | 2.5 | % | — | |||||||||||||
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Item 8. | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lennar Corporation
We have audited the accompanying consolidated balance sheets of Lennar Corporation and subsidiaries (the “Company”) as of November 30, 2014 and 2013, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended November 30, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Lennar Corporation and subsidiaries as of November 30, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of November 30, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 23, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 23, 2015
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 2014 and 2013
2014 (1) | 2013 (1) | |||||
(Dollars in thousands, except shares and per share amounts) | ||||||
ASSETS | ||||||
Lennar Homebuilding: | ||||||
Cash and cash equivalents | $ | 885,729 | 695,424 | |||
Restricted cash | 9,849 | 36,150 | ||||
Receivables, net | 93,444 | 51,935 | ||||
Inventories: | ||||||
Finished homes and construction in progress | 3,082,345 | 2,269,116 | ||||
Land and land under development | 4,601,802 | 3,871,773 | ||||
Consolidated inventory not owned | 52,453 | 460,159 | ||||
Total inventories | 7,736,600 | 6,601,048 | ||||
Investments in unconsolidated entities | 656,837 | 716,949 | ||||
Other assets | 672,589 | 748,629 | ||||
10,055,048 | 8,850,135 | |||||
Rialto: | ||||||
Cash and cash equivalents | 303,889 | 201,496 | ||||
Restricted cash | 46,975 | 2,593 | ||||
Receivables, net | 153,773 | 111,833 | ||||
Loans receivable, net | 130,105 | 278,392 | ||||
Loans held-for-sale | 113,596 | 44,228 | ||||
Real estate owned - held-for-sale | 190,535 | 197,851 | ||||
Real estate owned - held-and-used, net | 255,795 | 428,989 | ||||
Investments in unconsolidated entities | 175,700 | 154,573 | ||||
Other assets | 87,784 | 59,358 | ||||
1,458,152 | 1,479,313 | |||||
Lennar Financial Services | 1,177,053 | 796,710 | ||||
Lennar Multifamily | 268,014 | 147,089 | ||||
Total assets | $ | 12,958,267 | 11,273,247 | |||
(1) | Under certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its consolidated balance sheets the assets of consolidated variable interest entities (“VIEs”) that are owned by the consolidated VIEs and liabilities of consolidated VIEs as to which there is no recourse against the Company. |
As of November 30, 2014, total assets include $929.1 million related to consolidated VIEs of which $11.7 million is included in Lennar Homebuilding cash and cash equivalents, $0.3 million in restricted cash, $0.2 million in Lennar Homebuilding receivables, net, $0.2 million in Lennar Homebuilding finished homes and construction in progress, $208.2 million in Lennar Homebuilding land and land under development, $52.5 million in Lennar Homebuilding consolidated inventory not owned, $23.9 million in Lennar Homebuilding investments in unconsolidated entities, $104.6 million in Lennar Homebuilding other assets, $75.8 million in Rialto cash and cash equivalents, $128.9 million in Rialto loans receivable, net, $128.2 million in Rialto real estate owned held-for-sale, $172.7 million in Rialto real estate owned held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities, $2.1 million in Rialto other assets and $19.2 million in Lennar Multifamily assets.
As of November 30, 2013, total assets include $1,195.3 million related to consolidated VIEs of which $8.3 million is included in Lennar Homebuilding cash and cash equivalents, $17.7 million in restricted cash, $2.4 million in Lennar Homebuilding receivables, net, $94.8 million in Lennar Homebuilding land and land under development, $243.6 million in Lennar Homebuilding consolidated inventory not owned, $14.7 million in Lennar Homebuilding investments in unconsolidated entities, $86.8 million in Lennar Homebuilding other assets, $44.8 million in Rialto cash and cash equivalents, $244.0 million in Rialto loans receivable, net, $122.0 million in Rialto real estate owned held-for-sale, $313.8 million in Rialto real estate owned held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities and $1.8 million in Rialto other assets.
See accompanying notes to consolidated financial statements.
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 2014 and 2013
2014 (2) | 2013 (2) | |||||
(Dollars in thousands, except shares and per share amounts) | ||||||
LIABILITIES AND EQUITY | ||||||
Lennar Homebuilding: | ||||||
Accounts payable | $ | 412,558 | 271,365 | |||
Liabilities related to consolidated inventory not owned | 45,028 | 384,876 | ||||
Senior notes and other debts payable | 4,690,213 | 4,194,432 | ||||
Other liabilities | 863,236 | 712,931 | ||||
6,011,035 | 5,563,604 | |||||
Rialto | 747,044 | 497,008 | ||||
Lennar Financial Services | 896,643 | 543,639 | ||||
Lennar Multifamily | 52,243 | 41,526 | ||||
Total liabilities | 7,706,965 | 6,645,777 | ||||
Stockholders’ equity: | ||||||
Preferred stock | — | — | ||||
Class A common stock of $0.10 par value per share; Authorized: 2014 and 2013 - 300,000,000 shares; Issued: 2014 - 174,241,570 shares; 2013 - 184,833,120 shares | 17,424 | 18,483 | ||||
Class B common stock of $0.10 par value per share; Authorized: 2014 and 2013 - 90,000,000 shares, Issued: 2014 - 32,982,815 shares; 2013 - 32,982,815 shares | 3,298 | 3,298 | ||||
Additional paid-in capital | 2,239,704 | 2,721,246 | ||||
Retained earnings | 2,660,034 | 2,053,893 | ||||
Treasury stock, at cost; 2014 - 505,420 shares of Class A common stock and 1,679,620 shares of Class B common stock; 2013 - 12,063,466 shares of Class A common stock and 1,679,620 shares of Class B common stock | (93,440 | ) | (628,019 | ) | ||
Total stockholders’ equity | 4,827,020 | 4,168,901 | ||||
Noncontrolling interests | 424,282 | 458,569 | ||||
Total equity | 5,251,302 | 4,627,470 | ||||
Total liabilities and equity | $ | 12,958,267 | 11,273,247 | |||
(2) | As of November 30, 2014, total liabilities include $149.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $6.8 million is included in Lennar Homebuilding accounts payable, $45.0 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $61.6 million in Lennar Homebuilding senior notes and other debts payable, $14.8 million in Lennar Homebuilding other liabilities and $21.5 million in Rialto liabilities. |
As of November 30, 2013, total liabilities include $294.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $3.0 million is included in Lennar Homebuilding accounts payable, $191.6 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $75.1 million in Lennar Homebuilding senior notes and other debts payable, $4.9 million in Lennar Homebuilding other liabilities and $20.2 million in Rialto liabilities.
See accompanying notes to consolidated financial statements.
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended November 30, 2014, 2013 and 2012
2014 | 2013 | 2012 | |||||||
(Dollars in thousands, except per share amounts) | |||||||||
Revenues: | |||||||||
Lennar Homebuilding | $ | 7,025,130 | 5,354,947 | 3,581,232 | |||||
Lennar Financial Services | 454,381 | 427,342 | 384,618 | ||||||
Rialto | 230,521 | 138,060 | 138,856 | ||||||
Lennar Multifamily | 69,780 | 14,746 | 426 | ||||||
Total revenues | 7,779,812 | 5,935,095 | 4,105,132 | ||||||
Cost and expenses: | |||||||||
Lennar Homebuilding (1) | 5,962,029 | 4,579,108 | 3,216,366 | ||||||
Lennar Financial Services | 374,243 | 341,556 | 299,836 | ||||||
Rialto | 249,114 | 151,072 | 138,990 | ||||||
Lennar Multifamily | 95,227 | 31,463 | 6,306 | ||||||
Corporate general and administrative | 177,161 | 146,060 | 127,338 | ||||||
Total costs and expenses | 6,857,774 | 5,249,259 | 3,788,836 | ||||||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (2) | (355 | ) | 23,803 | (26,672 | ) | ||||
Lennar Homebuilding other income, net (3) | 7,526 | 27,346 | 15,144 | ||||||
Other interest expense | (36,551 | ) | (93,913 | ) | (94,353 | ) | |||
Rialto equity in earnings from unconsolidated entities | 59,277 | 22,353 | 41,483 | ||||||
Rialto other income (expense), net | 3,395 | 16,787 | (29,780 | ) | |||||
Lennar Multifamily equity in earnings (loss) from unconsolidated entities | 14,454 | (271 | ) | (4 | ) | ||||
Earnings before income taxes | 969,784 | 681,941 | 222,114 | ||||||
(Provision) benefit for income taxes | (341,091 | ) | (177,015 | ) | 435,218 | ||||
Net earnings (including net earnings (loss) attributable to noncontrolling interests) | 628,693 | 504,926 | 657,332 | ||||||
Less: Net earnings (loss) attributable to noncontrolling interests (4) | (10,223 | ) | 25,252 | (21,792 | ) | ||||
Net earnings attributable to Lennar | $ | 638,916 | 479,674 | 679,124 | |||||
Basic earnings per share | $ | 3.12 | 2.48 | 3.58 | |||||
Diluted earnings per share | $ | 2.80 | 2.15 | 3.11 | |||||
Comprehensive earnings attributable to Lennar | $ | 638,916 | 479,674 | 679,124 | |||||
Comprehensive earnings (loss) attributable to noncontrolling interests | $ | (10,223 | ) | 25,252 | (21,792 | ) | |||
(1) | Lennar Homebuilding costs and expenses included $9.9 million, $7.5 million and $15.6 million, respectively, of inventory valuation adjustments and write-offs of option deposits and pre-acquisition costs for the years ended November 30, 2014, 2013 and 2012. |
(2) | Lennar Homebuilding equity in earnings (loss) from unconsolidated entities included $4.6 million and $12.1 million of the Company’s share of valuation adjustments related to assets of unconsolidated entities for the years ended November 30, 2014 and 2012, respectively. |
(3) | Lennar Homebuilding other income, net included $3.2 million in write-offs of other receivables and valuation adjustments of other assets for the year ended November 30, 2014. |
(4) | Net earnings (loss) attributable to noncontrolling interests for the years ended November 30, 2014, 2013 and 2012 included ($22.5) million, $6.2 million and ($14.4) million, respectively, of net earnings (loss) related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC. |
See accompanying notes to consolidated financial statements.
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended November 30, 2014, 2013 and 2012
2014 | 2013 | 2012 | |||||||
(Dollars in thousands) | |||||||||
Class A common stock: | |||||||||
Beginning balance | $ | 18,483 | 17,240 | 16,910 | |||||
Employee stock and director plans | 114 | 243 | 330 | ||||||
Retirement of treasury stock | (1,173 | ) | — | — | |||||
Conversion of 2.00% convertible senior notes due 2020 to shares of Class A common stock | — | 1,000 | — | ||||||
Balance at November 30, | 17,424 | 18,483 | 17,240 | ||||||
Class B common stock | 3,298 | 3,298 | 3,298 | ||||||
Additional paid-in capital: | |||||||||
Beginning balance | 2,721,246 | 2,421,941 | 2,341,079 | ||||||
Employee stock and director plans | 1,514 | 17,423 | 29,006 | ||||||
Retirement of treasury stock | (541,019 | ) | — | — | |||||
Tax benefit from employee stock plans, vesting of restricted stock and conversion of 2.00% convertible senior notes due 2020 | 17,382 | 17,162 | 22,544 | ||||||
Amortization of restricted stock and performance-based stock options | 40,581 | 33,559 | 29,312 | ||||||
Conversion of 2.00% convertible senior notes due 2020 to shares of Class A common stock | — | 293,106 | — | ||||||
Equity adjustment related to purchase of noncontrolling interests | — | (61,945 | ) | — | |||||
Balance at November 30, | 2,239,704 | 2,721,246 | 2,421,941 | ||||||
Retained Earnings: | |||||||||
Beginning balance | 2,053,893 | 1,605,131 | 956,401 | ||||||
Net earnings attributable to Lennar | 638,916 | 479,674 | 679,124 | ||||||
Cash dividends - Class A common stock | (27,766 | ) | (25,635 | ) | (25,387 | ) | |||
Cash dividends - Class B common stock | (5,009 | ) | (5,277 | ) | (5,007 | ) | |||
Balance at November 30, | 2,660,034 | 2,053,893 | 1,605,131 | ||||||
Treasury stock, at cost: | |||||||||
Beginning balance | (628,019 | ) | (632,846 | ) | (621,220 | ) | |||
Employee stock and directors plans | (7,613 | ) | 4,827 | (17,149 | ) | ||||
Retirement of treasury stock | 542,192 | — | — | ||||||
Reissuance of treasury stock | — | — | 5,523 | ||||||
Balance at November 30, | (93,440 | ) | (628,019 | ) | (632,846 | ) | |||
Total stockholders’ equity | 4,827,020 | 4,168,901 | 3,414,764 | ||||||
Noncontrolling interests: | |||||||||
Beginning balance | 458,569 | 586,444 | 607,057 | ||||||
Net earnings (loss) attributable to noncontrolling interests | (10,223 | ) | 25,252 | (21,792 | ) | ||||
Receipts related to noncontrolling interests | 12,859 | 8,236 | 1,659 | ||||||
Payments related to noncontrolling interests | (155,625 | ) | (201,655 | ) | (480 | ) | |||
Non-cash consolidations | 118,272 | 2,242 | — | ||||||
Non-cash purchase or activity of noncontrolling interests | 430 | (63,500 | ) | — | |||||
Equity adjustment related to purchase of noncontrolling interests | — | 101,550 | — | ||||||
Balance at November 30, | 424,282 | 458,569 | 586,444 | ||||||
Total equity | $ | 5,251,302 | 4,627,470 | 4,001,208 | |||||
See accompanying notes to consolidated financial statements.
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended November 30, 2014, 2013 and 2012
2014 | 2013 | 2012 | |||||||
(Dollars in thousands) | |||||||||
Cash flows from operating activities: | |||||||||
Net earnings (including net earnings (loss) attributable to noncontrolling interests) | $ | 628,693 | 504,926 | 657,332 | |||||
Adjustments to reconcile net earnings to net cash used in operating activities: | |||||||||
Depreciation and amortization | 38,542 | 30,349 | 28,081 | ||||||
Amortization of discount/premium on debt, net | 21,387 | 23,497 | 21,450 | ||||||
Lennar Homebuilding equity in (earnings) loss from unconsolidated entities | 355 | (23,803 | ) | 26,672 | |||||
Distributions of earnings from Lennar Homebuilding unconsolidated entities | 5,316 | 3,381 | 1,005 | ||||||
Rialto equity in earnings from unconsolidated entities | (59,277 | ) | (22,353 | ) | (41,483 | ) | |||
Distributions of earnings from Rialto unconsolidated entities | 2,466 | 648 | 18,399 | ||||||
Lennar Multifamily equity in (earnings) loss from unconsolidated entities | (14,454 | ) | 271 | 4 | |||||
Distributions of earnings from Lennar Multifamily unconsolidated entities | 14,469 | — | — | ||||||
Share-based compensation expense | 40,718 | 33,689 | 31,745 | ||||||
Tax benefit from share-based awards | — | 17,162 | 22,544 | ||||||
Excess tax benefits from share-based awards | (7,497 | ) | (10,148 | ) | (10,814 | ) | |||
Deferred income tax (benefit) expense | 75,324 | 151,619 | (467,561 | ) | |||||
Gain on retirement of Lennar Homebuilding debt | — | (1,000 | ) | (988 | ) | ||||
Gain on retirement of Rialto notes payable | (4,555 | ) | — | — | |||||
Gain on sale of operating property and equipment | — | (14,432 | ) | — | |||||
Loss on retirement of Lennar Homebuilding senior notes | — | — | 6,510 | ||||||
Unrealized and realized gains on Rialto real estate owned, net | (36,901 | ) | (48,358 | ) | (19,771 | ) | |||
Unrealized gain on Rialto bargain purchase acquisition | — | (8,532 | ) | — | |||||
Impairments of Rialto loans receivable and real estate owned, net | 76,450 | 32,229 | 37,248 | ||||||
Valuation adjustments and write-offs of option deposits and pre-acquisition costs, other receivables and other assets | 13,088 | 8,435 | 16,647 | ||||||
Changes in assets and liabilities: | |||||||||
(Increase) decrease in restricted cash | (18,930 | ) | (6,430 | ) | 3,841 | ||||
(Increase) decrease in receivables | (113,001 | ) | (62,708 | ) | 17,370 | ||||
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs | (1,367,415 | ) | (1,627,136 | ) | (563,051 | ) | |||
(Increase) decrease in other assets | (13,990 | ) | 4,279 | (35,041 | ) | ||||
Increase in Rialto loans held-for-sale | (69,269 | ) | (44,000 | ) | — | ||||
(Increase) decrease in Lennar Financial Services loans held-for-sale | (326,094 | ) | 86,130 | (202,916 | ) | ||||
Increase in accounts payable and other liabilities | 326,087 | 164,571 | 28,129 | ||||||
Net cash used in operating activities | (788,488 | ) | (807,714 | ) | (424,648 | ) | |||
Cash flows from investing activities: | |||||||||
Decrease (increase) in restricted cash related to LOCs | $ | 37 | (21,527 | ) | — | ||||
Net additions of operating properties and equipment | (22,599 | ) | (8,126 | ) | (2,822 | ) | |||
Proceeds from the sale of operating properties and equipment | 43,937 | 140,564 | — | ||||||
Investments in and contributions to Lennar Homebuilding unconsolidated entities | (87,501 | ) | (57,067 | ) | (72,611 | ) | |||
Distributions of capital from Lennar Homebuilding unconsolidated entities | 143,451 | 158,076 | 34,030 | ||||||
Investments in and contributions to Rialto unconsolidated entities | (41,523 | ) | (66,953 | ) | (43,555 | ) | |||
Distributions of capital from Rialto unconsolidated entities | 68,914 | 42,556 | 83,368 | ||||||
Investments in and contributions to Lennar Multifamily unconsolidated entities | (30,759 | ) | (22,748 | ) | — | ||||
Distributions of capital from Lennar Multifamily unconsolidated entities | 66,941 | 38,857 | 10,626 | ||||||
Decrease (increase) in Rialto defeasance cash to retire notes payable | — | 223,813 | (4,427 | ) | |||||
Receipts of principal payments on Rialto loans receivable | 24,019 | 66,788 | 81,648 | ||||||
Proceeds from sales of Rialto real estate owned | 269,698 | 239,215 | 183,883 | ||||||
Purchases of commercial mortgage-backed securities bond | (8,705 | ) | — | — | |||||
Proceeds from sale of commercial mortgage-backed securities bond | 9,171 | — | — | ||||||
Improvements to Rialto real estate owned | (14,278 | ) | (9,407 | ) | (13,945 | ) | |||
Purchases of loans receivables | — | (5,450 | ) | — | |||||
Purchases of Lennar Homebuilding investments available-for-sale | (21,274 | ) | (28,708 | ) | (11,403 | ) | |||
Proceeds from sales of Lennar Homebuilding investments available-for-sale | 51,934 | 5,906 | 14,486 | ||||||
Acquisitions, net of cash acquired | (5,489 | ) | (5,623 | ) | — | ||||
Increase in Rialto loans held-for-investment, net | (7,000 | ) | — | — | |||||
Decrease (increase) in Lennar Financial Services loans held-for-investment, net | 1,102 | (730 | ) | 2,919 | |||||
Purchases of Lennar Financial Services investment securities | (40,627 | ) | (30,333 | ) | (51,138 | ) | |||
Proceeds from maturities of Lennar Financial Services investments securities | 38,910 | 30,146 | 34,232 | ||||||
Net cash provided by investing activities | 438,359 | 689,249 | 245,291 | ||||||
See accompanying notes to consolidated financial statements.
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LENNAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
Years Ended November 30, 2014, 2013 and 2012
2014 | 2013 | 2012 | |||||||
(Dollars in thousands) | |||||||||
Cash flows from financing activities: | |||||||||
Net borrowings (repayments) under Lennar Financial Services debt | $ | 324,281 | (83,828 | ) | 47,860 | ||||
Net borrowings under Rialto warehouse repurchase facilities | 65,254 | 76,017 | — | ||||||
Proceeds from Lennar Homebuilding senior notes | 850,500 | 500,000 | 750,000 | ||||||
Proceeds from Lennar Homebuilding convertible senior notes | — | — | 50,000 | ||||||
Proceeds from Rialto senior notes | 104,525 | 250,000 | — | ||||||
Proceeds from Rialto structured notes | 94,444 | — | — | ||||||
Debt issuance costs of senior notes and convertible senior notes | (9,989 | ) | (12,935 | ) | (9,118 | ) | |||
Redemption and partial redemption of senior notes | (250,000 | ) | (63,751 | ) | (210,862 | ) | |||
Principal payments on Rialto structured notes | (36,509 | ) | — | — | |||||
Principal repayments on Rialto notes payable | (39,370 | ) | (471,255 | ) | (191,221 | ) | |||
Proceeds from other borrowings | 34,424 | 92,596 | 41,500 | ||||||
Principal payments on other borrowings | (299,713 | ) | (287,359 | ) | (97,891 | ) | |||
Exercise of land option contracts from an unconsolidated land investment venture | (1,540 | ) | (28,869 | ) | (50,396 | ) | |||
Receipts related to noncontrolling interests | 12,859 | 8,236 | 1,659 | ||||||
Payments related to noncontrolling interests | (155,625 | ) | (201,655 | ) | (480 | ) | |||
Excess tax benefits from share-based awards | 7,497 | 10,148 | 10,814 | ||||||
Common stock: | |||||||||
Issuances | 13,599 | 34,114 | 32,174 | ||||||
Repurchases | (20,424 | ) | (12,320 | ) | (17,149 | ) | |||
Dividends | (32,775 | ) | (30,912 | ) | (30,394 | ) | |||
Net cash provided by (used in) financing activities | 661,438 | (221,773 | ) | 326,496 | |||||
Net increase (decrease) in cash and cash equivalents | 311,309 | (340,238 | ) | 147,139 | |||||
Cash and cash equivalents at beginning of year | 970,505 | 1,310,743 | 1,163,604 | ||||||
Cash and cash equivalents at end of year | $ | 1,281,814 | 970,505 | 1,310,743 | |||||
Summary of cash and cash equivalents: | |||||||||
Lennar Homebuilding | $ | 885,729 | 695,424 | 1,146,302 | |||||
Lennar Financial Services | 90,010 | 73,066 | 58,566 | ||||||
Rialto | 303,889 | 201,496 | 105,310 | ||||||
Lennar Multifamily | 2,186 | 519 | 565 | ||||||
$ | 1,281,814 | 970,505 | 1,310,743 | ||||||
Supplemental disclosures of cash flow information: | |||||||||
Cash paid for interest, net of amounts capitalized | $ | 68,366 | 112,694 | 108,879 | |||||
Cash paid for income taxes, net | $ | 202,374 | 11,433 | 26,687 | |||||
Supplemental disclosures of non-cash investing and financing activities: | |||||||||
Lennar Homebuilding and Lennar Multifamily: | |||||||||
Purchases of inventories, land under development and other assets financed by sellers | $ | 129,881 | 167,134 | 89,063 | |||||
Non-cash contributions to Lennar Homebuilding unconsolidated entities | $ | 10,844 | 227,243 | 720 | |||||
Inventory acquired in satisfaction of other assets including investments available-for-sale | $ | — | — | 103,114 | |||||
Non-cash purchases of investments available-for-sale | $ | — | — | 12,520 | |||||
Non-cash reduction of equity due to purchase of noncontrolling interest | $ | — | 101,550 | — | |||||
Non-cash purchase of noncontrolling interests | $ | — | 63,500 | — | |||||
Non-cash contributions to Lennar Multifamily unconsolidated entities | $ | 95,288 | 59,555 | 13,674 | |||||
Rialto: | |||||||||
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable | $ | 57,390 | 70,237 | 183,911 | |||||
Real estate owned acquired in bargain purchase acquisition | $ | — | 31,818 | — | |||||
Net liabilities assumed in bargain purchase acquisition | $ | — | 6,200 | — | |||||
Non-cash acquisition of Servicer Provider | $ | 8,317 | — | — | |||||
Reductions in loans receivable from deficiency settlements | $ | — | 619 | 3,068 | |||||
Lennar Financial Services: | |||||||||
Purchase of mortgage servicing rights financed by seller | $ | 5,697 | — | — | |||||
Consolidation/deconsolidation of unconsolidated/consolidated entities, net: | |||||||||
Inventories | $ | 155,021 | — | — | |||||
Investments in unconsolidated entities | $ | (30,647 | ) | — | — | ||||
Other assets | $ | (7,218 | ) | — | — | ||||
Noncontrolling interests | $ | (117,156 | ) | — | — | ||||
78
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 16) in which Lennar Corporation is deemed the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowner, the new homeowner’s initial and continuing investment is adequate to demonstrate a commitment to pay for the home, the new homeowner’s receivable is not subject to future subordination and the Company does not have a substantial continuing involvement with the new home. Revenues from sales of land are recognized when a significant down payment is received, the earnings process is complete, title passes and collectability of the receivable is reasonably assured. See Lennar Financial Services, Rialto and Lennar Multifamily within this Note for disclosure of other revenue recognition policies related to those segments.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $45.2 million, $31.9 million and $33.0 million for the years ended November 30, 2014, 2013 and 2012, respectively.
Share-Based Payments
The Company has share-based awards outstanding under the 2007 Equity Incentive Plan (the "Plan"), which provides for the granting of stock options, stock appreciation rights, restricted common stock (“nonvested shares”) and other shared based awards to officers, associates and directors. The exercise prices of stock options may not be less than the market value of the common stock on the date of the grant. Exercises are permitted in installments determined when options are granted. Each stock option will expire on a date determined at the time of the grant, but not more than ten years after the date of the grant. The Company accounts for stock option awards and nonvested share awards granted under the Plan based on the estimated grant date fair value.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Due to the short maturity period of cash equivalents, the carrying amounts of these instruments approximate their fair values. Cash and cash equivalents as of November 30, 2014 and 2013 included $263.2 million and $172.3 million, respectively, of cash held in escrow for approximately three days.
Restricted Cash
Lennar Homebuilding restricted cash consists of customer deposits on home sales held in restricted accounts until title transfers to the homebuyer, as required by the state and local governments in which the homes were sold, as well as funds on deposit to secure and support performance obligations. Rialto restricted cash consists of cash held in escrow by the Company's loan servicer provider on behalf of customers and lenders and is disbursed in accordance with agreements between transacting parties.
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LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Inventories
Finished homes and construction in progress are included within inventories. Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes, deposits on land purchase contracts and interest related to development and construction. Construction overhead and selling expenses are expensed as incurred. Homes held-for-sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated to homes within the respective areas. The Company reviews its inventory for indicators of impairment by evaluating each community during each reporting period. The inventory within each community is categorized as finished homes and construction in progress or land under development based on the development state of the community. There were 622 and 535 active communities, excluding unconsolidated entities, as of November 30, 2014 and 2013, respectively. If the undiscounted cash flows expected to be generated by a community are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such community to its estimated fair value.
In conducting its review for indicators of impairment on a community level, the Company evaluates, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. The Company pays particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales price and/or margins are trending downward and are anticipated to continue to trend downward. From this review, the Company identifies communities whose carrying values exceed their undiscounted cash flows.
The Company estimates the fair value of its communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above. For example, during the downturn in the housing market, the Company found ways to reduce its construction costs in many communities, and this reduction in construction costs in addition to changes in product type in many communities impacted future estimated cash flows.
Each of the homebuilding markets in which the Company operates is unique, as homebuilding has historically been a local business driven by local market conditions and demographics. Each of the Company’s homebuilding markets has specific supply and demand relationships reflective of local economic conditions. The Company’s projected cash flows are impacted by many assumptions. Some of the most critical assumptions in the Company’s cash flow model are projected absorption pace for home sales, sales prices and costs to build and deliver homes on a community by community basis.
In order to arrive at the assumed absorption pace for home sales included in the Company’s cash flow model, the Company analyzes its historical absorption pace in the community as well as other comparable communities in the geographical area. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics, unemployment rates and availability of competing product in the geographic area where the community is located. When analyzing the Company’s historical absorption pace for home sales and corresponding internal and external market studies, the Company places greater emphasis on more current metrics and trends such as the absorption pace realized in its most recent quarters as well as forecasted population demographics, unemployment rates and availability of competing product. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a trend and adjusts its historical information accordingly in order to develop assumptions on the projected absorption pace in the cash flow model for a community.
In order to determine the assumed sales prices included in its cash flow models, the Company analyzes the historical sales prices realized on homes it delivered in the community and other comparable communities in the geographical area as well as the sales prices included in its current backlog for such communities. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on sales prices in neighboring communities and sales prices on similar products in non-neighboring communities in the geographic area where the community is located. When analyzing its historical sales prices and corresponding market studies, the Company also places greater emphasis on more current metrics and trends such as future forecasted sales prices in neighboring communities as well as future forecasted sales prices for similar products in non-neighboring communities. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a
80
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
trend and adjusts its historical information accordingly in order to develop assumptions on the projected sales prices in the cash flow model for a community.
In order to arrive at the Company’s assumed costs to build and deliver homes, the Company generally assumes a cost structure reflecting contracts currently in place with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. Those costs assumed are used in the cash flow model for the Company’s communities.
Since the estimates and assumptions included in the Company’s cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead the Company to incur additional impairment charges in the future.
Using all available information, the Company calculates its best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. The Company generally uses a discount rate of approximately 20%, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory.
The Company estimates the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or assumptions change. For example, market deterioration or changes in assumptions may lead the Company to incur additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired but for which indicators of impairment may arise if market deterioration occurs.
For November 30, 2014, the Company reviewed its communities for potential indicators of impairments and identified 26 homebuilding communities with 1,774 homesites and a carrying value of $145.3 million as having potential indicators of impairment. Of those communities, the Company recorded valuation adjustments of $2.9 million on 120 homesites in one community with a carrying value of $8.1 million.
For November 30, 2013, the Company reviewed its communities for potential indicators of impairments and identified 35 homebuilding communities with 1,515 homesites and a carrying value of $130.5 million as having potential indicators of impairment. Of those communities, the Company recorded valuation adjustments of $4.5 million on 99 homesites in 3 communities with a carrying value of $16.5 million.
The table below summarizes the most significant unobservable inputs used in the Company's discounted cash flow model to determine the fair value of its communities for which the Company recorded valuation adjustments during the years ended November 30, 2014, 2013 and 2012:
November 30, | |||||||||||||||
2014 | 2013 | 2012 | |||||||||||||
Unobservable inputs | Range | Range | |||||||||||||
Average selling price | $164,000 | $163,000 | - | $279,000 | $83,000 | - | $340,000 | ||||||||
Absorption rate per quarter (homes) | 12 | 2 | - | 34 | 1 | - | 20 | ||||||||
Discount rate | 20% | 20% | 20% | ||||||||||||
The Company also has access to land inventory through option contracts, which generally enables the Company to defer acquiring portions of properties owned by third parties and unconsolidated entities until it has determined whether to exercise its option. A majority of the Company’s option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. The Company’s option contracts are recorded at cost. In determining whether to walk away from an option contract, the Company evaluates the option primarily based upon its expected cash flows from the property under option. If the Company intends to walk away from an option contract, it records a charge to earnings in the period such decision is made for the deposit amount and any related pre-acquisition costs associated with the option contract.
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LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Lennar Homebuilding and Lennar Multifamily Investments in Unconsolidated Entities
The Company evaluates its investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the fair value of the Company’s investment in the unconsolidated entity below its carrying amount has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value.
The evaluation of the Company’s investments in unconsolidated entities includes certain critical assumptions made by management: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors.
The Company’s assumptions on the projected future distributions from the unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the Lennar Homebuilding unconsolidated entities or assets by Lennar Multifamily unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The unconsolidated entities generally use a discount rate of approximately 20% in their reviews for impairment, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the Company's Lennar Homebuilding or Lennar Multifamily equity in earnings (loss) from unconsolidated entities with a corresponding decrease to its Lennar Homebuilding or Lennar Multifamily investment in unconsolidated entities. In certain instances, the Company may be required to record additional losses relating to its investment in unconsolidated entities, if the Company’s investment in the unconsolidated entity, or a portion thereof, is deemed to be other than temporarily impaired. These losses are included in Lennar Homebuilding other income, net or in Lennar Multifamily costs and expenses.
Additionally, the Company considers various qualitative factors to determine if a decrease in the value of an investment is other-than-temporary. These factors include age of the venture, intent and ability for the Company to recover its investment in the entity, financial condition and long-term prospects of the unconsolidated entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners and banks. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded.
The Company tracks its share of cumulative earnings and distributions of its joint ventures (“JVs”). For purposes of classifying distributions received from JVs in the Company’s consolidated statements of cash flows, cumulative distributions are treated as returns on capital to the extent of cumulative earnings and included in the Company’s consolidated statements of cash flows as operating activities. Cumulative distributions in excess of the Company’s share of cumulative earnings are treated as returns of capital and included in the Company’s consolidated statements of cash flows as investing activities.
Consolidation of Variable Interest Entities
GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company’s variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management and development agreements between the Company and a VIE, (4) loans provided by the Company to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. The Company examines specific criteria and uses its judgment when determining if it is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality, if any, between the Company and the other partner(s) and contracts to purchase assets from VIEs. The determination whether an entity is a VIE and, if so, whether the Company is the primary beneficiary may require it to exercise significant judgment.
Generally, all major decision making in the Company’s joint ventures is shared among all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by the Company are nominal and believed to be at market and there is no significant economic disproportionality between the Company and other partners. Generally, the Company purchases less than a majority of the JV’s assets and the purchase prices under its option contracts are believed to be at market.
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LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Generally, Lennar Homebuilding unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, the Company continues to fund operations and debt paydowns through partner loans or substituted capital contributions.
Operating Properties and Equipment
Operating properties and equipment are recorded at cost and are included in other assets in the consolidated balance sheets. The assets are depreciated over their estimated useful lives using the straight-line method. At the time operating properties and equipment are disposed of, the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to earnings. The estimated useful life for operating properties is thirty years, for furniture, fixtures and equipment is two to ten years and for leasehold improvements is five years or the life of the lease, whichever is shorter. Operating properties are reviewed for possible impairment if there are indicators that their carrying amounts are not recoverable.
Investment Securities
Investment securities are classified as available-for-sale unless they are classified as trading or held-to-maturity. Securities classified as trading are carried at fair value and unrealized holding gains and losses are recorded in earnings. Available-for-sale securities are recorded at fair value. Any unrealized holding gains or losses on available-for-sale securities are reported as accumulated other comprehensive gain or loss, which is a separate component of stockholders’ equity, net of tax, until realized. Securities classified as held-to-maturity are carried at amortized cost because they are purchased with the intent and ability to hold to maturity.
At November 30, 2014 and 2013, the Lennar Homebuilding segment had available-for-sale securities totaling $0.5 million and $40.0 million, respectively, included in Lennar Homebuilding other assets, which consist primarily of investments in community development district bonds that mature in 2039. Certain of these bonds are in default by the borrower, which may allow the Company to foreclose on the underlying real estate collateral. Unrealized holding gain (losses) during the years ended November 30, 2014 and 2013 were deferred as a result of the Company's continuing involvement in the underlying collateral, thus no gains were recognized during the years ended November 30, 2014 and 2013. At November 30, 2014 and 2013, the Lennar Financial Services segment had investment securities classified as held-to-maturity totaling $45.0 million and $62.3 million, respectively. The Lennar Financial Services held-to-maturity securities consist mainly of corporate bonds, certificates of deposit and U.S. treasury securities that mature at various dates within a year. In addition, at November 30, 2014 and 2013, the Rialto segment had investment securities classified as held-to-maturity totaling $17.3 million and $16.1 million, respectively. The Rialto segment held-to-maturity securities consist of commercial mortgage-backed securities (“CMBS”). At both November 30, 2014 and 2013, the Company had no investment securities classified as trading.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations. Evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units in which the Company has recorded goodwill. A reporting unit is a component of an operating segment for which discrete financial information is available and reviewed by the Company’s management on a regular basis. Inherent in the determination of fair value of the Company’s reporting units are certain estimates and judgments, including the interpretation of current economic indicators and market valuations as well as the Company’s strategic plans with regard to its operations. To the extent additional information arises or the Company’s strategies change, it is possible that the Company’s conclusion regarding goodwill impairment could change, which could have an effect on the Company’s financial position and results of operations.
The Company reviews goodwill annually (or whenever indicators of impairment exist) for impairment. The Company evaluated the carrying value of the Lennar Financial Services and Rialto segments' goodwill in the fourth quarter of 2014. The Company estimated the fair value of Lennar Financial Services title and mortgage operations and Rialto operations based on the income approach and concluded that a goodwill impairment was not required for 2014. As of both November 30, 2014 and 2013, there were no significant identifiable intangible assets, other than goodwill.
At both November 30, 2014 and 2013, accumulated goodwill impairments totaled $217.4 million, which includes $27.2 million and $190.2 million of previous Lennar Financial Services and Lennar Homebuilding goodwill impairments, respectively. At November 30, 2014, goodwill was $44.3 million, of which $38.9 million related to the Lennar Financial Services segment and $5.4 million related to the Rialto segment. At November 30, 2013, goodwill was $34.0 million, all of which related to the Lennar Financial Services segment. The changes in goodwill were due to the acquisitions of a Colorado-based mortgage company by Lennar Financial Services and of the 100% acquisition of the loan servicing business segment of a financial services company (the "Servicer Provider") in which a subsidiary of Rialto had an approximately 5% investment at the time of acquisition.
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Interest and Real Estate Taxes
Interest and real estate taxes attributable to land and homes are capitalized as inventory costs while they are being actively developed. Interest related to homebuilding and land, including interest costs relieved from inventories, is included in cost of homes sold and cost of land sold. Interest expense related to the Lennar Financial Services operations is included in its costs and expenses.
During the years ended November 30, 2014, 2013 and 2012, interest incurred by the Company’s homebuilding operations related to homebuilding debt was $273.4 million, $261.5 million and $222.0 million, respectively; interest capitalized into inventories was $236.9 million, $167.6 million and $127.7 million, respectively.
Interest expense was included in cost of homes sold, cost of land sold and other interest expense as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Interest expense in cost of homes sold | $ | 161,371 | 117,781 | 85,125 | |||||
Interest expense in cost of land sold | 3,617 | 2,562 | 1,907 | ||||||
Other interest expense | 36,551 | 93,913 | 94,353 | ||||||
Total interest expense | $ | 201,539 | 214,256 | 181,385 | |||||
Income Taxes
The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. Interest related to unrecognized tax benefits is recognized in the financial statements as a component of income tax expense.
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed each reporting period by the Company based on the consideration of all available positive and negative evidence using a "more-likely-than-not" standard with respect to whether deferred tax assets will be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.
Based on the analysis of positive and negative evidence, the Company believed that there was enough positive evidence for the Company to conclude that it was more likely than not that the Company would realize the majority of its deferred tax assets. As of November 30, 2014 and 2013, the Company's net deferred tax assets included a valuation allowance of $8.0 million and $12.7 million, respectively. See Note 10 for additional information.
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Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in Lennar Homebuilding other liabilities in the consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Warranty reserve, beginning of period | $ | 102,580 | 84,188 | |||
Warranties issued | 60,856 | 50,695 | ||||
Adjustments to pre-existing warranties from changes in estimates (1) | 12,685 | 19,687 | ||||
Payments | (60,194 | ) | (51,990 | ) | ||
Warranty reserve, end of period | $ | 115,927 | 102,580 | |||
(1) | The adjustments to pre-existing warranties from changes in estimates during the year ended November 30, 2014 and 2013 primarily related to specific claims related to certain of our homebuilding communities and other adjustments. |
Self-Insurance
Certain insurable risks such as construction defects, general liability, medical and workers’ compensation are self-insured by the Company up to certain limits. Undiscounted accruals for claims under the Company’s self-insurance program are based on claims filed and estimates for claims incurred but not yet reported. The Company’s self-insurance reserve as of November 30, 2014 and 2013 was $103.2 million and $108.7 million, respectively, of which $69.3 million and $74.5 million, respectively, was included in Lennar Financial Services’ other liabilities in the respective years. Amounts incurred in excess of the Company's self-insurance occurrence or aggregate retention limits are covered by insurance up to the Company's purchased coverage levels. The Company's insurance policies are maintained with highly-rated underwriters for whom the Company believes counterparty default risk is not significant.
Earnings per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the Company.
All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Lennar Financial Services
Revenue Recognition
Title premiums on policies issued directly by the Company are recognized as revenue on the effective date of the title policies and escrow fees and loan origination revenues are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. Revenues from title policies issued by independent agents are recognized as revenue when notice of issuance is received from the agent, which is generally when cash payment is received by the Company. Expected gains and losses from the sale of loans and their related servicing rights are included in the measurement of all written loan commitments that are accounted for at fair value through earnings at the time of commitment. Interest income on loans held-for-sale and loans held-for-investment is recognized as earned over the terms of the mortgage loans based on the contractual interest rates.
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Loans Held-for-Sale
Loans held-for-sale by the Lennar Financial Services segment are carried at fair value and changes in fair value are reflected in earnings. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions.
In addition, the Lennar Financial Services segment recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in the Company’s loans held-for-sale and Financial Services other assets as of November 30, 2014 and 2013. Fair value of the servicing rights is determined based on values in the Company’s servicing sales contracts. At November 30, 2014 and 2013, loans held-for-sale, all of which were accounted for at fair value, had an aggregate fair value of $738.4 million and $414.2 million, respectively, and an aggregate outstanding principal balance of $706.0 million and $399.0 million at November 30, 2014 and 2013, respectively.
Provision for Losses
Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreement. During recent years there has been an increased industry-wide effort by purchasers to defray their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Loan origination liabilities, beginning of year | $ | 9,311 | 7,250 | |||
Provision for losses (1) | 2,908 | 2,427 | ||||
Payments/settlements | (401 | ) | (366 | ) | ||
Loan origination liabilities, end of year | $ | 11,818 | 9,311 | |||
(1) | Provision for losses included adjustments to pre-existing provisions for losses from changes in estimates. For the year ended November 30, 2013, provision for losses included an adjustment for additional repurchase requests that were received beyond the estimated provision that was recorded due to an increase in potential issues identified by certain investors. |
The Lennar Financial Services segment also provides an allowance for loan losses. The provision recorded and the adequacy of the related allowance is determined by management’s continuing evaluation of the loan portfolio in light of past loan loss experience, credit worthiness and nature of underlying collateral, present economic conditions and other factors considered relevant by the Company’s management. Anticipated changes in economic factors, which may influence the level of the allowance, are considered in the evaluation by the Company’s management when the likelihood of the changes can be reasonably determined. While the Company’s management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary as a result of future economic and other conditions that may be beyond management’s control.
Loans Held-for-Investment, Net
Loans for which the Company has the positive intent and ability to hold to maturity consist of mortgage loans carried at lower of cost, net of unamortized discounts or fair value on a nonrecurring basis. Discounts are amortized over the estimated lives of the loans using the interest method.
For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual
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terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Impaired loans unpaid principal balance | $ | 7,576 | 7,897 | |||
Valuation allowance | (3,730 | ) | (3,891 | ) | ||
Investment in impaired loans | $ | 3,846 | 4,006 | |||
The average recorded investment in impaired loans totaled approximately $3.9 million and $3.5 million, for the years ended November 30, 2014 and 2013, respectively.
Derivative Financial Instruments
The Lennar Financial Services segment, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in mortgage-related interest rates. The segment uses mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to protect the value of fixed rate-locked loan commitments and loans held-for-sale from fluctuations in mortgage-related interest rates. These derivative financial instruments are carried at fair value with the changes in fair value included in Lennar Financial Services revenues.
Rialto
Management Fees Revenue
The Rialto segment provides services to a variety of legal entities and investment vehicles such as funds, joint ventures, co-invests, and other private equity structures to manage their respective investments. As a result, Rialto earns and receives management fees, underwriting fees and due diligence fees. These fees related to the Rialto segment are included in Rialto revenues and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. Rialto receives investment management fees from investment vehicles based on 1) a percentage of committed capital during the commitment period and after the commitment period ends and 2) a percentage of invested capital less the portion of such invested capital utilized to acquire investments that have been sold (in whole or in part) or liquidated. Fees earned for underwriting and due diligence services are based on actual costs incurred. In certain situations, Rialto may earn additional fees when the return on assets managed exceeds contractually established thresholds. Such revenue is only booked when the contract terms are met, the contract is at, or near, completion and the amounts are known and collectability is reasonably assured. Since such revenue is recognized at the end of the life of the investment vehicle, after substantially all of the assets have been sold and investment gains and losses realized, the possibility of claw backs is limited.
Loans Receivable – Revenue Recognition
All of the acquired loans for which (1) there was evidence of credit quality deterioration since origination and (2) for which it was deemed probable that the Company would be unable to collect all contractually required principal and interest payments were accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”). For loans accounted for under ASC 310-30, management determined upon acquisition the loan’s value based on due diligence regarding each of the loans, the underlying properties and the borrowers. The Company determined fair value by discounting the cash flows expected to be collected adjusted for factors that a market participant would consider when determining fair value. Factors considered in the valuation were projected cash flows for the loans, type of loan and related collateral, classification status and current discount rates. Since the estimates are based on projections, all estimates are subjective and can change due to unexpected changes in economic conditions or loan performance.
Under ASC 310-30, loans were pooled together according to common risk characteristics. A pool is then accounted for as a single asset with a single component interest rate and as aggregate expectation of cash flows. The excess of the cash flows expected to be collected over the cost of the loans acquired is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the effective yield method. The difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on our consolidated balance sheets. Changes in the expected cash flows of loans receivable from the date of acquisition will either impact the accretable yield or result in a charge to the provision for loan losses in the period in which the changes become probable. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of contractually required payments such that the nonaccretable difference is not affected. Subsequent significant decreases to the expected cash flows will generally result in a charge to the provision for loan losses,
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resulting in an increase to the allowance for loan losses, and a reclassification from accretable yield to nonaccretable difference. Subsequent probable and significant increases in the cash flows will result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield. Amounts related to the ASC 310-30 loans are estimates and may change as we obtain additional information related to the respective loans and the inherent uncertainty associated with estimating the amount and timing of the expected cash flows associated with distressed residential and commercial real estate loans. The timing and amount of expected cash flows and related accretable yield can also be impacted by disposal of loans, loan payoffs or expected foreclosures, which result in removal of the loans from the pools. Since the cash flows are based on projections, they are subjective and can change due to unexpected changes in economic conditions and loan performance. During the fourth quarter of 2014, in an effort to better reflect the performance of the loan portfolios, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. At November 30, 2014, these loans were classified as nonaccrual loans.
Nonaccrual Loans- Revenue Recognition & Impairment
At November 30, 2014 and 2013, there were loans receivable with a carrying value of $130.1 million and $8.3 million, respectively, for which interest income was not being recognized as they were classified as nonaccrual. When forecasted principal and interest cannot be reasonably estimated at the loan acquisition date, management classifies the loan as nonaccrual and accounts for these assets in accordance with ASC 310-10, Receivable, (“ASC 310-10”). When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.
A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.
Real Estate Owned
Real estate owned (“REO”) represents real estate that the Rialto segment has taken control or has effective control of in partial or full satisfaction of loans receivable. At the time of acquisition of a property through foreclosure of a loan, REO is recorded at fair value less estimated costs to sell if classified as held-for-sale or at fair value if classified as held-and-used, which becomes the property’s new basis. The fair values of these assets are determined in part by placing reliance on third-party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity. The third-party appraisals and internally developed analyses are significantly impacted by the local market economy, market supply and demand, competitive conditions and prices on comparable properties, adjusted for date of sale, location, property size, and other factors. Each REO is unique and is analyzed in the context of the particular market where the property is located. In order to establish the significant assumptions for a particular REO, the Company analyzes historical trends, including trends achieved by the Company's local homebuilding operations, if applicable, and current trends in the market and economy impacting the REO. Using available trend information, the Company then calculates its best estimate of fair value, which can include projected cash flows discounted at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. These methods use unobservable inputs to develop fair value for the Company’s REO. Due to the volume and variance of unobservable inputs, resulting from the uniqueness of each of the Company's REO, the Company does not use a standard range of unobservable inputs with respect to its evaluation of REO. However, for operating properties within REO, the Company may also use estimated cash flows multiplied by a capitalization rate to determine the fair value of the property. For the year ended November 30, 2014, the capitalization rates used to estimate fair value ranged from 8% to 12% and varied based on the location of the asset, asset type and occupancy rates for the operating properties.
Changes in economic factors, consumer demand and market conditions, among other things, could materially impact estimates used in the third-party appraisals and/or internally prepared analyses of recent offers or prices on comparable properties. Thus, estimates can differ significantly from the amounts ultimately realized by the Rialto segment from disposition of these assets. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain upon foreclosure in the Company’s consolidated statement of operations. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is generally recorded as a provision for loan losses in the Company’s consolidated statement of operations.
At times, the Company may foreclose on a loan from an accrual loan pool in which the removal of the loan does not cause an overall decrease in the expected cash flows of the loan pool, and as such, no provision for loan losses is required to be
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recorded. However, the amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is recorded as an unrealized loss upon foreclosure.
Additionally, REO includes real estate which Rialto has purchased directly from financial institutions. These REOs are recorded at cost or allocated cost if purchased in a bulk transaction.
Subsequent to obtaining REO via foreclosure or directly from a financial institution, management periodically performs valuations using the methodologies described above such that the real estate is carried at the lower of its carrying value or current fair value, less estimated costs to sell if classified as held-for-sale. Held-and-used assets are tested for recoverability whenever changes in circumstances indicate that the carrying value may not be recoverable, and impairment losses are recorded for any amount by which the carrying value exceeds its fair value. Any subsequent valuation adjustments, operating expenses or income, and gains and losses on disposition of such properties are also recognized in Rialto other income (expense), net. REO assets classified as held-and-used are depreciated using a useful life of forty years for commercial properties and twenty seven and a half years for residential properties. REO assets classified as held-for-sale are not depreciated. Occasionally an asset will require certain improvements to yield a higher return. In accordance with ASC 970-340-25, Real Estate, construction costs incurred prior to acquisition or during development of the asset may be capitalized.
Rialto Mortgage Finance - Loans Held-for-Sale
The originated mortgage loans are classified as loans held-for-sale on the consolidated balance sheets and are recorded at fair value. The Company elected the fair value option for Rialto Mortgage Finance's ("RMF's") loans held-for-sale in accordance with ASC 825, Financial Instruments, which permits entities to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Management believes that carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments, which are also carried at fair value, used to economically hedge them without having to apply complex hedge accounting provisions. Changes in fair values of the loans are reflected in Rialto revenues in the accompanying consolidated statements of operations. Interest income on these loans is calculated based on the interest rate of the loan and is recorded within Rialto revenues in the accompanying consolidated statements of operations. Substantially all of the mortgage loans originated are sold within a short period of time in a securitization on a servicing released, non-recourse basis; although, the Company remains liable for certain limited industry-standard representations and warranties related to loan sales.
Consolidations of Variable Interest Entities
In 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The Company determined that each of the LLCs met the definition of a VIE and that the Company was the primary beneficiary. In accordance with ASC 810-10-65-2, Consolidations, (“ASC 810-10-65-2”), the Company identified the activities that most significantly impact the LLCs’ economic performance and determined that it has the power to direct those activities. The economic performance of the LLCs is most significantly impacted by the performance of the LLCs’ portfolios of assets, which consisted primarily of distressed residential and commercial mortgage loans. Thus, the activities that most significantly impact the LLCs’ economic performance are the servicing and disposition of mortgage loans and real estate obtained through foreclosure of loans, restructuring of loans, or other planned activities associated with the monetizing of loans.
The FDIC does not have the unilateral power to terminate the Company’s role in managing the LLCs and servicing the loan portfolios. While the FDIC has the right to prevent certain types of transactions (i.e., bulk sales, selling assets with recourse back to the selling entity, selling assets with representations and warranties and financing the sales of assets without the FDIC’s approval), the FDIC does not have full voting or blocking rights over the LLCs’ activities, making their voting rights protective in nature, not substantive participating voting rights. Other than as described in the preceding sentence, which are not the primary activities of the LLCs, the Company can cause the LLCs to enter into both the disposition and restructuring of loans without any involvement of the FDIC. Additionally, the FDIC has no voting rights with regard to the operation/management of the operating properties that are acquired upon foreclosure of loans (e.g. REO) and no voting rights over the business plans of the LLCs. The FDIC can make suggestions regarding the business plans, but the Company can decide not to follow the FDIC’s suggestions and not to incorporate them in the business plans. Since the FDIC’s voting rights are protective in nature and not substantive participating voting rights, the Company has the power to direct the activities that most significantly impact the LLCs’ economic performance.
In accordance with ASC 810-10-65-2, the Company determined that it had an obligation to absorb losses of the LLCs that could potentially be significant to the LLCs or the right to receive benefits from the LLCs that could potentially be significant to the LLCs based on the following factors:
• | Rialto/Lennar owns 40% of the equity of the LLCs and has the power to direct the activities of the LLCs that most significantly impact their economic performance through loan resolutions and the sale of REO. |
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• | Rialto/Lennar has a management/servicer contract under which the Company earns a 0.5% servicing fee. |
• | Rialto/Lennar has guaranteed, as the servicer, its obligations under the servicing agreement up to $10 million. |
The Company is aware that the FDIC, as the owner of 60% of the equity of each of the LLCs, may also have an obligation to absorb losses of the LLCs that could potentially be significant to the LLCs. However, in accordance with ASC 810-10-25-38A, only one enterprise, if any, is expected to be identified as the primary beneficiary of a VIE.
Since both criteria for consolidation in ASC 810-10-65-2 are met, the Company consolidated the LLCs.
Voting Interest Entities
Rialto Real Estate Fund, LP ("Fund I"), Rialto Real Estate Fund II, LP ("Fund II") and the Rialto Mezzanine Partners Fund ("Mezzanine Fund") are unconsolidated entities and are accounted for under the equity method of accounting. They were determined to have the attributes of an investment company in accordance with ASC Topic 946, Financial Services – Investment Companies, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, Fund I, Fund II and the Mezzanine Fund’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations, the Company’s share of which will be recorded in the Rialto equity in earnings (loss) from unconsolidated entities financial statement line item. The Company determined that Fund I, Fund II and the Mezzanine Fund are not variable interest entities but rather voting interest entities due to the following factors:
• | The Company determined that Rialto’s general partner interest and all the limited partners’ interests qualify as equity investment at risk. |
• | Based on the capital structure of Fund I, Fund II and the Mezzanine Fund (100% capitalized via equity contributions), the Company was able to conclude that the equity investment at risk was sufficient to allow Fund I, Fund II and the Mezzanine Fund to finance its activities without additional subordinated financial support. |
• | The general partner and the limited partners in Fund I, Fund II and the Mezzanine Fund, collectively, have full decision-making ability as they collectively have the power to direct the activities of Fund I, Fund II and the Mezzanine Fund, since Rialto, in addition to being a general partner with a substantive equity investment in Fund I, Fund II and the Mezzanine Fund, also provides services to Fund I, Fund II and the Mezzanine Fund under a management agreement and an investment agreement, which are not separable from Rialto’s general partnership interest. |
• | As a result of all these factors, the Company has concluded that the power to direct the activities of Fund I, Fund II and the Mezzanine Fund reside in its general partnership interest and thus with the holders of the equity investment at risk. |
• | In addition, there are no guaranteed returns provided to the equity investors and the equity contributions are fully subjected to Fund I, Fund II and the Mezzanine Fund's operational results, thus the equity investors absorb the expected negative and positive variability relative to Fund I, Fund II and the Mezzanine Fund. |
• | Finally, substantially all of the activities of Fund I, Fund II and the Mezzanine Fund are not conducted on behalf of any individual investor or related group that has disproportionately few voting rights (i.e., on behalf of any individual limited partner). |
Having concluded that Fund I, Fund II and the Mezzanine Fund are voting interest entities, the Company has evaluated the funds under the voting interest entity model to determine whether, as general partner, it has control over Fund I, Fund II or the Mezzanine Fund. The Company determined that it does not control Fund I, Fund II or the Mezzanine Fund as its general partner, because the unaffiliated limited partners have substantial kick-out rights and can remove Rialto as general partner at any time for cause or without cause through a simple majority vote of the limited partners. In addition, there are no significant barriers to the exercise of these rights. As a result of determining that the Company does not control Fund I, Fund II or the Mezzanine Fund under the voting interest entity model, Fund I, Fund II and the Mezzanine Fund are not consolidated in the Company’s financial statements.
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Lennar Multifamily
Management Fees and General Contractor Revenue
The Lennar Multifamily segment provides management services with respect to the development, construction and management of rental projects in joint ventures in which the Company has investments. As a result, the Lennar Multifamily segment earns and receives fees, which are based upon a stated percentage of development and construction costs. These fees are included in Lennar Multifamily revenue and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. In addition, the Lennar Multifamily provides general contractor services for the construction of some of its rental projects and recognizes the revenue over the period in which the services are performed under the percentage of completion method.
New Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, (“ASU 2011-11”), which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. In January 2013, this guidance was amended by ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting assets and Liabilities ("ASU 2013-01"). ASU 2013-01 limits the scope of ASU 2011-11 to certain derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. The guidance was effective for the Company's fiscal year beginning December 1, 2013 and subsequent interim periods. The adoption of this guidance, which is related to disclosure only, did not have a material effect on the Company’s consolidated financial statements.
In April 2013, the FASB issued ASU 2013-04, Liabilities, (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU 2013-04 is effective for the Company’s fiscal year beginning December 1, 2014 and subsequent interim periods. The adoption of ASU 2013-04 is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2013, the FASB issued ASU 2013-08, Investment Companies, (“ASU 2013-08”), which amends the criteria for an entity to qualify as an investment company under ASC 946, Financial Services - Investment Companies, (“ASC 946”). While ASU 2013-08 is not expected to significantly change which entities qualify for the specialized investment company accounting in ASC 946, it (1) introduces new disclosure requirements that apply to all investment companies and (2) amends the measurement criteria for certain interests in other investment companies. ASU 2013-08 also amends the requirements in ASC 810 related to qualifying for the “investment company deferral” as well as the requirements in ASC 820, Fair Value Measurement, related to qualifying for the “net asset value practical expedient.” ASU 2013-08 was effective for the Company’s second fiscal quarter beginning March 1, 2014. The adoption of ASU 2013-08 did not have a material effect on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a similar Tax Loss, or a Tax Credit Carryforward Exists, (“ASU 2013-11”). ASU 2013-13 is intended to end inconsistent practices regarding the presentation of a unrecognized tax benefits when a net operating loss ("NOL"), a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. ASU 2013-11 is effective for the Company’s fiscal year beginning December 1, 2014 and subsequent interim periods. The adoption of ASU 2013-11 is not expected to have a material effect on the Company’s consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, (“ASU 2014-08”). ASU 2014-08 is intended to change the criteria for reporting discontinued operations and enhance disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations that has a major effect on the entity's operations and financial results should be presented as discontinued operations. If the disposal does qualify as a discontinued operation, the entity will be required to provide expanded disclosures as well as disclosure of the pretax income attributable to the disposal of a significant part of an entity that does not qualify as a discontinued operation. ASU 2014-08 is effective for the Company’s fiscal year beginning December 1, 2014 and subsequent interim periods. The adoption of ASU 2014-08 is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step
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model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU 2014-09 will be effective for the Company’s fiscal year beginning December 1, 2017 and subsequent interim periods The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this ASU recognized at the date of initial application. Early adoption is not permitted. The Company is currently evaluating the method by which it will implement ASU 2014-09 and the impact the adoption of this ASU will have on the Company's consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. The adoption of ASU 2014-15 is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, (“ASU 2015-01”). ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. The adoption of ASU 2015-015 is not expected to have a material effect on the Company’s consolidated financial statements.
2. Operating and Reporting Segments
The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:
(1) | Homebuilding East |
(2) | Homebuilding Central |
(3) | Homebuilding West |
(4) | Homebuilding Southeast Florida |
(5) | Homebuilding Houston |
(6) | Financial Services |
(7) | Rialto |
(8) | Lennar Multifamily |
Information about homebuilding activities in which the Company’s homebuilding activities are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, selling, general and administrative expenses and other interest expense of the segment.
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The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately, have operations located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2)
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1) | Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment. |
(2) | Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment. |
Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. The Lennar Financial Services sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations as well as in other states.
Operations of the Rialto segment include raising, investing and managing third-party capital, originating and securitizing commercial mortgage loans as well as investing its own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities as well as providing strategic real estate capital. Rialto’s operating earnings consists of revenues generated primarily from gains from securitization transactions and interest income from the RMF business, interest income associated with portfolios of real estate loans acquired in partnership with the FDIC and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the segment's investments in the real estate investment funds managed by the Rialto segment, fees for sub-advisory services, other income (expense), net, consisting primarily of gains upon foreclosure of real estate owned (“REO”) and gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF, REO expenses and other general and administrative expenses.
Operations of the Lennar Multifamily segment include revenues generated from the sales of land, revenue from construction activities and management fees generated from joint ventures and equity in earnings (loss) from unconsolidated entities, less the cost of sales of land, expenses related to construction activities and general and administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1—“Summary of Significant Accounting Policies” to the consolidated financial statements. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
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Financial information relating to the Company’s operations was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Homebuilding East | $ | 2,323,978 | 1,890,138 | |||
Homebuilding Central | 1,233,991 | 963,815 | ||||
Homebuilding West | 3,454,611 | 3,108,395 | ||||
Homebuilding Southeast Florida | 722,706 | 757,125 | ||||
Homebuilding Houston | 398,538 | 307,864 | ||||
Homebuilding Other | 880,912 | 808,496 | ||||
Rialto | 1,458,152 | 1,479,313 | ||||
Lennar Financial Services | 1,177,053 | 796,710 | ||||
Lennar Multifamily | 268,014 | 147,089 | ||||
Corporate and unallocated | 1,040,312 | 1,014,302 | ||||
Total assets | $ | 12,958,267 | 11,273,247 | |||
Lennar Homebuilding investments in unconsolidated entities: | ||||||
Homebuilding East | $ | 10,620 | 19,569 | |||
Homebuilding Central | 35,772 | 56,136 | ||||
Homebuilding West | 564,643 | 600,622 | ||||
Homebuilding Southeast Florida | 32,670 | 36,595 | ||||
Homebuilding Houston | 162 | 2,074 | ||||
Homebuilding Other | 12,970 | 1,953 | ||||
Total Lennar Homebuilding investments in unconsolidated entities | $ | 656,837 | 716,949 | |||
Rialto investments in unconsolidated entities | $ | 175,700 | 154,573 | |||
Lennar Multifamily investments in unconsolidated entities | $ | 105,674 | 46,301 | |||
Rialto goodwill | $ | 5,396 | — | |||
Lennar Financial Services goodwill | $ | 38,854 | 34,046 | |||
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Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues: | |||||||||
Homebuilding East | $ | 2,247,681 | 1,842,162 | 1,299,980 | |||||
Homebuilding Central | 936,940 | 743,475 | 506,388 | ||||||
Homebuilding West | 1,796,375 | 1,161,332 | 697,289 | ||||||
Homebuilding Southeast Florida | 692,898 | 502,175 | 367,641 | ||||||
Homebuilding Houston | 713,113 | 641,161 | 471,623 | ||||||
Homebuilding Other | 638,123 | 464,642 | 238,311 | ||||||
Lennar Financial Services | 454,381 | 427,342 | 384,618 | ||||||
Rialto | 230,521 | 138,060 | 138,856 | ||||||
Lennar Multifamily | 69,780 | 14,746 | 426 | ||||||
Total revenues (1) | $ | 7,779,812 | 5,935,095 | 4,105,132 | |||||
Operating earnings (loss): | |||||||||
Homebuilding East (2) | $ | 340,108 | 251,117 | 113,997 | |||||
Homebuilding Central (3) | 75,585 | 55,203 | 24,827 | ||||||
Homebuilding West (4) | 292,719 | 211,155 | (14,027 | ) | |||||
Homebuilding Southeast Florida (5) | 161,963 | 106,889 | 71,057 | ||||||
Homebuilding Houston | 107,622 | 80,819 | 46,275 | ||||||
Homebuilding Other (6) | 55,724 | 27,892 | 16,856 | ||||||
Lennar Financial Services | 80,138 | 85,786 | 84,782 | ||||||
Rialto | 44,079 | 26,128 | 11,569 | ||||||
Lennar Multifamily | (10,993 | ) | (16,988 | ) | (5,884 | ) | |||
Total operating earnings | 1,146,945 | 828,001 | 349,452 | ||||||
Corporate general and administrative expenses | 177,161 | 146,060 | 127,338 | ||||||
Earnings before income taxes | $ | 969,784 | 681,941 | 222,114 | |||||
(1) | Total revenues were net of sales incentives of $449.2 million ($21,400 per home delivered) for the year ended November 30, 2014, $373.1 million ($20,500 per home delivered) for the year ended November 30, 2013 and $388.2 million ($28,300 per home delivered) for the year ended November 30, 2012. |
(2) | For the year ended November 30, 2012, operating earnings included $2.4 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes, $1.8 million in write-offs of option deposits and pre-acquisition costs and $1.0 million in write-offs of other receivables. |
(3) | For the year ended November 30, 2014, operating earnings included $1.1 million in write-offs of option deposits and pre-acquisition costs and $2.0 million in write-offs of other receivables. |
(4) | For the year ended November 30, 2014, operating earnings included $2.0 million in write-offs of option deposits and pre-acquisition costs and $4.3 million of the Company's share of valuation adjustments primarily related to assets of a Lennar Homebuilding unconsolidated entity. For the year ended November 30, 2013, operating earnings included a $14.4 million gain on the sale of an operating property, $19.8 million of our share of equity in earnings as a result of sales of homesites to third parties by one unconsolidated entity. For the year ended November 30, 2012, operating loss included $5.2 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes and $12.1 million of the Company's share of valuation adjustments primarily related to strategic asset sales at Lennar Homebuilding unconsolidated entities. |
(5) | For the year ended November 30, 2014, operating earnings included $3.0 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes and $1.0 million of valuation adjustments to other assets. For the year ended November 30, 2013, operating earnings included $4.0 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes. For the year ended November 30, 2012, operating earnings included a $15.0 million gain on the sale of an operating property, partially offset by $3.6 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes. |
(6) | For the year ended November 30, 2014, operating earnings included $1.5 million in write-offs of option deposits and pre-acquisition costs. |
Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.
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Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Lennar Homebuilding interest expense: | |||||||||
Homebuilding East | $ | 65,437 | 65,123 | 60,026 | |||||
Homebuilding Central | 24,593 | 28,534 | 24,765 | ||||||
Homebuilding West | 58,999 | 63,106 | 49,096 | ||||||
Homebuilding Southeast Florida | 21,307 | 19,237 | 17,282 | ||||||
Homebuilding Houston | 14,914 | 16,412 | 13,800 | ||||||
Homebuilding Other | 16,289 | 21,844 | 16,416 | ||||||
Total Lennar Homebuilding interest expense | $ | 201,539 | 214,256 | 181,385 | |||||
Lennar Financial Services interest income, net | $ | 6,585 | 5,154 | 3,697 | |||||
Depreciation and amortization: | |||||||||
Homebuilding East | $ | 10,860 | 8,955 | 6,039 | |||||
Homebuilding Central | 5,568 | 3,569 | 2,165 | ||||||
Homebuilding West | 14,533 | 10,594 | 9,225 | ||||||
Homebuilding Southeast Florida | 3,039 | 2,047 | 1,889 | ||||||
Homebuilding Houston | 3,252 | 2,647 | 1,692 | ||||||
Homebuilding Other | 5,729 | 4,213 | 3,228 | ||||||
Lennar Financial Services | 4,539 | 2,755 | 2,863 | ||||||
Rialto | 7,367 | 5,588 | 6,998 | ||||||
Lennar Multifamily | 595 | 484 | — | ||||||
Corporate and unallocated | 23,641 | 23,056 | 23,294 | ||||||
Total depreciation and amortization | $ | 79,123 | 63,908 | 57,393 | |||||
Net additions (disposals) to operating properties and equipment: | |||||||||
Homebuilding East | $ | 350 | 97 | 597 | |||||
Homebuilding Central | 578 | 201 | 114 | ||||||
Homebuilding West (1) | 6,719 | (128,058 | ) | 724 | |||||
Homebuilding Southeast Florida (2) | (42,780 | ) | 78 | 4 | |||||
Homebuilding Houston | 6 | — | — | ||||||
Homebuilding Other | 1,042 | 561 | 193 | ||||||
Lennar Financial Services | 4,502 | 3,648 | 960 | ||||||
Rialto | 4,361 | 4,052 | — | ||||||
Lennar Multifamily | 1,907 | 92 | 12 | ||||||
Corporate and unallocated | 1,977 | 401 | 218 | ||||||
Total net additions (disposals) to operating properties and equipment | $ | (21,338 | ) | (118,928 | ) | 2,822 | |||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities | |||||||||
Homebuilding East | $ | 2,254 | 678 | 542 | |||||
Homebuilding Central | (131 | ) | (87 | ) | (514 | ) | |||
Homebuilding West (3) | (1,647 | ) | 22,039 | (25,415 | ) | ||||
Homebuilding Southeast Florida | (576 | ) | (152 | ) | (961 | ) | |||
Homebuilding Houston | 121 | 2,079 | (35 | ) | |||||
Homebuilding Other | (376 | ) | (754 | ) | (289 | ) | |||
Total Lennar Homebuilding equity in earnings (loss) from unconsolidated entities | $ | (355 | ) | 23,803 | (26,672 | ) | |||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
Lennar Multifamily equity in earnings (loss) from unconsolidated entities | $ | 14,454 | (271 | ) | (4 | ) | |||
(1) | For the year ended November 30, 2013, net disposals of operating properties and equipment included the sale of an operating property with a basis of $127.1 million. |
(2) | For the year ended November 30, 2014, net disposals to operating properties and equipment included the sale of an operating property with a basis of $44.1 million. |
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(3) | For the year ended November 30, 2014, Lennar Homebuilding equity in loss from unconsolidated entities related primarily to the Company's share of operating losses of the Company's Lennar Homebuilding unconsolidated entities, which included $4.3 million of the Company's share of valuation adjustments related to assets of Lennar Homebuilding's unconsolidated entities, partially offset by the Company's share of operating earnings of $4.7 million related to third-party land sales by one unconsolidated entity. For the year ended November 30, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $19.8 million of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity. For the year ended November 30, 2012, equity in loss from unconsolidated entities related primarily to the Company's share of operating losses of the Company's Lennar Homebuilding unconsolidated entities, which included $12.1 million of the Company's share of valuation adjustments primarily related to assets of Lennar Homebuilding unconsolidated entities. |
3. Lennar Homebuilding Receivables
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Accounts receivable | $ | 44,368 | 32,677 | |||
Mortgage and notes receivable | 41,326 | 14,550 | ||||
Income tax receivables | 10,620 | 7,432 | ||||
96,314 | 54,659 | |||||
Allowance for doubtful accounts | (2,870 | ) | (2,724 | ) | ||
$ | 93,444 | 51,935 | ||||
At November 30, 2014 and 2013, Lennar Homebuilding accounts receivable related primarily to other receivables and rebates. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. Mortgages and notes receivable arising from the sale of land are generally collateralized by the property sold to the buyer. Allowances are maintained for potential credit losses based on historical experience, present economic conditions and other factors considered relevant by the Company.
4. Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations | |||||||||
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 263,395 | 570,910 | 353,902 | |||||
Costs and expenses | 291,993 | 425,282 | 418,905 | ||||||
Other income | — | 14,602 | 10,515 | ||||||
Net earnings (loss) of unconsolidated entities | $ | (28,598 | ) | 160,230 | (54,488 | ) | |||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1) | $ | (355 | ) | 23,803 | (26,672 | ) | |||
(1) | For the year ended November 30, 2014, Lennar Homebuilding equity in loss from unconsolidated entities related primarily to the Company's share of operating losses of Lennar Homebuilding unconsolidated entities, which included $4.6 million of valuation adjustments related to assets of Lennar Homebuilding's unconsolidated entities, partially offset by $4.7 million of equity in earnings as a result of third-party land sales by one unconsolidated entity. For the year ended November 30, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $19.8 million of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity. For the year ended November 30, 2012, Lennar Homebuilding equity in loss from unconsolidated entities included $12.1 million of valuation adjustments primarily related to strategic asset sales at Lennar Homebuilding's unconsolidated entities. |
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Balance Sheets | ||||||
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 243,597 | 184,521 | |||
Inventories | 2,889,267 | 2,904,795 | ||||
Other assets | 155,470 | 147,410 | ||||
$ | 3,288,334 | 3,236,726 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 271,638 | 272,940 | |||
Debt | 737,755 | 450,457 | ||||
Equity | 2,278,941 | 2,513,329 | ||||
$ | 3,288,334 | 3,236,726 | ||||
As of November 30, 2014 and 2013, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $656.8 million and $716.9 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of November 30, 2014 and 2013 was $722.6 million and $829.5 million, respectively. The basis difference is primarily as a result of the Company buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.
The Company’s partners generally are unrelated homebuilders, land owners/developers and financial or other strategic partners. The unconsolidated entities follow accounting principles that are in all material respects the same as those used by the Company. The Company shares in the profits and losses of these unconsolidated entities generally in accordance with its ownership interests. In many instances, the Company is appointed as the day-to-day manager under the direction of a management committee that has shared powers amongst the partners of the unconsolidated entities and receives management fees and/or reimbursement of expenses for performing this function. During the years ended November 30, 2014, 2013 and 2012, the Company received management fees and reimbursement of expenses from the Homebuilding unconsolidated entities totaling $30.7 million, $18.8 million and $20.6 million, respectively.
The Company and/or its partners sometimes obtain options or enter into other arrangements under which the Company can purchase portions of the land held by the unconsolidated entities. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During the years ended November 30, 2014, 2013 and 2012, $59.0 million, $192.5 million and $130.3 million, respectively, of the unconsolidated entities’ revenues were from land sales to the Company. The Company does not include in its Lennar Homebuilding equity in earnings (loss) from unconsolidated entities its pro rata share of unconsolidated entities’ earnings resulting from land sales to its homebuilding divisions. Instead, the Company accounts for those earnings as a reduction of the cost of purchasing the land from the unconsolidated entities. This in effect defers recognition of the Company’s share of the unconsolidated entities’ earnings related to these sales until the Company delivers a home and title passes to a third-party homebuyer.
In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc. ("MSR"), in which the Company has a 20% ownership interest and 50% voting rights. Due to the nature of the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory remained on the Company’s consolidated balance sheet in consolidated inventory not owned. As of November 30, 2013, the portfolio of land (including land development costs) of $241.8 million was also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities. In 2014, the Company entered into a new agreement with the joint venture, which required $155.0 million of inventory assets to remain consolidated due to the existence of option contracts on substantially all of the homesites and were reclassified into land and land under development. The remaining $70.3 million of inventory assets no longer under option by the Company were deconsolidated.
The Lennar Homebuilding entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.
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LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
November 30, | ||||||
(Dollars in thousands) | 2014 | 2013 | ||||
The Company’s net recourse exposure | $ | 24,481 | 27,496 | |||
Reimbursement agreements from partners | — | 13,500 | ||||
The Company’s maximum recourse exposure | $ | 24,481 | 40,996 | |||
Non-recourse bank debt and other debt (partner’s share of several recourse) | $ | 56,573 | 61,008 | |||
Non-recourse land seller debt or other debt | 4,022 | 20,454 | ||||
Non-recourse debt with completion guarantees | 442,854 | 245,821 | ||||
Non-recourse debt without completion guarantees | 209,825 | 82,178 | ||||
Non-recourse debt to the Company | 713,274 | 409,461 | ||||
Total debt | $ | 737,755 | 450,457 | |||
The Company’s maximum recourse exposure as a % of total JV debt | 3 | % | 9 | % | ||
In most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Historically, the Company has had repayment guarantees and/or maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value or the collateral (generally land and improvements) is less than a specified percentage of the loan balance. As of both November 30, 2014 and 2013, the Company does not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
If the Company is required to make a payment under any guarantee, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company's investment in the unconsolidated entity and its share of any funds the entity distributes.
As of both November 30, 2014 and 2013, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of November 30, 2014, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 6).
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5. Lennar Homebuilding Operating Properties and Equipment
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Operating properties (1) | $ | 161,741 | 205,707 | |||
Leasehold improvements | 32,890 | 29,681 | ||||
Furniture, fixtures and equipment | 36,464 | 29,827 | ||||
231,095 | 265,215 | |||||
Accumulated depreciation and amortization | (87,931 | ) | (83,792 | ) | ||
$ | 143,164 | 181,423 | ||||
(1) | Operating properties primarily include multi-level residential buildings that have been converted to rental operations. During the year ended November 30, 2014, the Company sold one of its operating properties with a basis of $44.1 million. |
Operating properties and equipment are included in Lennar Homebuilding other assets in the consolidated balance sheets.
6. Lennar Homebuilding Senior Notes and Other Debts Payable
November 30, | ||||||
(Dollars in thousands) | 2014 | 2013 | ||||
5.60% senior notes due 2015 | $ | 500,272 | 500,527 | |||
6.50% senior notes due 2016 | 249,923 | 249,886 | ||||
12.25% senior notes due 2017 | 396,278 | 395,312 | ||||
4.75% senior notes due 2017 | 399,250 | 399,250 | ||||
6.95% senior notes due 2018 | 248,485 | 248,167 | ||||
4.125% senior notes due 2018 | 274,995 | 274,995 | ||||
4.500% senior notes due 2019 | 500,477 | — | ||||
4.50% senior notes due 2019 | 350,000 | — | ||||
2.75% convertible senior notes due 2020 | 431,042 | 416,041 | ||||
3.25% convertible senior notes due 2021 | 400,000 | 400,000 | ||||
4.750% senior notes due 2022 | 571,439 | 571,012 | ||||
5.50% senior notes due 2014 | — | 249,640 | ||||
Mortgages notes on land and other debt | 368,052 | 489,602 | ||||
$ | 4,690,213 | 4,194,432 | ||||
At November 30, 2014, the Company had a $1.5 billion unsecured revolving credit facility (the "Credit Facility"), which includes a $248 million accordion feature, subject to additional commitments, with certain financial institutions that matures in June 2018. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to $500 million in commitments may be used for letters of credit. As of both November 30, 2014 and 2013, the Company had no outstanding borrowings under the Credit Facility. Under the Credit Facility agreement, the Company is required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. For more details refer to Management's Discussion and Analysis of Financial Conditions and Results of Operations in Item 7. The Company believes it was in compliance with its debt covenants at November 30, 2014. In addition, the Company had $125 million letter of credit facilities with a financial institution and a $140 million letter of credit facility with a different financial institution.
The Company’s performance letters of credit outstanding were $234.1 million and $160.6 million at November 30, 2014 and 2013, respectively. The Company’s financial letters of credit outstanding were $190.4 million and $212.8 million at November 30, 2014 and 2013, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at November 30, 2014, the Company had outstanding performance and surety bonds related to site improvements at various projects (including certain projects of the Company’s joint ventures) of $923.3 million. Although significant
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of November 30, 2014, there were approximately $363.7 million, or 39%, of anticipated future costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds or letters of credit, but if any such draws occur, the Company does not believe they would have a material effect on its financial position, results of operations or cash flows.
The terms of each of the Company's senior and convertible senior notes outstanding at November 30, 2014 were as follows:
Senior and Convertible Senior Notes Outstanding (1) | Principal Amount | Net Proceeds (2) | Price | Dates Issued | |||||||||
(Dollars in thousands) | |||||||||||||
5.60% senior notes due 2015 | $ | 500,000 | $ | 501,400 | (3) | April 2005, July 2005 | |||||||
6.50% senior notes due 2016 | 250,000 | 248,900 | 99.873 | % | April 2006 | ||||||||
12.25% senior notes due 2017 | 400,000 | 386,700 | 98.098 | % | April 2009 | ||||||||
4.75% senior notes due 2017 | 400,000 | 395,900 | 100 | % | July 2012, August 2012 | ||||||||
6.95% senior notes due 2018 | 250,000 | 243,900 | 98.929 | % | May 2010 | ||||||||
4.125% senior notes due 2018 (4) | 275,000 | 271,718 | 99.998 | % | February 2013 | ||||||||
4.500% senior notes due 2019 | 500,000 | 495,725 | (5) | February 2014 | |||||||||
4.50% senior notes due 2019 | 350,000 | 347,016 | 100 | % | November 2014 | ||||||||
2.75% convertible senior notes due 2020 | 446,000 | 436,400 | 100 | % | November 2010 | ||||||||
3.25% convertible senior notes due 2021 | 400,000 | 391,600 | 100 | % | November 2011, December 2011 | ||||||||
4.750% senior notes due 2022 (4) | 575,000 | 567,585 | (6) | October 2012, February 2013, April 2013 | |||||||||
(1) | Interest is payable semi-annually for each of the series of senior and convertible senior notes. The senior and convertible senior notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries. |
(2) | The Company generally uses the net proceeds for working capital and general corporate purposes, which can include the repayment or repurchase of other outstanding senior notes. |
(3) | The Company issued $300 million aggregate principal amount at a price of 99.771% and $200 million aggregate principal amount at a price of 101.407%. |
(4) | During 2013, the Company incurred additional interest with respect to the 4.125% senior notes due 2018 and to the 4.750% senior notes due 2022 because the registration statements relating to the notes did not become effective by, and the exchange offers were not consummated by, the dates specified in the Registration Rights Agreement related to such notes. |
(5) | The Company issued $400 million aggregate principal amount at a price of 100% and $100 million aggregate principal amount at a price of 100.5%. |
(6) | The Company issued $350 million aggregate principal amount at a price of 100%, $175 million aggregate principal amount at a price of 98.073% and $50 million aggregate principal amount at a price of 98.250%. |
In September 2014, the Company retired its $250 million 5.50% senior notes for 100% of the outstanding principal amount, plus accrued and unpaid interest as of the maturity date. At November 30, 2013, the carrying value of the 5.50% Senior Notes was $249.6 million.
The 3.25% convertible senior notes due 2021 (the "3.25% Convertible Senior Notes") are convertible into shares of Class A common stock at any time prior to maturity or redemption at the initial conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of the 3.25% Convertible Senior Notes or 17,022,200 shares of Class A common stock if all the 3.25% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $23.50 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. Holders of the 3.25% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest on November 15, 2016. The Company has the right to redeem the 3.25% Convertible Senior Notes at any time on or after November 20, 2016 for 100% of their principal amount, plus accrued but unpaid interest.
The 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”) are convertible into cash, shares of Class A common stock or a combination of both, at the Company’s election. However, it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash. Holders may convert the 2.75% Convertible Senior Notes at the initial conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount or 20,150,012 shares of Class A common stock if all the 2.75% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $22.13 per share of Class A common stock, subject to anti-dilution adjustments. For the years ended
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
November 30, 2014 and 2013, the Company's volume weighted average stock price was $39.96 and $37.06, respectively, which exceeded the conversion price, thus 9.0 million shares and 8.2 million shares, respectively, were included in the calculation of diluted earnings per share.
Holders of the 2.75% Convertible Senior Notes have the right to convert them, during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day. Holders of the 2.75% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on December 15, 2015. The Company has the right to redeem the 2.75% Convertible Senior Notes at any time on or after December 20, 2015 for 100% of their principal amount, plus accrued but unpaid interest.
For its 2.75% Convertible Senior Notes, the Company will be required to pay contingent interest with regard to any interest period beginning with the interest period commencing December 20, 2015 and ending June 14, 2016, and for each subsequent six-month period commencing on an interest payment date to, but excluding, the next interest payment date, if the average trading price of the 2.75% Convertible Senior Notes during the five consecutive trading days ending on the second trading day immediately preceding the first day of the applicable interest period exceeds 120% of the principal amount of the 2.75% Convertible Senior Notes. The amount of contingent interest payable per $1,000 principal amount of notes during the applicable interest period will equal 0.75% per year of the average trading price of such $1,000 principal amount of 2.75% Convertible Senior Notes during the five trading day reference period.
Certain provisions under ASC 470, Debt, require the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company has applied these provisions to its 2.75% Convertible Senior Notes. At issuance, the Company estimated the fair value of the 2.75% Convertible Senior Notes using similar debt instruments that did not have a conversion feature and allocated the residual value to an equity component that represented the estimated fair value of the conversion feature at issuance. The debt discount of the 2.75% Convertible Senior Notes is being amortized over five years and the annual effective interest rate is 7.1% after giving effect to the amortization of the discount and deferred financing costs. At both November 30, 2014 and 2013, the principal amount of the 2.75% Convertible Senior Notes was $446.0 million. At November 30, 2014 and 2013, the carrying amount of the equity component included in stockholders’ equity was $15.0 million and $30.0 million, respectively, and the net carrying amount of the 2.75% Convertible Senior Notes included in Lennar Homebuilding senior notes and other debts payable was $431.0 million and $416.0 million, respectively. During the years ended November 30, 2014 and 2013, the amount of interest recognized relating to both the contractual interest and amortization of the discount was $27.3 million and $26.5 million, respectively.
Although the guarantees by substantially all of the Company's 100% owned homebuilding subsidiaries are full, unconditional and joint and several while they are in effect, (i) a subsidiary will cease to be a guarantor at any time when it is not directly or indirectly guaranteeing at least $75 million of debt of Lennar Corporation (the parent company), and (ii) a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
At November 30, 2014, the Company had mortgage notes on land and other debt due at various dates through 2028 bearing interest at rates up to 9.0% with an average interest rate of 3.2%. At November 30, 2014 and 2013, the carrying amount of the mortgage notes on land and other debt was $368.1 million and $489.6 million, respectively. During the years ended November 30, 2014 and 2013, the Company retired $285.9 million and $285.4 million, respectively, of mortgage notes on land and other debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The minimum aggregate principal maturities of senior notes and other debts payable during the five years subsequent to November 30, 2014 and thereafter are as follows:
(In thousands) | Debt Maturities (1) | ||
2015 | $ | 659,378 | |
2016 | 417,880 | ||
2017 | 412,026 | ||
2018 | 650,998 | ||
2019 | 1,125,472 | ||
Thereafter | 1,424,459 | ||
(1) | Some of the debt maturities included in these amounts relate to convertible senior notes that are putable to the Company at earlier dates than in this table, as described in the detail description of each of the convertible senior notes. |
7. Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 90,010 | 73,066 | |||
Restricted cash | 8,609 | 10,283 | ||||
Receivables, net (1) | 150,858 | 127,223 | ||||
Loans held-for-sale (2) | 738,396 | 414,231 | ||||
Loans held-for-investment, net | 26,894 | 26,356 | ||||
Investments held-to-maturity | 45,038 | 62,344 | ||||
Goodwill | 38,854 | 34,046 | ||||
Other (3) | 78,394 | 49,161 | ||||
$ | 1,177,053 | 796,710 | ||||
Liabilities: | ||||||
Notes and other debts payable | $ | 704,143 | 374,166 | |||
Other (4) | 192,500 | 169,473 | ||||
$ | 896,643 | 543,639 | ||||
(1) | Receivables, net, primarily related to loans sold to investors for which the Company had not yet been paid as of November 30, 2014 and 2013, respectively. |
(2) | Loans held-for-sale related to unsold loans carried at fair value. |
(3) | Other assets included mortgage loan commitments carried at fair value of $12.7 million and $7.3 million as of November 30, 2014 and 2013, respectively. Other assets also included forward contracts carried at fair value of $1.4 million as of November 30, 2013. In addition, other assets included mortgage servicing rights carried at fair value of $17.4 million and $11.5 million as of November 30, 2014 and 2013, respectively, and other investment securities of $16.8 million as of November 30, 2014. |
(4) | Other liabilities included $69.3 million and $74.5 million as of November 30, 2014 and 2013, respectively, of certain of the Company’s self-insurance reserves related to construction defects, general liability and workers’ compensation. Other liabilities also included forward contracts carried at fair value of $7.6 million as of November 30, 2014. |
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LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At November 30, 2014, the financial services warehouse facilities were as follows:
Warehouse Repurchase Facilities (In thousands) | Maximum Aggregate Commitment | ||
364-day warehouse repurchase facility that matures December 2014 (1) | $ | 325,000 | |
364-day warehouse repurchase facility that matures January 2015 (2) | 300,000 | ||
364-day warehouse repurchase facility that matures February 2015 | 150,000 | ||
364-day warehouse repurchase facility that matures June 2015 (3) | 150,000 | ||
Total | $ | 925,000 | |
(1) | In December 2014, the Lennar Financial Services segment amended its 364-day warehouse repurchase facility that matured in December 2014 increasing the maximum aggregate commitment from $325 million to $350 million through the second quarter of fiscal 2015 and to $450 million for the third and fourth quarter of fiscal 2015. The maturity date was extended to December 2015. |
(2) | Maximum aggregate commitment includes a $100 million accordion feature that is usable 10 days prior to fiscal quarter-end through 20 days after fiscal quarter-end. |
(3) | Maximum aggregate commitment includes a $50 million accordion feature that is available beginning on the tenth (10th) calendar day immediately preceding the first day of a fiscal quarter through 20 days after fiscal quarter-end. |
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $698.4 million and $374.2 million at November 30, 2014 and 2013, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $732.1 million and $452.5 million at November 30, 2014 and 2013, respectively. The combined effective interest rate on the facilities at November 30, 2014 was 2.5%. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
In April 2014, the Lennar Financial Services segment acquired a Colorado-based mortgage company. At acquisition date the fair value of the assets acquired was $1.4 million and the goodwill recorded was $4.8 million.
8. Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 303,889 | 201,496 | |||
Restricted cash | 46,975 | 2,593 | ||||
Receivables, net (1) | 153,773 | 111,833 | ||||
Loans receivable, net | 130,105 | 278,392 | ||||
Loans held-for-sale (2) | 113,596 | 44,228 | ||||
Real estate owned - held-for-sale | 190,535 | 197,851 | ||||
Real estate owned - held-and-used, net | 255,795 | 428,989 | ||||
Investments in unconsolidated entities | 175,700 | 154,573 | ||||
Investments held-to-maturity | 17,290 | 16,070 | ||||
Other | 70,494 | 43,288 | ||||
$ | 1,458,152 | 1,479,313 | ||||
Liabilities: | ||||||
Notes payable and other debts payable (3) | $ | 623,246 | 441,883 | |||
Other | 123,798 | 55,125 | ||||
$ | 747,044 | 497,008 | ||||
(1) | Receivables, net primarily related to loans sold but not settled as of November 30, 2014 and 2013. |
(2) | Loans held-for-sale related to unsold loans originated by RMF carried at fair value. |
(3) | Notes and other debts payable included $351.9 million and $250.0 million related to the 7.00% Senior Notes due 2018 ("7.00% Senior Notes") as of November 30, 2014 and 2013, respectively, $141.3 million and $76.0 million related to the RMF warehouse repurchase financing agreements as of November 30, 2014 and 2013, respectively, and $58.0 million related to notes issued through a structured note offering as of November 30, 2014. |
Rialto’s operating earnings were as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 230,521 | 138,060 | 138,856 | |||||
Costs and expenses (1) | 249,114 | 151,072 | 138,990 | ||||||
Rialto equity in earnings from unconsolidated entities | 59,277 | 22,353 | 41,483 | ||||||
Rialto other income (expense), net | 3,395 | 16,787 | (29,780 | ) | |||||
Operating earnings (2) | $ | 44,079 | 26,128 | 11,569 | |||||
(1) | Costs and expenses for the years ended November 30, 2014, 2013 and 2012 included loan impairments of $57.1 million, $16.1 million and $28.0 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). |
(2) | Operating earnings for the years ended November 30, 2014, 2013 and 2012 included net earnings (loss) attributable to noncontrolling interests of ($22.5) million, $6.2 million and ($14.4) million, respectively. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a detail of Rialto other income (expense), net for the periods indicated:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Realized gains on REO sales, net | $ | 43,671 | 48,785 | 21,649 | |||||
Unrealized losses on transfer of loans receivable to REO and impairments, net | (26,107 | ) | (16,517 | ) | (11,160 | ) | |||
REO and other expenses | (58,067 | ) | (44,282 | ) | (56,745 | ) | |||
Rental and other income | 43,898 | 20,269 | 16,476 | ||||||
Gain on bargain purchase acquisition | — | 8,532 | — | ||||||
Rialto other income (expense), net | $ | 3,395 | 16,787 | (29,780 | ) | ||||
Loans Receivable
In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC, which retained 60% equity interest in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, the Company’s equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60% / 40% with the FDIC. During the years ended November 30, 2014 and 2013, the LLCs distributed $184.9 million and $46.7 million, respectively, of which $110.9 million and $28.4 million, respectively, was distributed to the FDIC and $74.0 million and $18.3 million, respectively, was distributed to Rialto, the parent company.
The LLCs meet the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The Company was determined to be the primary beneficiary because it has the power to direct the activities of the LLCs that most significantly impact the LLCs’ performance through Rialto's management and servicer contracts. At November 30, 2014, these consolidated LLCs had total combined assets and liabilities of $508.4 million and $21.5 million, respectively. At November 30, 2013, these consolidated LLCs had total combined assets and liabilities of $727.1 million and $20.2 million, respectively.
In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. The Company paid $310.0 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions. As of November 30, 2014 and 2013, there was $60.6 million and $90.9 million outstanding, respectively.
In May 2014, Rialto issued $73.8 million principal amount of notes through a structured note offering (the "Structured Notes") collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserve, were $69.1 million. In November 2014, Rialto issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is December 15, 2015. As of November 30, 2014, there was $58.0 million outstanding related to the Structured Notes.
The following table displays the loans receivable, net by aggregate collateral type:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Land | $ | 89,603 | 166,950 | |||
Single family homes | 20,402 | 59,647 | ||||
Commercial properties | 7,286 | 38,060 | ||||
Other | 12,814 | 13,735 | ||||
Loans receivable, net | $ | 130,105 | 278,392 | |||
With regards to loans accounted for under ASC 310-30, the Rialto segment estimated the cash flows, at acquisition, it expected to collect on the FDIC Portfolios and Bank Portfolios. In accordance with ASC 310-30, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Company’s consolidated balance sheets. The
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excess of cash flows expected to be collected over the cost of the loans acquired is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the effective yield method.
The Rialto segment periodically evaluates its estimate of cash flows expected to be collected on its FDIC Portfolios and Bank Portfolios. These evaluations require the continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value of the loans to allocate purchase price. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows will generally result in an impairment charge recognized as a provision for loan losses, resulting in an increase to the allowance for loan losses but can reversed if conditions improve.
During the fourth quarter of 2014, in an effort to better reflect the performance of the FDIC Portfolios and Bank Portfolios, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. At November 30, 2014, these loans were classified as nonaccrual loans. The change from accrual to nonaccrual in accordance with ASC 310-30, resulted in an additional impairment charge of $10.1 million within the FDIC Portfolios and a recovery of $0.1 million in the Bank Portfolios.
The outstanding balance and carrying value of loans accounted for under ASC 310-30 were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Outstanding principal balance | $ | — | 586,901 | |||
Carrying value | $ | — | 270,075 | |||
The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios for the years ended November 30, 2014 and 2013 was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Accretable yield, beginning of year | $ | 73,144 | 112,899 | |||
Additions | 8,988 | 70,077 | ||||
Deletions | (54,482 | ) | (60,582 | ) | ||
Accretions | (27,650 | ) | (49,250 | ) | ||
Accretable yield, end of year | $ | — | 73,144 | |||
Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent loan impairments, net of recoveries, and disposal of loans, which includes foreclosure of underlying collateral and result in the removal of the loans from the accretable yield portfolios. During the year ended November 30, 2014, deletions also included a reclassification to nonaccretable difference due to the change from accrual to nonaccrual described above.
When forecasted principal and interest cannot be reasonably estimated at the loan acquisition date, management classifies the loan as nonaccrual and accounts for these assets in accordance with ASC 310-10. When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Although these loans met the definition of ASC 310-10, these loans were not considered impaired relative to the Company’s recorded investment at the time of the acquisition since they were acquired at a substantial discount to their unpaid principal balance. A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.
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The following tables represents nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
November 30, 2014
Recorded Investment | ||||||||||||
(In thousands) | Unpaid Principal Balance | With Allowance | Without Allowance | Total Recorded Investment | ||||||||
Land | $ | 228,245 | 85,912 | 3,691 | 89,603 | |||||||
Single family homes | 66,183 | 18,096 | 2,306 | 20,402 | ||||||||
Commercial properties | 34,048 | 3,368 | 3,918 | 7,286 | ||||||||
Other | 64,284 | 5 | 12,809 | 12,814 | ||||||||
Loans receivable | $ | 392,760 | 107,381 | 22,724 | 130,105 | |||||||
November 30, 2013
Recorded Investment | ||||||||||||
(In thousands) | Unpaid Principal Balance | With Allowance | Without Allowance | Total Recorded Investment | ||||||||
Land | $ | 6,791 | 249 | 2,304 | 2,553 | |||||||
Single family homes | 15,125 | 519 | 4,119 | 4,638 | ||||||||
Commercial properties | 3,400 | 498 | 628 | 1,126 | ||||||||
Loans receivable | $ | 25,316 | 1,266 | 7,051 | 8,317 | |||||||
The average recorded investment in impaired loans totaled approximately $69 million and $24 million for the years ended November 30, 2014 and 2013, respectively.
The loans receivable portfolios consist of loans acquired at a discount. Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral.
Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and/or the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses but can be reversed if conditions improve. The activity in the Company's allowance rollforward related to accrual loans was as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Allowance on accrual loans, beginning of year | $ | 18,952 | 12,178 | |||
Provision for loan losses | 44,577 | 14,241 | ||||
Reclassification to nonaccrual (1) | (53,265 | ) | — | |||
Charge-offs | (10,264 | ) | (7,467 | ) | ||
Allowance on accrual loans, end of year | $ | — | 18,952 | |||
(1) | During the fourth quarter of 2014, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. At November 30, 2014, these loans were classified as nonaccrual loans. |
Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition or subsequently. Although the Company believes the recorded investment balance will ultimately be realized, the risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:
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November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Allowance on nonaccrual loans, beginning of year | $ | 1,213 | 3,722 | |||
Provision for loan losses | 12,536 | 1,898 | ||||
Reclassification from accrual (1) | 53,265 | — | ||||
Charge-offs | (8,688 | ) | (4,407 | ) | ||
Allowance on nonaccrual loans, end of year | $ | 58,326 | 1,213 | |||
(1) | During the fourth quarter of 2014, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. At November 30, 2014, these loans were classified as nonaccrual loans. |
Accrual and nonaccrual loans receivable, net by risk categories were as follows:
November 30, 2014
(In thousands) | Accrual | Nonaccrual | Total | ||||||
Land | $ | — | 89,603 | 89,603 | |||||
Single family homes | — | 20,402 | 20,402 | ||||||
Commercial properties | — | 7,286 | 7,286 | ||||||
Other | — | 12,814 | 12,814 | ||||||
Loans receivable, net | $ | — | 130,105 | 130,105 | |||||
November 30, 2013
(In thousands) | Accrual | Nonaccrual | Total | ||||||
Land | $ | 164,397 | 2,553 | 166,950 | |||||
Single family homes | 55,009 | 4,638 | 59,647 | ||||||
Commercial properties | 36,934 | 1,126 | 38,060 | ||||||
Other | 13,735 | — | 13,735 | ||||||
Loans receivable | $ | 270,075 | 8,317 | 278,392 | |||||
In order to assess the risk associated with each risk category, Rialto management evaluates the forecasted cash flows and the value of the underlying collateral securing loans receivable on a quarterly basis or when an event occurs that suggests a decline in the collaterals’ fair value.
Real Estate Owned
The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the consolidated balance sheets as REO held-and-used, net and REO held-for-sale. When a property is determined to be held-and-used, net the asset is recorded at fair value and depreciated over its useful life using the straight line method. When certain criteria set forth in ASC 360, Property, Plant and Equipment, are met, the property is classified as held-for-sale. When a real estate asset is classified as held-for-sale, the property is recorded at the lower of its cost basis or fair value less estimated costs to sell. The fair value of REO held-for-sale is determined in part by placing reliance on third-party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity.
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The following tables present the activity in REO:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
REO - held-for-sale, beginning of year | $ | 197,851 | 134,161 | |||
Additions | — | 15,985 | ||||
Improvements | 8,176 | 5,791 | ||||
Sales | (226,027 | ) | (190,430 | ) | ||
Impairments and unrealized losses | (9,441 | ) | (5,573 | ) | ||
Transfers to/from held-and-used, net (1) | 219,976 | 247,397 | ||||
Transfers to Lennar Homebuilding | — | (9,480 | ) | |||
REO - held-for-sale, end of year | $ | 190,535 | 197,851 | |||
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
REO - held-and-used, net, beginning of year | $ | 428,989 | 601,022 | |||
Additions | 55,407 | 86,262 | ||||
Improvements | 6,102 | 3,616 | ||||
Impairments | (11,501 | ) | (10,517 | ) | ||
Depreciation | (3,226 | ) | (3,997 | ) | ||
Transfers to held-for-sale (1) | (219,976 | ) | (247,397 | ) | ||
REO - held-and-used, net, end of year | $ | 255,795 | 428,989 | |||
(1) | During the years ended November 30, 2014 and 2013, the Rialto segment transferred certain properties to/from REO held-and-used, net to REO held-for-sale as a result of changes made in the disposition strategy of the real estate assets. |
For the years ended November 30, 2014, 2013 and 2012, the Company recorded net losses of $6.8 million, $0.4 million and $1.9 million, respectively, from acquisitions of REO through foreclosure. These net losses are recorded in Rialto other income (expense), net.
Rialto Mortgage Finance
In July 2013, RMF was formed to originate and sell into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. During the year ended November 30, 2014, RMF had originated loans with a total principal balance of $1.6 billion and sold $1.3 billion of these originated loans into eight separate securitizations. During the year ended November 30, 2013, RMF had originated loans with a principal balance of $690.3 million and sold $537.0 million of loans into three separate securitizations. As of November 30, 2014 and 2013, $147.2 million and $109.3 million, respectively, of these originated loans were sold into a securitization trust but not settled and thus were included as receivables, net. As of November 30, 2014 and 2013, RMF had two warehouse repurchase financing agreements that mature in fiscal year 2015 with commitments totaling $650 million and $500 million, respectively, to help finance the loans it makes. Borrowings under these facilities were $141.3 million and $76.0 million as of November 30, 2014 and 2013, respectively.
In November 2013, the Rialto segment issued $250 million aggregate principal amount of the 7.00% Senior Notes, at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were approximately $245 million. Rialto used a majority of the net proceeds of the sale of the 7.00% Senior Notes as working capital for RMF and used $100 million to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes at a price of 102.25% of their face value in a private placement. Proceeds from the offering, after payment of expenses, were approximately $102 million. Rialto used the net proceeds of the offering to provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. Interest on the 7.00% Senior Notes is due semi-annually. At November 30, 2014 and 2013, the carrying amount of the 7.00% Senior Notes was $351.9 million and $250.0 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to, or enter into transactions with, Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. The Company believes Rialto was in compliance with its debt covenants at November 30, 2014.
Investments
All of Rialto's investments in funds have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, as amended by ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the assets and liabilities of Rialto's funds investment are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations and the Company’s share is recorded in Rialto equity in earnings from unconsolidated entities in the Company's statement of operations.
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
November 30, 2014 | November 30, 2014 | November 30, 2013 | ||||||||||||||||||||||
(Dollars in thousands) | Inception Year | Equity Commitments | Equity Commitments Called | Commitment to fund by the Company | Funds contributed by the Company | Investment | ||||||||||||||||||
Rialto Real Estate Fund, LP | 2010 | $ | 700,006 | $ | 700,006 | $ | 75,000 | $ | 75,000 | $ | 71,831 | 75,729 | ||||||||||||
Rialto Real Estate Fund II, LP | 2012 | 1,305,000 | 760,058 | 100,000 | 58,242 | 67,652 | 53,103 | |||||||||||||||||
Rialto Mezzanine Partners Fund | 2013 | 251,100 | 188,600 | 27,299 | 20,504 | 20,226 | 16,724 | |||||||||||||||||
Other investments | 15,991 | 9,017 | ||||||||||||||||||||||
$ | 175,700 | 154,573 | ||||||||||||||||||||||
Rialto's share of earnings from unconsolidated entities was as follows:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Rialto Real Estate Fund, LP | $ | 30,612 | 19,391 | 21,026 | |||||
Rialto Real Estate Fund II, LP | 15,929 | 2,523 | — | ||||||
Rialto Mezzanine Partners Fund | 1,913 | 354 | — | ||||||
Other investments | 10,823 | 85 | 20,457 | ||||||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
During the year ended November 30, 2014, the Company received a $34.7 million advanced distribution with regard to Rialto's carried interest in Fund I in order to cover the income tax obligation, which resulted from allocations of taxable income to Rialto's general partner interest. This was included in the Rialto segment revenues.
In addition to the acquisition and management of the FDIC and Bank portfolios, an affiliate in the Rialto segment was a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor received management fees for sub-advisory services. At the end of 2012, the AB PPIP fund finalized the last sales of the underlying securities in the fund and made substantially all of the final liquidating distributions to the partners, including the Company. As the Company’s role as sub-advisor to the AB PPIP fund has been completed, no further management fees will be received for these services. During the year ended November 30, 2012, the Company contributed $1.9 million and received distributions of $87.6 million. Of the distributions received during the year ended November 30, 2012, $83.5 million related to the unwinding of the AB PPIP fund's operations. During the year ended November 30, 2013, the Company also earned $9.1 million in fees from the segment's role as a sub-advisor to the AB PPIP fund, which were included in the Rialto segment revenues.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets | ||||||
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 141,609 | 332,968 | |||
Loans receivable | 512,034 | 523,249 | ||||
Real estate owned | 378,702 | 285,565 | ||||
Investment securities | 795,306 | 381,555 | ||||
Investments in partnerships | 311,037 | 149,350 | ||||
Other assets | 45,451 | 191,624 | ||||
$ | 2,184,139 | 1,864,311 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 20,573 | 108,514 | |||
Notes payable | 395,654 | 398,445 | ||||
Partner loans | — | 163,940 | ||||
Equity | 1,767,912 | 1,193,412 | ||||
$ | 2,184,139 | 1,864,311 | ||||
Statements of Operations | |||||||||
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 150,452 | 251,533 | 414,027 | |||||
Costs and expenses | 95,629 | 252,563 | 243,483 | ||||||
Other income, net (1) | 479,929 | 187,446 | 713,710 | ||||||
Net earnings of unconsolidated entities | $ | 534,752 | 186,416 | 884,254 | |||||
Rialto equity in earnings from unconsolidated entities | $ | 59,277 | 22,353 | 41,483 | |||||
(1) | Other income, net for the year ended November 30, 2014 included Fund I, Fund II, Mezzanine Fund and other investments realized and unrealized gains on investments as well as other income from REO. Other income, net for the year ended November 30, 2013 included Fund I, Fund II and other investments realized and unrealized gains on investments as well as other income from REO. Other income, net for the year ended November 30, 2012 included the AB PPIP Fund’s mark-to-market unrealized gains and losses, and realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, all of which the Company's portion was a small percentage. |
In 2010, the Rialto segment invested in non-investment grade CMBS at a 55% discount to par value. The carrying value of the investment securities at November 30, 2014 and 2013 was $17.3 million and $16.1 million, respectively. These securities bear interest at a coupon rate of 4% and have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during the years ended November 30, 2014, 2013 and 2012. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In a CMBS transaction, monthly interest received from all of the pooled loans is paid to the investors, starting with those investors holding the highest rated bonds and progressing in an order of seniority based on the class of security. Based on the aforementioned, the principal and interest repayments of a particular class are dependent upon collections on the underlying mortgages, which are affected by prepayments, extensions and defaults.
In January 2014, Rialto acquired 100% of the Servicer Provider in which a subsidiary of Rialto had an approximately 5% investment, in exchange for its investment interest. The Servicer Provider has a business segment that provides service and infrastructure to the residential home loan market, which provides loan servicing support for all of Rialto's owned and managed portfolios and asset management services for Rialto's small balance loan program. At acquisition date, the fair value of the assets acquired was $20.8 million, the goodwill recorded was $5.1 million and the fair value of the liabilities assumed was
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$17.6 million. As of November 30, 2013, the carrying value of the Company’s investment in the Servicer Provider was $8.3 million.
9. Lennar Multifamily Segment
The Company is actively involved, primarily through unconsolidated entities, in the development of multifamily rental properties. The Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
The assets and liabilities related to the Lennar Multifamily segment were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 2,186 | 519 | |||
Land under development | 120,666 | 88,260 | ||||
Consolidated inventory not owned | 5,508 | 10,500 | ||||
Investments in unconsolidated entities | 105,674 | 46,301 | ||||
Operating properties and equipment | 15,740 | — | ||||
Other assets | 18,240 | 1,509 | ||||
$ | 268,014 | 147,089 | ||||
Liabilities: | ||||||
Accounts payable and other liabilities | $ | 48,235 | 17,518 | |||
Notes payable | — | 13,858 | ||||
Liabilities related to consolidated inventory not owned | 4,008 | 10,150 | ||||
$ | 52,243 | 41,526 | ||||
The unconsolidated entities in which the Lennar Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Lennar Multifamily unconsolidated entities, the Company (or entities related to them) have been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Additionally, the Company guarantees the construction costs of the project. Generally construction cost over-runs would be paid by the Company. Generally, these payments are increases to our investments in the entities and would increase our share of funds the entities distribute after the achievement of certain thresholds. As of both November 30, 2014 and 2013, the fair value of the completion guarantees was immaterial. Additionally, as of November 30, 2014 and 2013, the Lennar Multifamily segment had $23.5 million and $28.2 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities. These letters of credit outstanding were included in the disclosure in Note 6 related to the Company's performance and financial letters of credit. As of November 30, 2014 and 2013, the Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $163.4 million and $51.6 million, respectively.
In many instances, the Lennar Multifamily segment is appointed as the day-to-day manager of certain of its Lennar Multifamily unconsolidated entities and receives fees for performing this function. During the years ended November 30, 2014 and 2013, the Lennar Multifamily segment received fees from its unconsolidated entities totaling $13.5 million and $4.0 million, respectively.
During the year ended November 30, 2014, the Lennar Multifamily segment provided general contractors services for the construction of some of its rental properties and received fees totaling $50.9 million, which are offset by costs related to those services of $49.0 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summarized condensed financial information on a combined 100% basis related to Lennar Multifamily's investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets | ||||||
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Assets: | ||||||
Cash and cash equivalents | $ | 25,319 | 5,800 | |||
Operating properties and equipment | 637,259 | 236,528 | ||||
Other assets | 14,742 | 3,460 | ||||
$ | 677,320 | 245,788 | ||||
Liabilities and equity: | ||||||
Accounts payable and other liabilities | $ | 87,151 | 11,147 | |||
Notes payable | 163,376 | 51,604 | ||||
Equity | 426,793 | 183,037 | ||||
$ | 677,320 | 245,788 | ||||
Statements of Operations | |||||||||
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Revenues | $ | 4,855 | — | — | |||||
Costs and expenses | 7,435 | 1,493 | 29 | ||||||
Other income, net (1) | 35,068 | — | — | ||||||
Net earnings (loss) of unconsolidated entities | $ | 32,488 | (1,493 | ) | (29 | ) | |||
Lennar Multifamily equity in earnings (loss) from unconsolidated entities (2) | $ | 14,454 | (271 | ) | (4 | ) | |||
(1) | Other income, net, included the gains related to the sale of two operating properties during the year ended November 30, 2014. |
(2) | For the year ended November 30, 2014, Lennar Multifamily equity in earnings from unconsolidated entities included Lennar Multifamily's share of gains totaling $14.7 million related to the sale of two operating properties by unconsolidated entities. The Company’s share of profits and cash distributions from the sales of the two operating properties was higher compared to the Company’s ownership interests in the two unconsolidated entities due to the achievement of specified internal rate of return milestones. |
10. Income Taxes
The benefit (provision) for income taxes consisted of the following:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Current: | |||||||||
Federal | $ | (261,306 | ) | (2,495 | ) | (3,790 | ) | ||
State | 3,340 | (5,740 | ) | (5,860 | ) | ||||
$ | (257,966 | ) | (8,235 | ) | (9,650 | ) | |||
Deferred: | |||||||||
Federal | $ | (42,847 | ) | (207,588 | ) | 350,165 | |||
State | (40,278 | ) | 38,808 | 94,703 | |||||
(83,125 | ) | (168,780 | ) | 444,868 | |||||
$ | (341,091 | ) | (177,015 | ) | 435,218 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the statutory rate and the effective tax rate was as follows:
Percentage of Pretax Income | ||||||||
2014 | 2013 | 2012 | ||||||
Statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | ||
State income taxes, net of federal income tax benefit | 3.17 | 3.16 | 3.79 | |||||
Domestic production activities deduction | (2.81 | ) | — | — | ||||
Tax reserves and interest expense | 0.59 | 0.56 | 5.00 | |||||
Deferred tax asset valuation reversal | (0.28 | ) | (10.22 | ) | (212.55 | ) | ||
Tax credits | (0.41 | ) | (0.45 | ) | (0.10 | ) | ||
Net operating loss adjustment (1) | — | — | (8.32 | ) | ||||
Nondeductible compensation | — | — | 0.40 | |||||
Other | (0.46 | ) | (1.09 | ) | (1.65 | ) | ||
Effective rate | 34.80 | % | 26.96 | % | (178.43 | %) | ||
(1) | During the year ended November 30, 2012, the Company recorded adjustments to its NOL carryforwards as a result of the conclusion of an IRS examination and additional state net operating loss adjustments. |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax assets were as follows:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Deferred tax assets: | ||||||
Inventory valuation adjustments | $ | 59,208 | 68,170 | |||
Reserves and accruals | 158,858 | 125,756 | ||||
Net operating loss carryforwards | 115,850 | 231,735 | ||||
Capitalized expenses | 66,768 | 71,739 | ||||
Investments in unconsolidated entities | 24,843 | 1,012 | ||||
Other assets | 32,904 | 29,017 | ||||
Total deferred tax assets | 458,431 | 527,429 | ||||
Valuation allowance | (8,029 | ) | (12,705 | ) | ||
Total deferred tax assets after valuation allowance | 450,402 | 514,724 | ||||
Deferred tax liabilities: | ||||||
Capitalized expenses | 64,448 | 75,921 | ||||
Convertible debt basis difference | 5,833 | 11,684 | ||||
Rialto investments | 22,262 | 16,268 | ||||
Deferred income | 7,707 | 4,467 | ||||
Other | 36,323 | 29,585 | ||||
Total deferred tax liabilities | 136,573 | 137,925 | ||||
Net deferred tax assets | $ | 313,829 | 376,799 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The detail of the Company's net deferred tax assets were as follows:
November 30, | |||||||
(In thousands) | 2014 | 2013 | |||||
Deferred tax assets (liabilities) | Balance Sheet Presentation | ||||||
Lennar Homebuilding | Other assets | $ | 325,779 | 388,647 | |||
Rialto | Other liabilities | (3,335 | ) | (7,815 | ) | ||
Lennar Financial Services | Other liabilities | (8,615 | ) | (4,033 | ) | ||
Net deferred tax assets | $ | 313,829 | 376,799 | ||||
As of November 30, 2014 and 2013, the net deferred tax assets included a valuation allowance of $8.0 million and $12.7 million, respectively, primarily related to state net operating loss ("NOL") carryforwards that are not more likely than not to be utilized due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states. During the year ended November 30, 2014, the Company reversed $4.7 million of valuation allowance, primarily due to the utilization of federal and state net operating losses. The Company continues to evaluate both positive and negative evidence in determining the need for a valuation allowance with respect to its tax benefits for state NOL carryforwards. In future periods, the remaining allowance could be reversed if additional sufficient positive evidence is present indicating that it is more likely than not that a portion or all of the Company's remaining deferred tax assets will be realized.
During the year ended November 30, 2013, the Company concluded that it was more likely than not that the majority of its deferred tax assets would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative. The positive evidence included factors such as consecutive quarters of earnings, actual and forecasted profitability, generating cumulative pre-tax earnings over a rolling four year period including the pre-tax earnings achieved during 2013, the expectation of continued earnings and evidence of a sustained recovery in the housing markets that the Company operates.
For the year ended November 30, 2013, the Company reversed $67.1 million of its valuation allowance primarily against its state deferred tax assets. This reversal was offset by a tax provision of $244.1 million, primarily related to pre-tax earnings during the year ended November 30, 2013, resulting in a $177.0 million provision for income taxes for the year ended November 30, 2013.
At November 30, 2014 and 2013, the Company had federal tax effected NOL carryforwards totaling $2.0 million and $88.1 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2025. At November 30, 2014 and 2013, the Company had state tax effected NOL carryforwards totaling $113.8 million and $143.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2015 and 2034. As of November 30, 2014, state tax effected NOL carryforwards totaling $2.0 million may expire over the next twelve months, if sufficient taxable income is not generated to utilize the NOLs.
The following table summarizes the changes in gross unrecognized tax benefits:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Gross unrecognized tax benefits, beginning of year | $ | 10,459 | 12,297 | 36,739 | |||||
Increases due to tax positions taken during the period (1) | — | 1,982 | — | ||||||
Decreases due to settlements with taxing authorities (2) | (3,202 | ) | (3,820 | ) | (24,442 | ) | |||
Gross unrecognized tax benefits, end of year | $ | 7,257 | 10,459 | 12,297 | |||||
(1) | Increased the Company's effective tax rate for the year ended November 30, 2013 from 26.71% to 26.96%. |
(2) | Decreased the Company's effective tax rate for the year ended November 30, 2014 from 35.13% to 34.80% and for the year ended November 30, 2012 from (178.03)% to (178.43)%. The decrease for the year ended November 30, 2013 had no effect on the Company's effective tax rate. |
If the Company were to recognize its gross unrecognized tax benefits as of November 30, 2014, $4.7 million would affect the Company’s effective tax rate. The Company does not expect the total amount of unrecognized tax benefits to increase or decrease by a material amount within the following twelve months.
At November 30, 2014 and 2013, the Company had $31.5 million and $19.1 million, respectively, accrued for interest and penalties, of which $14.0 million and $3.8 million, were recorded during the years ended November 30, 2014 and 2013, respectively. During the years ended November 30, 2014 and 2013, the accrual for interest and penalties was reduced by $1.6
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million and $5.2 million, respectively, as a result of the payment of interest related to state tax payments resulting from settled IRS examinations and various state issues.
The IRS is currently examining the Company’s federal income tax return for fiscal year 2013, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal year 2005 and subsequent years. The Company participates in an IRS examination program, Compliance Assurance Process, "CAP." This program operates as a contemporaneous exam throughout the year in order to keep exam cycles current and achieve a higher level of compliance.
11. Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
Years Ended November 30, | |||||||||
(In thousands, except per share amounts) | 2014 | 2013 | 2012 | ||||||
Numerator: | |||||||||
Net earnings attributable to Lennar | $ | 638,916 | 479,674 | 679,124 | |||||
Less: distributed earnings allocated to nonvested shares | 414 | 458 | 531 | ||||||
Less: undistributed earnings allocated to nonvested shares | 7,379 | 6,356 | 10,397 | ||||||
Numerator for basic earnings per share | 631,123 | 472,860 | 668,196 | ||||||
Plus: interest on 3.25% convertible senior notes due 2021 and 2.00% convertible senior notes due 2020 (1) | 7,928 | 11,302 | 11,330 | ||||||
Plus: undistributed earnings allocated to convertible shares | 7,379 | 6,356 | 10,397 | ||||||
Less: undistributed earnings reallocated to convertible shares | 6,632 | 5,506 | 9,050 | ||||||
Numerator for diluted earnings per share | $ | 639,798 | 485,012 | 680,873 | |||||
Denominator: | |||||||||
Denominator for basic earnings per share - weighted average common shares outstanding | 202,209 | 190,473 | 186,662 | ||||||
Effect of dilutive securities: | |||||||||
Shared based payments | 8 | 254 | 984 | ||||||
Convertible senior notes | 26,023 | 35,193 | 31,049 | ||||||
Denominator for diluted earnings per share - weighted average common shares outstanding | 228,240 | 225,920 | 218,695 | ||||||
Basic earnings per share | $ | 3.12 | 2.48 | 3.58 | |||||
Diluted earnings per share | $ | 2.80 | 2.15 | 3.11 | |||||
(1) | Interest on the 2.00% convertible senior notes due 2020 was included for the years ended November 30, 2013 and 2012 because the holders of the 2.00% convertible senior notes due 2020 converted the notes into shares of Class A common stock on November 30, 2013. |
For the years ended November 30, 2014, 2013 and 2012, there were no options to purchase shares of common stock that were outstanding and anti-dilutive.
12. Comprehensive Income (Loss)
Comprehensive income attributable to Lennar represents changes in stockholders’ equity from non-owner sources. For the years ended November 30, 2014, 2013 and 2012, comprehensive income attributable to Lennar was the same as net earnings attributable to Lennar. Comprehensive income (loss) attributable to noncontrolling interests for the years ended November 30, 2014, 2013 and 2012 was the same as the net earnings (loss) attributable to noncontrolling interests. There was no accumulated other comprehensive income at November 30, 2014 and 2013.
13. Capital Stock
Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock with a par value of $10 per share and 100 million shares of participating preferred stock with a par value of $0.10 per share. No shares of preferred stock or participating preferred stock have been issued as of November 30, 2014 and 2013.
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Common Stock
During the years ended November 30, 2014, 2013 and 2012, the Company’s Class A and Class B common stockholders received a per share annual dividend of $0.16. The only significant difference between the Class A common stock and Class B common stock is that Class A common stock entitles holders to one vote per share and the Class B common stock entitles holders to ten votes per share.
As of November 30, 2014, Stuart A. Miller, the Company’s Chief Executive Officer and a Director, directly owned, or controlled through family-owned entities, shares of Class A and Class B common stock, which represented approximately 44% voting power of the Company’s stock.
The Company has a stock repurchase program, which originally authorized the purchase up to 20 million shares of its outstanding common stock. During the years ended November 30, 2014, 2013 and 2012, there were no share repurchases of common stock under the stock repurchase program. As of November 30, 2014, the remaining authorized shares that can be purchased under the stock repurchase program were 6.2 million shares of common stock.
During the year ended November 30, 2014, treasury stock decreased by 11.6 million shares of Class A common stock primarily due to the retirement of 11.7 million shares of Class A common stock authorized by the Company's Board of Directors, partially offset by activity related to the Company's equity compensation plan. The retirement of Class A common stock resulted in a reclass between treasury stock and additional paid-in capital within stockholders' equity. During the year ended November 30, 2013, treasury stock decreased by 0.4 million shares of Class A common stock due to activity related to the Company’s equity compensation plan.
Restrictions on Payment of Dividends
There are no restrictions on the payment of dividends on common stock by the Company. There are no agreements which restrict the payment of dividends by subsidiaries of the Company other than to maintain the financial ratios and net worth requirements under the Lennar Financial Services segment’s warehouse lines of credit, which restrict the payment of dividends from the Company’s mortgage subsidiaries following the occurrence and during the continuance of an event of default thereunder and limit dividends to 50% of net income in the absence of an event of default and the restriction under Rialto's 7.00% Senior Notes indenture that limits Rialto's ability to make distributions to Lennar.
401(k) Plan
Under the Company’s 401(k) Plan (the “Plan”), contributions made by associates can be invested in a variety of mutual funds or proprietary funds provided by the Plan trustee. The Company may also make contributions for the benefit of associates. The Company records as compensation expense its contribution to the Plan. For the years ended November 30, 2014, 2013 and 2012, this amount was $10.2 million, $8.0 million and $6.2 million, respectively.
14. Share-Based Payments
Compensation expense related to the Company’s share-based awards was as follows:
Years ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Stock options | $ | 137 | 130 | 2,433 | |||||
Nonvested shares | 40,581 | 33,559 | 29,312 | ||||||
Total compensation expense for share-based awards | $ | 40,718 | 33,689 | 31,745 | |||||
Cash flows resulting from tax benefits related to tax deductions in excess of the compensation expense recognized are classified as financing cash flows. For the years ended November 30, 2014, 2013 and 2012 there was $7.5 million, $10.1 million and $10.8 million, respectively, of excess tax benefits from share based awards.
Cash received from stock options exercised during the years ended November 30, 2014, 2013 and 2012 was $0.3 million, $16.7 million and $26.5 million, respectively. The tax benefit related to stock options exercised during the years ended November 30, 2014, 2013, and 2012 was $0.1 million, $12.0 million and $14.8 million, respectively.
The fair value of each of the Company’s stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of the Company’s stock option awards, which are subject to graded vesting, is expensed on a straight-line basis over the vesting life of the stock options. Expected volatility is based on historical volatility of the Company’s stock over the most recent period equal to the expected life of the award. The risk-free rate for periods within the contractual life of the stock option award is based on the yield curve of a zero-
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coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award granted. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The expected life of stock option awards granted is derived from historical exercise experience under the Company’s share-based payment plans and represents the period of time that stock option awards granted are expected to be outstanding.
The fair value of these options was determined at the date of the grant using the Black-Scholes option-pricing model. The significant weighted average assumptions were as follows:
2014 | 2013 | 2012 | |||
Dividends yield | 0.4% | 0.4% | 0.6% | ||
Volatility rate | 35.6% | 35.3% | 47% | ||
Risk-free interest rate | 0.2% | 0.2% | 0.2% | ||
Expected option life (years) | 1.5 | 1.5 | 1.5 | ||
A summary of the Company’s stock option activity for the year ended November 30, 2014 was as follows:
Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value (In thousands) | |||||||||
Outstanding at November 30, 2013 | 52,500 | $ | 28.62 | |||||||||
Grants | 20,000 | $ | 39.62 | |||||||||
Exercises | (15,000 | ) | $ | 18.19 | ||||||||
Outstanding at November 30, 2014 | 57,500 | $ | 35.16 | 1.4 years | $ | 694 | ||||||
Vested and expected to vest in the future at November 30, 2014 | 57,500 | $ | 35.16 | 1.4 years | $ | 694 | ||||||
Exercisable at November 30, 2014 | 57,500 | $ | 35.16 | 1.4 years | $ | 694 | ||||||
Available for grant at November 30, 2014 | 9,551,316 | |||||||||||
The weighted average fair value of options granted during the years ended November 30, 2014, 2013 and 2012 was $6.76, $6.59 and $5.72, respectively. The total intrinsic value of options exercised during the years ended November 30, 2014, 2013 and 2012 was $0.3 million, $30.8 million and $38.1 million, respectively.
The fair value of nonvested shares is determined based on the trading price of the Company’s common stock on the grant date. The weighted average fair value of nonvested shares granted during the years ended November 30, 2014, 2013 and 2012 was $41.89, $35.04 and $30.62, respectively. A summary of the Company’s nonvested shares activity for the year ended November 30, 2014 was as follows:
Shares | Weighted Average Grant Date Fair Value | |||||
Nonvested restricted shares at November 30, 2013 | 2,472,068 | $ | 30.66 | |||
Grants | 1,119,356 | $ | 41.89 | |||
Vested | (1,244,045 | ) | $ | 28.23 | ||
Forfeited | (58,253 | ) | $ | 34.12 | ||
Nonvested restricted shares at November 30, 2014 | 2,289,126 | $ | 37.38 | |||
At November 30, 2014, there was $67.9 million of unrecognized compensation expense related to unvested share-based awards granted under the Company’s share-based payment plan, all of which relates to nonvested shares with a weighted average remaining contractual life of 2.0 years. During the years ended November 30, 2014, 2013 and 2012, 1.2 million nonvested shares, 1.3 million nonvested shares and 1.7 million nonvested shares, respectively, vested. For the years ended November 30, 2014, 2013, and 2012, the Company recorded an excess tax benefit related to nonvested share activity of $7.4 million, $6.9 million and $11.7 million, respectively.
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15. Financial Instruments and Fair Value Disclosures
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at November 30, 2014 and 2013, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, receivables, net, and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
November 30, | ||||||||||||||
2014 | 2013 | |||||||||||||
Fair Value | Carrying | Fair | Carrying | Fair | ||||||||||
(In thousands) | Hierarchy | Amount | Value | Amount | Value | |||||||||
ASSETS | ||||||||||||||
Rialto: | ||||||||||||||
Loans receivable, net | Level 3 | $ | 130,105 | 135,881 | 278,392 | 305,810 | ||||||||
Investments held-to-maturity | Level 3 | $ | 17,290 | 17,155 | 16,070 | 15,952 | ||||||||
Lennar Financial Services: | ||||||||||||||
Loans held-for-investment, net | Level 3 | $ | 26,894 | 26,723 | 26,356 | 26,095 | ||||||||
Investments held-to-maturity | Level 2 | $ | 45,038 | 45,051 | 62,344 | 62,580 | ||||||||
LIABILITIES | ||||||||||||||
Lennar Homebuilding senior notes and other debts payable | Level 2 | $ | 4,690,213 | 5,760,075 | 4,194,432 | 4,971,500 | ||||||||
Rialto notes payable and other debts payable | Level 2 | $ | 623,246 | 640,335 | 441,883 | 438,373 | ||||||||
Lennar Financial Services notes and other debts payable | Level 2 | $ | 704,143 | 704,143 | 374,166 | 374,166 | ||||||||
Lennar Multifamily notes payable | Level 2 | $ | — | — | 13,858 | 13,858 | ||||||||
The following methods and assumptions are used by the Company in estimating fair values:
Lennar Homebuilding and Lennar Multifamily—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates.
Rialto—The fair values for loans receivable, net are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable. The fair value for investments held-to-maturity is based on discounted cash flows. For notes and other debts payable, the fair value is calculated based on discounted cash flows using the Company’s weighted average borrowing rate and for the warehouse repurchase financing agreements fair values approximate their carrying value due to their short maturities.
Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information.
Fair Value Measurements
GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
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The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
Financial Instruments | ||||||||
(In thousands) | Fair Value Hierarchy | Fair Value at November 30, 2014 | Fair Value at November 30, 2013 | |||||
Lennar Financial Services: | ||||||||
Loans held-for-sale (1) | Level 2 | $ | 738,396 | 414,231 | ||||
Mortgage loan commitments | Level 2 | $ | 12,687 | 7,335 | ||||
Forward contracts | Level 2 | $ | (7,576 | ) | 1,444 | |||
Mortgage servicing rights | Level 3 | $ | 17,353 | 11,455 | ||||
Lennar Homebuilding: | ||||||||
Investments available-for-sale | Level 3 | $ | 480 | 40,032 | ||||
Rialto: | ||||||||
Loans held-for-sale (2) | Level 3 | $ | 113,596 | 44,228 | ||||
(1) | The aggregate fair value of Lennar Financial Services loans held-for-sale of $738.4 million at November 30, 2014 exceeds their aggregate principal balance of $706.0 million by $32.4 million. The aggregate fair value of loans held-for-sale of $414.2 million at November 30, 2013 exceeds their aggregate principal balance of $399.0 million by $15.3 million. |
(2) | The aggregate fair value of Rialto loans held-for-sale of $113.6 million at November 30, 2014 exceeds their aggregate principal balance of $111.8 million by $1.8 million. The aggregate fair value of Rialto loans held-for-sale of $44.2 million at November 30, 2013 exceeds their aggregate principal balance of $44.0 million by $0.2 million. |
The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values:
Lennar Financial Services loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of November 30, 2014 and 2013. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.
Lennar Financial Services mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets.
Lennar Financial Services forward contracts— Fair value is based on quoted market prices for similar financial instruments. As of November 30, 2014, the fair value of forward contracts is included in the Lennar Financial Services segment's other liabilities. As of November 30, 2013, the fair value of forward contracts is included in the Lennar Financial Services segment's other assets.
Lennar Financial Services mortgage servicing rights — Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis, at the time of securitization or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of November 30, 2014, the key assumptions used in determining the fair value include a 13.2% mortgage prepayment rate, a 6.5% delinquency rate and a 12.0% discount rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.
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Lennar Homebuilding investments available-for-sale— The fair value of these investments is based on third-party valuations and/or estimated by the Company on the basis of discounted cash flows and it is included in the Lennar Homebuilding segment's other assets.
Rialto loans held-for-sale— The fair value of loans held-for-sale is calculated from model-based techniques that use discounted cash flow assumptions and the Company’s own estimates of CMBS spreads, market interest rate movements and the underlying loan credit quality. Loan values are calculated by allocating the change in value of an assumed CMBS capital structure to each loan. The value of an assumed CMBS capital structure is calculated, generally, by discounting the cash flows associated with each CMBS class at market interest rates and at the Company’s own estimate of CMBS spreads. The Company estimates CMBS spreads by observing the pricing of recent CMBS offerings, secondary CMBS markets, changes in the CMBX index, and general capital and commercial real estate market conditions. Considerations in estimating CMBS spreads include comparing the Company’s current loan portfolio with comparable CMBS offerings containing loans with similar duration, credit quality and collateral composition. These methods use unobservable inputs in estimating a discount rate that is used to assign a value to each loan. While the cash payments on the loans are contractual, the discount rate used and assumptions regarding the relative size of each class in the CMBS capital structure can significantly impact the valuation. Therefore, the estimates used could differ materially from the fair value determined when the loans are sold to a securitization trust.
The changes in fair value for Level 1 and Level 2 financial instruments measured on a recurring basis are shown below by financial instrument and financial statement line item:
Years Ended November 30, | |||||||||
(In thousands) | 2014 | 2013 | 2012 | ||||||
Changes in fair value included in Lennar Financial Services revenues: | |||||||||
Loans held-for-sale | $ | 17,124 | (7,927 | ) | 11,654 | ||||
Mortgage loan commitments | $ | 5,352 | (5,378 | ) | 8,521 | ||||
Forward contracts | $ | (9,020 | ) | 4,014 | (1,166 | ) | |||
Interest income on Lennar Financial Services loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded as revenues in the Lennar Financial Services’ statement of operations.
The Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting the Company’s counterparties to investment banks, federally regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At November 30, 2014, the segment had open commitments amounting to $771.0 million to sell MBS with varying settlement dates through February 2015.
The following tables represents the reconciliations of the beginning and ending balance for the Level 3 recurring fair value measurements:
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Mortgage servicing rights, beginning of period | $ | 11,455 | 4,749 | |||
Purchases and retention of mortgage servicing rights (1) | 9,314 | 5,675 | ||||
Disposals | (2,308 | ) | (790 | ) | ||
Changes in fair value (2) | (1,108 | ) | 1,821 | |||
Mortgage servicing rights, end of period | 17,353 | 11,455 | ||||
(1) | For the year ended November 30, 2014, purchases and retention of mortgage servicing rights included the $5.7 million acquisition of a portfolio of mortgage servicing rights. |
(2) | Amount represents changes in fair value included in Lennar Financial Services revenues. |
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November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Investments available-for-sale, beginning of period | $ | 40,032 | 19,591 | |||
Purchases and other (1) | 21,274 | 25,518 | ||||
Sales | (51,934 | ) | (5,618 | ) | ||
Changes in fair value (2) | 7,379 | 748 | ||||
Settlements (3) | (16,271 | ) | (207 | ) | ||
Investments available-for-sale, end of period | $ | 480 | 40,032 | |||
(1) | Represents investments in community development district bond that mature at 2039. |
(2) | The changes in fair value were not included in other comprehensive income because the changes in fair value were deferred as a result of the Company's continuing involvement in the underlying real estate collateral. |
(3) | The investments available-for-sale that were settled during the year ended November 30, 2014 related to investments in community development district bonds, which were in default by the borrower and regarding which the Company redeemed the bonds. |
November 30, | ||||||
(In thousands) | 2014 | 2013 | ||||
Rialto loans held-for-sale, beginning of period | $ | 44,228 | — | |||
Loan originations | 1,562,748 | 690,266 | ||||
Originated loans sold, including those not settled | (1,494,075 | ) | (646,266 | ) | ||
Interest and principal paydowns | (800 | ) | 195 | |||
Changes in fair value (1) | 1,495 | 33 | ||||
Rialto loans held-for-sale, end of period | $ | 113,596 | 44,228 | |||
(1) | Amount represents changes in fair value included in Rialto revenues. |
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The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs. The fair values included in the tables below represent only those assets whose carrying values were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:
Years Ended November 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2012 | |||||||||||||||||||||||||||
(In thousands) | Fair Value Hierarchy | Carrying Value | Fair Value | Total Gains (Losses) (1) | Carrying Value | Fair Value | Total Gains (Losses) (1) | Carrying Value | Fair Value | Total Gains (Losses) (1) | |||||||||||||||||||
Financial Assets | |||||||||||||||||||||||||||||
Rialto: | |||||||||||||||||||||||||||||
Impaired loans receivable | Level 3 | $ | 187,218 | 130,105 | (57,113 | ) | 237,829 | 221,690 | (16,139 | ) | 354,687 | 326,721 | (27,966 | ) | |||||||||||||||
Non-financial assets | |||||||||||||||||||||||||||||
Lennar Homebuilding: | |||||||||||||||||||||||||||||
Finished homes and construction in progress (2) | Level 3 | $ | 8,071 | 4,498 | (3,573 | ) | 16,453 | 11,995 | (4,458 | ) | 25,784 | 14,755 | (11,029 | ) | |||||||||||||||
Land and land under development (2) | Level 3 | $ | 7,013 | 6,143 | (870 | ) | — | — | — | 18,044 | 16,166 | (1,878 | ) | ||||||||||||||||
Investments in unconsolidated entities (3) | Level 3 | $ | — | — | — | 20,921 | 20,024 | (897 | ) | — | — | — | |||||||||||||||||
Rialto: | |||||||||||||||||||||||||||||
REO - held-for-sale (4) | |||||||||||||||||||||||||||||
Upon acquisition/transfer | Level 3 | $ | 26,750 | 25,145 | (1,605 | ) | 14,367 | 15,985 | 1,618 | 14,325 | 9,987 | (4,338 | ) | ||||||||||||||||
Upon management periodic valuations | Level 3 | $ | 50,115 | 42,279 | (7,836 | ) | 26,772 | 21,199 | (5,573 | ) | 19,718 | 17,139 | (2,579 | ) | |||||||||||||||
REO - held-and-used, net (5) | |||||||||||||||||||||||||||||
Upon acquisition/transfer | Level 3 | $ | 60,572 | 55,407 | (5,165 | ) | 79,775 | 86,262 | 6,487 | 172,654 | 175,114 | 2,460 | |||||||||||||||||
Upon management periodic valuations | Level 3 | $ | 39,728 | 28,227 | (11,501 | ) | 22,743 | 12,226 | (10,517 | ) | 33,003 | 26,300 | (6,703 | ) | |||||||||||||||
(1) | Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the years ended November 30, 2014, 2013 and 2012. |
(2) | Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's consolidated statement of operations for the years ended November 30, 2014, 2013 and 2012. |
(3) | Valuation adjustments were included in Lennar Homebuilding other income, net in the Company's consolidated statement of operations for the year ended November 30, 2013. |
(4) | REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of the transfer or acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-for-sale is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO held-for-sale. The gains (losses) upon the transfer or acquisition of REO and impairments were included in Rialto other income (expense), net, in the Company’s consolidated statement of operations for the years ended November 30, 2014, 2013 and 2012. |
(5) | REO held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. In addition, management periodically performs valuations of its REO held-and-used, net. The gains (losses) upon acquisition of REO held-and-used, net and impairments were included in Rialto other income (expense), net, in the Company’s consolidated statement of operations for the years ended November 30, 2014, 2013 and 2012. |
See Note 1 for a detailed description of the Company’s process for identifying and recording valuation adjustments related to Lennar Homebuilding inventory, Lennar Homebuilding investments in unconsolidated entities and Rialto REO assets.
16. Consolidation of Variable Interest Entities
GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
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The Company evaluated the joint venture agreements of its joint ventures that were formed or that had reconsideration events during the year ended November 30, 2014. Based on the Company’s evaluation, in the third quarter of 2014, the Company consolidated entities within its Lennar Multifamily segment that had combined total assets of $17.9 million. In the second quarter of 2014, the Company entered into a new option agreement with MSR, which resulted in the consolidation of certain VIEs because of the Company having options on substantially all of the homesites. The VIEs that consolidated had total combined assets of $158.5 million and non-recourse liabilities of $1.6 million.
At November 30, 2014 and 2013, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $656.8 million and $716.9 million, respectively, the Rialto segment’s investments in unconsolidated entities were $175.7 million and $154.6 million, respectively, and the Lennar Multifamily segment's investments in unconsolidated entities were $105.7 million and $46.3 million, respectively.
Consolidated VIEs
As of November 30, 2014, the carrying amount of the VIEs’ assets and non-recourse liabilities that consolidated were $929.1 million and $149.8 million, respectively. As of November 30, 2013, the carrying amount of the VIEs’ assets and non-recourse liabilities that consolidated were $1,195.3 million and $294.8 million, respectively. Those assets are owned by, and those liabilities are obligations of, the VIEs, not the Company.
A VIE’s assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company’s senior notes and other debts payable. In addition, the assets held by a VIE usually are collateral for that VIE’s debt. The Company and other partners do not generally have an obligation to make capital contributions to a VIE unless the Company and/or the other partner(s) have entered into debt guarantees with the VIE’s banks. Other than debt guarantee agreements with a VIE’s banks, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to a VIE. While the Company has option contracts to purchase land from certain of its VIEs, the Company is not required to purchase the assets and could walk away from the contracts.
Consolidated Joint Ventures
During the year ended November 30, 2013, in a joint venture transaction, the Company bought out its 50% partners for $82.3 million, paying $18.8 million in cash and financing the remainder with a short-term note. The Company's consolidated joint venture then contributed certain assets to a new unconsolidated joint venture and brought in a new, long-term partner for $125 million, or a 31.25% interest. During the year ended November 30, 2013, the new unconsolidated joint venture subsequently distributed $125 million of cash to the Company as a return of capital.
Unconsolidated VIEs
At November 30, 2014 and 2013, the Company’s recorded investments in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:
November 30, 2014 | ||||||
(In thousands) | Investments in Unconsolidated VIEs | Lennar’s Maximum Exposure to Loss | ||||
Lennar Homebuilding (1) | $ | 124,311 | 194,321 | |||
Rialto (2) | 17,290 | 17,290 | ||||
Lennar Multifamily (3) | 41,600 | 65,810 | ||||
$ | 183,201 | 277,421 | ||||
November 30, 2013 | ||||||
(In thousands) | Investments in Unconsolidated VIEs | Lennar’s Maximum Exposure to Loss | ||||
Lennar Homebuilding (1) | $ | 195,720 | 301,315 | |||
Rialto (2) | 24,393 | 24,393 | ||||
Lennar Multifamily (3) | 25,874 | 55,002 | ||||
$ | 245,987 | 380,710 | ||||
(1) | At November 30, 2014, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs was limited to its investment in the unconsolidated VIEs, except with regard to $70.0 million remaining commitment to fund an unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing. At November 30, 2013, the maximum exposure to loss |
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of Lennar Homebuilding’s investments in unconsolidated entities was limited to its investment in the unconsolidated VIEs, except with regard to $90.5 million remaining commitment to fund an unconsolidated entity that was formed in 2013 for further expenses up until the unconsolidated entity obtains permanent financing and $15.0 million of recourse debt of an unconsolidated VIEs, which was included in the Company’s maximum recourse related to Lennar Homebuilding unconsolidated entities.
(2) | At both November 30, 2014 and 2013, the maximum recourse exposure to loss of Rialto’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated entities. At November 30, 2014 and 2013, investments in unconsolidated VIEs and Lennar’s maximum exposure to loss included $17.3 million and $16.1 million, respectively, related to Rialto’s investments held-to-maturity. |
(3) | At November 30, 2014 and 2013, the maximum exposure to loss of Lennar Multifamily's investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $23.4 million and $28.0 million, respectively, of letters of credit outstanding for certain of the unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements. |
While these entities are VIEs, the Company has determined that the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance is generally shared. While the Company generally manages the day-to-day operations of the VIEs, each of these VIEs has an executive committee made up of representatives from each partner. The members of the executive committee have equal votes and major decisions require unanimous consent and approval from all members. The Company does not have the unilateral ability to exercise participating voting rights without partner consent.
The Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for $23.4 million of letters of credit outstanding for certain Lennar Multifamily unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the VIEs, except with regard to a $70.0 million remaining commitment to fund an unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing. Except for the unconsolidated VIEs discussed above, the Company and the other partners did not guarantee any debt of the other unconsolidated VIEs. While the Company has option contracts to purchase land from certain of its unconsolidated VIEs, the Company is not required to purchase the assets and could walk away from the contracts.
Option Contracts
The Company has access to land through option contracts, which generally enables it to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company has determined whether to exercise the option.
A majority of the Company’s option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. The Company’s option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on the fair value at the time of takedown.
The Company’s investments in option contracts are recorded at cost unless those investments are determined to be impaired, in which case the Company’s investments are written down to fair value. The Company reviews option contracts for indicators of impairment during each reporting period. The most significant indicator of impairment is a decline in the fair value of the optioned property such that the purchase and development of the optioned property would no longer meet the Company’s targeted return on investment with appropriate consideration given to the length of time available to exercise the option. Such declines could be caused by a variety of factors including increased competition, decreases in demand or changes in local regulations that adversely impact the cost of development. Changes in any of these factors would cause the Company to re-evaluate the likelihood of exercising its land options.
Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, the Company is not required to purchase land in accordance with those take-down schedules. In substantially all instances, the Company has the right and ability to not exercise its option and forfeit its deposit without further penalty, other than termination of the option and loss of any unapplied portion of its deposit and pre-acquisition costs. Therefore, in substantially all instances, the Company does not consider the take-down price to be a firm contractual obligation.
When the Company does not intend to exercise an option, it writes off any unapplied deposit and pre-acquisition costs associated with the option contract. For the years ended November 30, 2014, 2013 and 2012, the Company wrote-off $4.6 million, $1.9 million and $2.4 million, respectively, of option deposits and pre-acquisition costs related to land under option that it does not intend to purchase.
The Company evaluates all option contracts for land to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, if the Company is deemed to be the primary beneficiary or makes a significant deposit for optioned land, it may need to consolidate the land under option at the purchase price of the optioned land. Due to the new agreement with MSR
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
discussed in Note 4, $155.0 million of consolidated inventory not owned was reclassified to land and land under development and $70.3 million of consolidated inventory not owned was deconsolidated during the year ended November 30, 2014.
In addition to this transaction, during the year ended November 30, 2014, consolidated inventory not owned decreased by $182.4 million with a corresponding decrease to liabilities related to consolidated inventory not owned in the accompanying consolidated balance sheet as of November 30, 2014. The decrease was primarily due to the purchase of land that was the subject of a previously consolidated option contract. To reflect the purchase price of the inventory consolidated, the Company had a net reclass related to option deposits from consolidated inventory not owned to land under development in the accompanying consolidated balance sheet as of November 30, 2014. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and the Company’s cash deposits.
The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits and pre-acquisition costs totaling $85.6 million and $129.2 million at November 30, 2014 and 2013, respectively. Additionally, the Company had posted $34.5 million and $29.9 million of letters of credit in lieu of cash deposits under certain option contracts as of November 30, 2014 and 2013, respectively.
17. Commitments and Contingent Liabilities
The Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial statements. The Company is also a party to various lawsuits involving purchases and sales of real property. These lawsuits include claims regarding representations and warranties made in connection with the transfer of the property and disputes regarding the obligation to purchase or sell the property.
The Company has been engaged in litigation since 2008 in the United States District Court for the District of Maryland regarding whether the Company is required by a contract it entered into in 2005 to purchase a property in Maryland. After entering into the contract, the Company later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In July 2014, the Court ruled that the Company may be obligated to purchase the property. As a result of changes in zoning for the property during the litigation, the Court ordered further proceedings to determine whether the sellers are entitled to specific performance and, if so, whether a further reduction in the purchase price is required. In January 2015, the Court rendered a decision ordering the Company to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. The Company believes the decision is contrary to applicable law and will appeal the decision. The Company does not believe it is probable that a loss has occurred and, therefore, no liability has been recorded with respect to this case.
The Company does not believe that the ultimate resolution of these claims or lawsuits will have a material adverse effect on its business or financial position. However, the financial effect of litigation concerning purchases and sales of property may depend upon the value of the subject property, which may have changed from the time the agreement for purchase or sale was entered into.
In December 2013, the Company was awarded by a civil jury compensatory damages and punitive damages against a former unconsolidated joint venture partner on court findings of defamation and conspiracy to extort money from the Company in 2008 and 2009. The Company does not expect to be able to collect the amount awarded to it and thus has not recorded any amounts receivable in its financial statements related to the award.
The Company is subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate, which it does in the routine conduct of its business. Option contracts generally enable the Company to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company determines whether to exercise the option. The use of option contracts allows the Company to reduce the financial risks associated with long-term land holdings. At November 30, 2014, the Company had $85.6 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites, which were included in inventories in the consolidated balance sheet.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the non-cancellable leases in effect at November 30, 2014 were as follows:
(In thousands) | Lease Payments | ||
2015 | $ | 34,358 | |
2016 | 28,524 | ||
2017 | 23,695 | ||
2018 | 19,885 | ||
2019 | 13,994 | ||
Thereafter | 16,658 | ||
Rental expense for the years ended November 30, 2014, 2013 and 2012 was $48.9 million, $41.9 million and $38.7 million, respectively.
The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $424.6 million at November 30, 2014. The Company also had outstanding performance and surety bonds related to site improvements at various projects (including certain projects in the Company’s joint ventures) of $923.3 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of November 30, 2014, there were approximately $363.7 million, or 39%, of costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds that would have a material effect on its consolidated financial statements.
18. Supplemental Financial Information
The indentures governing the Company’s 5.60% senior notes due 2015, 6.50% senior notes due 2016, 12.25% senior notes due 2017, 4.75% senior notes due 2017, 6.95% senior notes due 2018, 4.125% senior notes due 2018, 4.500% senior notes due 2019, 4.50% senior notes due 2019, 2.75% convertible senior notes due 2020, 3.25% convertible senior notes due 2021 and 4.750% senior notes due 2022 require that, if any of the Company’s 100% owned subsidiaries, other than its finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least $75 million principal amount of debt of Lennar Corporation, those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as “guarantors” in the following tables are subsidiaries that are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because at November 30, 2014 they were guaranteeing Lennar Corporation's $125 million letter of credit facilities, it's $140 million letter of credit facility and its Credit Facility. The guarantees are full, unconditional and joint and several and the guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. A subsidiary's guarantee will be suspended at any time when it is not directly or indirectly guaranteeing at least $75 million principal amount of debt of Lennar Corporation, and a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
For purposes of the condensed consolidating statement of cash flows included in the following supplemental financial information, the Company's accounting policy is to treat cash received by Lennar Corporation ("the Parent") from its subsidiaries, to the extent of net earnings from such subsidiaries as a dividend and accordingly a return on investment within cash flows from operating activities. Distributions of capital received by the Parent from its subsidiaries are reflected as cash flows from investing activities. The cash outflows associated with the return on investment dividends and distributions of capital received by the Parent are reflected by the Guarantor and Non-Guarantor subsidiaries in the Dividends line item within cash flows from financing activities. All other cash flows between the Parent and its subsidiaries represent the settlement of receivables and payables between such entities in conjunction with the Parent's centralized cash management arrangement with its subsidiaries, which operates with the characteristics of a revolving credit facility, and are accordingly reflected net in the Intercompany line item within cash flows from investing activities for the Parent and net in the Intercompany line item within cash flows from financing activities for the Guarantor and Non-Guarantor subsidiaries.
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Supplemental information for the subsidiaries that were guarantor subsidiaries at November 30, 2014 was as follows:
Consolidating Balance Sheet November 30, 2014 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
ASSETS | |||||||||||||||
Lennar Homebuilding: | |||||||||||||||
Cash and cash equivalents, restricted cash and receivables, net | $ | 653,491 | 323,325 | 12,206 | — | 989,022 | |||||||||
Inventories | — | 7,528,633 | 207,967 | — | 7,736,600 | ||||||||||
Investments in unconsolidated entities | — | 632,973 | 23,864 | — | 656,837 | ||||||||||
Other assets | 159,564 | 402,076 | 104,619 | 6,330 | 672,589 | ||||||||||
Investments in subsidiaries | 4,073,687 | 299,432 | — | (4,373,119 | ) | — | |||||||||
Intercompany | 4,709,544 | — | — | (4,709,544 | ) | — | |||||||||
9,596,286 | 9,186,439 | 348,656 | (9,076,333 | ) | 10,055,048 | ||||||||||
Rialto real estate owned - held-and-used, net | — | — | 255,795 | — | 255,795 | ||||||||||
Rialto all other assets | — | — | 1,202,357 | — | 1,202,357 | ||||||||||
Lennar Financial Services | — | 76,428 | 1,100,625 | — | 1,177,053 | ||||||||||
Lennar Multifamily | — | 248,784 | 19,230 | — | 268,014 | ||||||||||
Total assets | $ | 9,596,286 | 9,511,651 | 2,926,663 | (9,076,333 | ) | 12,958,267 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||
Lennar Homebuilding: | |||||||||||||||
Accounts payable and other liabilities | $ | 447,104 | 756,991 | 71,699 | — | 1,275,794 | |||||||||
Liabilities related to consolidated inventory not owned | — | 45,028 | — | — | 45,028 | ||||||||||
Senior notes and other debts payable | 4,322,162 | 287,700 | 80,351 | — | 4,690,213 | ||||||||||
Intercompany | — | 4,579,314 | 130,230 | (4,709,544 | ) | — | |||||||||
4,769,266 | 5,669,033 | 282,280 | (4,709,544 | ) | 6,011,035 | ||||||||||
Rialto | — | — | 747,044 | — | 747,044 | ||||||||||
Lennar Financial Services | — | 28,705 | 861,608 | 6,330 | 896,643 | ||||||||||
Lennar Multifamily | — | 52,150 | 93 | — | 52,243 | ||||||||||
Total liabilities | $ | 4,769,266 | 5,749,888 | 1,891,025 | (4,703,214 | ) | 7,706,965 | ||||||||
Stockholders’ equity | 4,827,020 | 3,761,763 | 611,356 | (4,373,119 | ) | 4,827,020 | |||||||||
Noncontrolling interests | — | — | 424,282 | — | 424,282 | ||||||||||
Total equity | 4,827,020 | 3,761,763 | 1,035,638 | (4,373,119 | ) | 5,251,302 | |||||||||
Total liabilities and equity | $ | 9,596,286 | 9,511,651 | 2,926,663 | (9,076,333 | ) | 12,958,267 | ||||||||
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Consolidating Balance Sheet November 30, 2013 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
ASSETS | |||||||||||||||
Lennar Homebuilding: | |||||||||||||||
Cash and cash equivalents, restricted cash and receivables, net | $ | 562,134 | 192,945 | 28,430 | — | 783,509 | |||||||||
Inventories | — | 6,507,172 | 93,876 | — | 6,601,048 | ||||||||||
Investments in unconsolidated entities | — | 702,291 | 14,658 | — | 716,949 | ||||||||||
Other assets | 116,657 | 539,264 | 86,773 | 5,935 | 748,629 | ||||||||||
Investments in subsidiaries | 4,305,887 | 325,906 | — | (4,631,793 | ) | — | |||||||||
Intercompany | 3,191,611 | — | — | (3,191,611 | ) | — | |||||||||
8,176,289 | 8,267,578 | 223,737 | (7,817,469 | ) | 8,850,135 | ||||||||||
Rialto real estate owned - held-and-used, net | — | — | 428,989 | — | 428,989 | ||||||||||
Rialto all other assets | — | — | 1,050,324 | — | 1,050,324 | ||||||||||
Lennar Financial Services | — | 76,160 | 720,550 | — | 796,710 | ||||||||||
Lennar Multifamily | — | 147,089 | — | — | 147,089 | ||||||||||
Total assets | $ | 8,176,289 | 8,490,827 | 2,423,600 | (7,817,469 | ) | 11,273,247 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||
Lennar Homebuilding: | |||||||||||||||
Accounts payable and other liabilities | $ | 302,558 | 623,709 | 58,029 | — | 984,296 | |||||||||
Liabilities related to consolidated inventory not owned | — | 384,876 | — | — | 384,876 | ||||||||||
Senior notes and other debts payable | 3,704,830 | 400,044 | 89,558 | — | 4,194,432 | ||||||||||
Intercompany | — | 3,183,664 | 7,947 | (3,191,611 | ) | — | |||||||||
4,007,388 | 4,592,293 | 155,534 | (3,191,611 | ) | 5,563,604 | ||||||||||
Rialto | — | — | 497,008 | — | 497,008 | ||||||||||
Lennar Financial Services | — | 30,045 | 507,659 | 5,935 | 543,639 | ||||||||||
Lennar Multifamily | — | 41,526 | — | — | 41,526 | ||||||||||
Total liabilities | $ | 4,007,388 | 4,663,864 | 1,160,201 | (3,185,676 | ) | 6,645,777 | ||||||||
Stockholders’ equity | 4,168,901 | 3,826,963 | 804,830 | (4,631,793 | ) | 4,168,901 | |||||||||
Noncontrolling interests | — | — | 458,569 | — | 458,569 | ||||||||||
Total equity | 4,168,901 | 3,826,963 | 1,263,399 | (4,631,793 | ) | 4,627,470 | |||||||||
Total liabilities and equity | $ | 8,176,289 | 8,490,827 | 2,423,600 | (7,817,469 | ) | 11,273,247 | ||||||||
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Consolidating Statement of Operations Year Ended November 30, 2014 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Revenues: | |||||||||||||||
Lennar Homebuilding | $ | — | 7,023,678 | 1,452 | — | 7,025,130 | |||||||||
Lennar Financial Services | — | 161,145 | 315,123 | (21,887 | ) | 454,381 | |||||||||
Rialto | — | — | 230,521 | — | 230,521 | ||||||||||
Lennar Multifamily | — | 69,780 | — | — | 69,780 | ||||||||||
Total revenues | — | 7,254,603 | 547,096 | (21,887 | ) | 7,779,812 | |||||||||
Cost and expenses: | |||||||||||||||
Lennar Homebuilding | — | 5,968,866 | 1,640 | (8,477 | ) | 5,962,029 | |||||||||
Lennar Financial Services | — | 153,975 | 233,162 | (12,894 | ) | 374,243 | |||||||||
Rialto | — | — | 249,114 | — | 249,114 | ||||||||||
Lennar Multifamily | — | 95,226 | 1 | — | 95,227 | ||||||||||
Corporate general and administrative | 172,099 | — | — | 5,062 | 177,161 | ||||||||||
Total costs and expenses | 172,099 | 6,218,067 | 483,917 | (16,309 | ) | 6,857,774 | |||||||||
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities | — | (3,882 | ) | 3,527 | — | (355 | ) | ||||||||
Lennar Homebuilding other income, net | 254 | 7,488 | — | (216 | ) | 7,526 | |||||||||
Other interest expense | (5,794 | ) | (36,551 | ) | — | 5,794 | (36,551 | ) | |||||||
Rialto equity in earnings from unconsolidated entities | — | — | 59,277 | — | 59,277 | ||||||||||
Rialto other income, net | — | — | 3,395 | — | 3,395 | ||||||||||
Lennar Multifamily equity in earnings from unconsolidated entities | — | 14,454 | — | — | 14,454 | ||||||||||
Earnings (loss) before income taxes | (177,639 | ) | 1,018,045 | 129,378 | — | 969,784 | |||||||||
Benefit (provision) for income taxes | 61,818 | (351,787 | ) | (51,122 | ) | — | (341,091 | ) | |||||||
Equity in earnings from subsidiaries | 754,737 | 39,623 | — | (794,360 | ) | — | |||||||||
Net earnings (including net loss attributable to noncontrolling interests) | 638,916 | 705,881 | 78,256 | (794,360 | ) | 628,693 | |||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (10,223 | ) | — | (10,223 | ) | ||||||||
Net earnings attributable to Lennar | $ | 638,916 | 705,881 | 88,479 | (794,360 | ) | 638,916 | ||||||||
Comprehensive earnings attributable to Lennar | $ | 638,916 | 705,881 | 88,479 | (794,360 | ) | 638,916 | ||||||||
Comprehensive loss attributable to noncontrolling interests | $ | — | — | (10,223 | ) | — | (10,223 | ) | |||||||
130
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidating Statement of Operations Year Ended November 30, 2013 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Revenues: | |||||||||||||||
Lennar Homebuilding | $ | — | 5,317,890 | 37,057 | — | 5,354,947 | |||||||||
Lennar Financial Services | — | 162,939 | 285,474 | (21,071 | ) | 427,342 | |||||||||
Rialto | — | — | 138,060 | — | 138,060 | ||||||||||
Lennar Multifamily | — | 14,746 | — | — | 14,746 | ||||||||||
Total revenues | — | 5,495,575 | 460,591 | (21,071 | ) | 5,935,095 | |||||||||
Cost and expenses: | |||||||||||||||
Lennar Homebuilding | — | 4,547,431 | 24,368 | 7,309 | 4,579,108 | ||||||||||
Lennar Financial Services | — | 157,351 | 212,380 | (28,175 | ) | 341,556 | |||||||||
Rialto | — | — | 151,072 | — | 151,072 | ||||||||||
Lennar Multifamily | — | 31,463 | — | — | 31,463 | ||||||||||
Corporate general and administrative | 140,999 | — | — | 5,061 | 146,060 | ||||||||||
Total costs and expenses | 140,999 | 4,736,245 | 387,820 | (15,805 | ) | 5,249,259 | |||||||||
Lennar Homebuilding equity in earnings from unconsolidated entities | — | 22,966 | 837 | — | 23,803 | ||||||||||
Lennar Homebuilding other income, net | 542 | 27,308 | — | (504 | ) | 27,346 | |||||||||
Other interest expense | (5,770 | ) | (93,913 | ) | — | 5,770 | (93,913 | ) | |||||||
Rialto equity in earnings from unconsolidated entities | — | — | 22,353 | — | 22,353 | ||||||||||
Rialto other income, net | — | — | 16,787 | — | 16,787 | ||||||||||
Lennar Multifamily equity in loss from unconsolidated entities | — | (271 | ) | — | — | (271 | ) | ||||||||
Earnings (loss) before income taxes | (146,227 | ) | 715,420 | 112,748 | — | 681,941 | |||||||||
Benefit (provision) for income taxes | 54,353 | (198,292 | ) | (33,076 | ) | — | (177,015 | ) | |||||||
Equity in earnings from subsidiaries | 571,548 | 45,015 | — | (616,563 | ) | — | |||||||||
Net earnings (including net earnings attributable to noncontrolling interests) | 479,674 | 562,143 | 79,672 | (616,563 | ) | 504,926 | |||||||||
Less: Net earnings attributable to noncontrolling interests | — | — | 25,252 | — | 25,252 | ||||||||||
Net earnings attributable to Lennar | $ | 479,674 | 562,143 | 54,420 | (616,563 | ) | 479,674 | ||||||||
Comprehensive earnings attributable to Lennar | $ | 479,674 | 562,143 | 54,420 | (616,563 | ) | 479,674 | ||||||||
Comprehensive earnings attributable to noncontrolling interests | $ | — | — | 25,252 | — | 25,252 | |||||||||
131
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidating Statement of Operations Year Ended November 30, 2012 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Revenues: | |||||||||||||||
Lennar Homebuilding | $ | — | 3,580,827 | 405 | — | 3,581,232 | |||||||||
Lennar Financial Services | — | 156,478 | 246,566 | (18,426 | ) | 384,618 | |||||||||
Rialto | — | — | 138,856 | — | 138,856 | ||||||||||
Lennar Multifamily | — | 426 | — | — | 426 | ||||||||||
Total revenues | — | 3,737,731 | 385,827 | (18,426 | ) | 4,105,132 | |||||||||
Cost and expenses: | |||||||||||||||
Lennar Homebuilding | — | 3,201,036 | 15,872 | (542 | ) | 3,216,366 | |||||||||
Lennar Financial Services | — | 151,455 | 165,419 | (17,038 | ) | 299,836 | |||||||||
Rialto | — | — | 138,990 | — | 138,990 | ||||||||||
Lennar Multifamily | — | 6,306 | — | — | 6,306 | ||||||||||
Corporate general and administrative | 122,277 | — | — | 5,061 | 127,338 | ||||||||||
Total costs and expenses | 122,277 | 3,358,797 | 320,281 | (12,519 | ) | 3,788,836 | |||||||||
Lennar Homebuilding equity in loss from unconsolidated entities | — | (26,153 | ) | (519 | ) | — | (26,672 | ) | |||||||
Lennar Homebuilding other income (expense), net | (90 | ) | 15,106 | — | 128 | 15,144 | |||||||||
Other interest expense | (5,779 | ) | (94,353 | ) | — | 5,779 | (94,353 | ) | |||||||
Rialto equity in earnings from unconsolidated entities | — | — | 41,483 | — | 41,483 | ||||||||||
Rialto other expense, net | — | — | (29,780 | ) | — | (29,780 | ) | ||||||||
Lennar Multifamily equity in loss from unconsolidated entities | — | (4 | ) | — | — | (4 | ) | ||||||||
Earnings (loss) before income taxes | (128,146 | ) | 273,530 | 76,730 | — | 222,114 | |||||||||
Benefit (provision) for income taxes | 20,711 | 457,850 | (43,343 | ) | — | 435,218 | |||||||||
Equity in earnings from subsidiaries | 786,559 | 44,815 | — | (831,374 | ) | — | |||||||||
Net earnings (including net loss attributable to noncontrolling interests) | 679,124 | 776,195 | 33,387 | (831,374 | ) | 657,332 | |||||||||
Less: Net loss attributable to noncontrolling interests | — | — | (21,792 | ) | — | (21,792 | ) | ||||||||
Net earnings attributable to Lennar | $ | 679,124 | 776,195 | 55,179 | (831,374 | ) | 679,124 | ||||||||
Comprehensive earnings attributable to Lennar | $ | 679,124 | 776,195 | 55,179 | (831,374 | ) | 679,124 | ||||||||
Comprehensive loss attributable to noncontrolling interests | $ | — | — | (21,792 | ) | — | (21,792 | ) | |||||||
132
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidating Statement of Cash Flows Year Ended November 30, 2014 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Cash flows from operating activities: | |||||||||||||||
Net earnings (including net loss attributable to noncontrolling interests) | $ | 638,916 | 705,881 | 78,256 | (794,360 | ) | 628,693 | ||||||||
Distributions of earnings from guarantor and non-guarantor subsidiaries | 754,737 | 39,623 | — | (794,360 | ) | — | |||||||||
Other adjustments to reconcile net earnings (including net loss attributable to noncontrolling interests) to net cash provided by (used in) operating activities | (583,119 | ) | (1,227,547 | ) | (400,875 | ) | 794,360 | (1,417,181 | ) | ||||||
Net cash provided by (used in) operating activities | 810,534 | (482,043 | ) | (322,619 | ) | (794,360 | ) | (788,488 | ) | ||||||
Cash flows from investing activities: | |||||||||||||||
Distributions of capital from Lennar Homebuilding unconsolidated entities, net of investments in and contributions to | — | 54,065 | 1,885 | — | 55,950 | ||||||||||
Distributions of capital from Rialto unconsolidated entities, net of investments in and contributions to | — | — | 27,391 | — | 27,391 | ||||||||||
Distributions of capital from Lennar Multifamily unconsolidated entities, net of investments in and contributions to | — | 36,182 | — | — | 36,182 | ||||||||||
Receipts of principal payments on Rialto loans receivable, net | — | — | 24,019 | — | 24,019 | ||||||||||
Proceeds from sales of Rialto real estate owned | — | — | 269,698 | — | 269,698 | ||||||||||
Proceeds from sale of operating properties | — | 43,937 | — | — | 43,937 | ||||||||||
Other | (2,347 | ) | 17,491 | (33,962 | ) | — | (18,818 | ) | |||||||
Distributions of capital from guarantor and non-guarantor subsidiaries | 232,200 | 65,200 | — | (297,400 | ) | — | |||||||||
Intercompany | (1,515,367 | ) | — | — | 1,515,367 | — | |||||||||
Net cash provided by (used in) investing activities | (1,285,514 | ) | 216,875 | 289,031 | 1,217,967 | 438,359 | |||||||||
Cash flows from financing activities: | |||||||||||||||
Net borrowings under Lennar Financial Services debt | — | — | 324,281 | — | 324,281 | ||||||||||
Net borrowings under Rialto warehouse repurchase facilities | — | — | 65,254 | — | 65,254 | ||||||||||
Net proceeds from senior notes and structured notes | 843,300 | — | 196,180 | — | 1,039,480 | ||||||||||
Redemption of senior notes | (250,000 | ) | — | — | — | (250,000 | ) | ||||||||
Principal repayments on Rialto notes payable | — | — | (75,879 | ) | — | (75,879 | ) | ||||||||
Net repayments on other borrowings | — | (255,397 | ) | (9,892 | ) | — | (265,289 | ) | |||||||
Exercise of land option contracts from an unconsolidated land investment venture | — | (1,540 | ) | — | — | (1,540 | ) | ||||||||
Net payments related to noncontrolling interests | — | — | (142,766 | ) | — | (142,766 | ) | ||||||||
Excess tax benefits from share-based awards | 7,497 | — | — | — | 7,497 | ||||||||||
Common stock: | |||||||||||||||
Issuances | 13,599 | — | — | — | 13,599 | ||||||||||
Repurchases | (20,424 | ) | — | — | — | (20,424 | ) | ||||||||
Dividends | (32,775 | ) | (771,081 | ) | (320,679 | ) | 1,091,760 | (32,775 | ) | ||||||
Intercompany | — | 1,395,934 | 119,433 | (1,515,367 | ) | — | |||||||||
Net cash provided by financing activities | 561,197 | 367,916 | 155,932 | (423,607 | ) | 661,438 | |||||||||
Net increase in cash and cash equivalents | 86,217 | 102,748 | 122,344 | — | 311,309 | ||||||||||
Cash and cash equivalents at beginning of period | 547,101 | 152,753 | 270,651 | — | 970,505 | ||||||||||
Cash and cash equivalents at end of period | $ | 633,318 | 255,501 | 392,995 | — | 1,281,814 | |||||||||
133
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidating Statement of Cash Flows Year Ended November 30, 2013 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Cash flows from operating activities: | |||||||||||||||
Net earnings (including net earnings attributable to noncontrolling interests) | $ | 479,674 | 562,143 | 79,672 | (616,563 | ) | 504,926 | ||||||||
Distributions of earnings from guarantor and non-guarantor subsidiaries | 571,548 | 45,015 | — | (616,563 | ) | — | |||||||||
Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities | (555,792 | ) | (1,421,646 | ) | 48,235 | 616,563 | (1,312,640 | ) | |||||||
Net cash provided by (used in) operating activities | 495,430 | (814,488 | ) | 127,907 | (616,563 | ) | (807,714 | ) | |||||||
Cash flows from investing activities: | |||||||||||||||
Distributions of capital from Lennar Homebuilding unconsolidated entities, net of investments in and contributions to | — | 98,819 | 2,190 | — | 101,009 | ||||||||||
Investments in and contributions to Rialto unconsolidated entities, net of distributions of capital | — | — | (24,397 | ) | — | (24,397 | ) | ||||||||
Decrease in Rialto defeasance cash to retire notes payable | — | — | 223,813 | — | 223,813 | ||||||||||
Receipts of principal payments on Rialto loans receivable, net | — | — | 66,788 | — | 66,788 | ||||||||||
Proceeds from sales of Rialto real estate owned | — | — | 239,215 | — | 239,215 | ||||||||||
Proceeds from sale of operating properties | — | — | 140,564 | — | 140,564 | ||||||||||
Other | (233 | ) | (30,213 | ) | (27,297 | ) | — | (57,743 | ) | ||||||
Intercompany | (1,333,932 | ) | — | — | 1,333,932 | — | |||||||||
Net cash provided by (used in) investing activities | (1,334,165 | ) | 68,606 | 620,876 | 1,333,932 | 689,249 | |||||||||
Cash flows from financing activities: | |||||||||||||||
Net repayments under Lennar Financial Services debt | — | — | (83,828 | ) | — | (83,828 | ) | ||||||||
Net borrowings under Rialto warehouse repurchase facilities | — | — | 76,017 | — | 76,017 | ||||||||||
Net proceeds from convertible and senior notes | 494,329 | — | — | — | 494,329 | ||||||||||
Redemption of senior notes | (63,001 | ) | (750 | ) | — | — | (63,751 | ) | |||||||
Net proceeds from Rialto senior notes | — | — | 242,736 | — | 242,736 | ||||||||||
Principal repayments on Rialto notes payable | — | — | (471,255 | ) | — | (471,255 | ) | ||||||||
Net repayments on other borrowings | — | (67,984 | ) | (126,779 | ) | — | (194,763 | ) | |||||||
Exercise of land option contracts from an unconsolidated land investment venture | — | (28,869 | ) | — | — | (28,869 | ) | ||||||||
Net payments related to noncontrolling interests | — | — | (193,419 | ) | — | (193,419 | ) | ||||||||
Excess tax benefits from share-based awards | 10,148 | — | — | — | 10,148 | ||||||||||
Common stock: | |||||||||||||||
Issuances | 34,114 | — | — | — | 34,114 | ||||||||||
Repurchases | (12,320 | ) | — | — | — | (12,320 | ) | ||||||||
Dividends | (30,912 | ) | (562,143 | ) | (54,420 | ) | 616,563 | (30,912 | ) | ||||||
Intercompany | — | 1,366,008 | (32,076 | ) | (1,333,932 | ) | — | ||||||||
Net cash provided by (used in) financing activities | 432,358 | 706,262 | (643,024 | ) | (717,369 | ) | (221,773 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (406,377 | ) | (39,620 | ) | 105,759 | — | (340,238 | ) | |||||||
Cash and cash equivalents at beginning of period | 953,478 | 192,373 | 164,892 | — | 1,310,743 | ||||||||||
Cash and cash equivalents at end of period | $ | 547,101 | 152,753 | 270,651 | — | 970,505 | |||||||||
134
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidating Statement of Cash Flows Year Ended November 30, 2012 | |||||||||||||||
(In thousands) | Lennar Corporation | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Total | ||||||||||
Cash flows from operating activities: | |||||||||||||||
Net earnings (including net loss attributable to noncontrolling interests) | $ | 679,124 | 776,195 | 33,387 | (831,374 | ) | 657,332 | ||||||||
Distributions of earnings from guarantor and non-guarantor subsidiaries | 318,998 | 44,815 | — | (363,813 | ) | — | |||||||||
Other adjustments to reconcile net earnings (including net loss attributable to noncontrolling interests) to net cash provided by (used in) operating activities | (783,282 | ) | (962,447 | ) | (167,625 | ) | 831,374 | (1,081,980 | ) | ||||||
Net cash provided by (used in) operating activities | 214,840 | (141,437 | ) | (134,238 | ) | (363,813 | ) | (424,648 | ) | ||||||
Cash flows from investing activities: | |||||||||||||||
Investments in and contributions to Lennar Homebuilding unconsolidated entities, net of distributions of capital | — | (27,113 | ) | (842 | ) | — | (27,955 | ) | |||||||
Distributions of capital from Rialto unconsolidated entities, net of investments and contributions to | — | — | 39,813 | — | 39,813 | ||||||||||
Increase in Rialto defeasance cash to retire notes payable | — | — | (4,427 | ) | — | (4,427 | ) | ||||||||
Receipts of principal payments on Rialto loans receivable, net | — | — | 81,648 | — | 81,648 | ||||||||||
Proceeds from sales of Rialto real estate owned | — | — | 183,883 | — | 183,883 | ||||||||||
Other | (218 | ) | 3,720 | (31,173 | ) | — | (27,671 | ) | |||||||
Intercompany | (700,846 | ) | — | — | 700,846 | — | |||||||||
Net cash provided by (used in) investing activities | (701,064 | ) | (23,393 | ) | 268,902 | 700,846 | 245,291 | ||||||||
Cash flows from financing activities: | |||||||||||||||
Net borrowings (repayments) under Lennar Financial Services debt | — | (76 | ) | 47,936 | — | 47,860 | |||||||||
Net proceeds from convertible and senior notes | 790,882 | — | — | — | 790,882 | ||||||||||
Partial redemption of senior notes | (210,862 | ) | — | — | — | (210,862 | ) | ||||||||
Net repayments on other borrowings | — | (51,918 | ) | (195,694 | ) | — | (247,612 | ) | |||||||
Exercise of land option contracts from an unconsolidated land investment venture | — | (50,396 | ) | — | — | (50,396 | ) | ||||||||
Net receipts related to noncontrolling interests | — | — | 1,179 | 1,179 | |||||||||||
Excess tax benefits from share-based awards | 10,814 | — | — | — | 10,814 | ||||||||||
Common stock: | |||||||||||||||
Issuances | 32,174 | — | — | — | 32,174 | ||||||||||
Repurchases | (17,149 | ) | — | — | — | (17,149 | ) | ||||||||
Dividends | (30,394 | ) | (308,634 | ) | (55,179 | ) | 363,813 | (30,394 | ) | ||||||
Intercompany | — | 596,209 | 104,637 | (700,846 | ) | — | |||||||||
Net cash provided by (used in) financing activities | 575,465 | 185,185 | (97,121 | ) | (337,033 | ) | 326,496 | ||||||||
Net increase in cash and cash equivalents | 89,241 | 20,355 | 37,543 | — | 147,139 | ||||||||||
Cash and cash equivalents at beginning of period | 864,237 | 172,018 | 127,349 | — | 1,163,604 | ||||||||||
Cash and cash equivalents at end of period | $ | 953,478 | 192,373 | 164,892 | — | 1,310,743 | |||||||||
135
LENNAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19. Quarterly Data (unaudited)
First | Second | Third | Fourth | |||||||||
(In thousands, except per share amounts) | ||||||||||||
2014 | ||||||||||||
Revenues | $ | 1,363,095 | 1,818,745 | 2,014,034 | 2,583,938 | |||||||
Gross profit from sales of homes | $ | 286,053 | 409,615 | 456,162 | 584,403 | |||||||
Earnings before income taxes | $ | 125,876 | 203,630 | 262,335 | 377,943 | |||||||
Net earnings attributable to Lennar | $ | 78,117 | 137,719 | 177,757 | 245,323 | |||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.38 | 0.67 | 0.87 | 1.20 | |||||||
Diluted | $ | 0.35 | 0.61 | 0.78 | 1.07 | |||||||
2013 | ||||||||||||
Revenues | $ | 990,243 | 1,426,881 | 1,602,768 | 1,915,203 | |||||||
Gross profit from sales of homes | $ | 188,997 | 303,284 | 360,946 | 465,033 | |||||||
Earnings before income taxes | $ | 53,321 | 162,289 | 189,359 | 276,972 | |||||||
Net earnings attributable to Lennar | $ | 57,492 | 137,436 | 120,662 | 164,084 | |||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.30 | 0.71 | 0.62 | 0.84 | |||||||
Diluted | $ | 0.26 | 0.61 | 0.54 | 0.73 | |||||||
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year.
136
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of the period cover by this report. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of November 30, 2014 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended November 30, 2014. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm obtained from Deloitte & Touche LLP relating to the effectiveness of Lennar Corporation’s internal control over financial reporting are included elsewhere in this document.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of November 30, 2014. The effectiveness of our internal control over financial reporting as of November 30, 2014 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.
137
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lennar Corporation
We have audited the internal control over financial reporting of Lennar Corporation and subsidiaries (the “Company”) as of November 30, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended November 30, 2014 of the Company and our report dated January 23, 2015 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP |
Certified Public Accountants |
Miami, Florida |
January 23, 2015 |
138
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item for executive officers is set forth under the heading “Executive Officers of Lennar Corporation” in Part I. We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The Code of Business Conduct and Ethics is located on our internet web site at www.lennar.com under “Investor Relations – Corporate Governance.” We intend to provide disclosure of any amendments or waivers of our Code of Business Conduct and Ethics on our website within four business days following the date of the amendment or waiver. The other information called for by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2015 (120 days after the end of our fiscal year).
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2015 (120 days after the end of our fiscal year).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2015 (120 days after the end of our fiscal year), except for the information required by Item 201(d) of Regulation S-K, which is provided below.
The following table summarizes our equity compensation plans as of November 30, 2014:
Plan category | Number of shares to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) c(1) | ||||||
Equity compensation plans approved by stockholders | 57,500 | $ | 35.16 | 9,551,316 | |||||
Equity compensation plans not approved by stockholders | — | — | — | ||||||
Total | 57,500 | $ | 35.16 | 9,551,316 | |||||
(1) | Both Class A and Class B common stock may be issued. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2015 (120 days after the end of our fiscal year).
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2015 (120 days after the end of our fiscal year).
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) | Documents filed as part of this Report. |
1. | The following financial statements are contained in Item 8: |
Financial Statements | Page in this Report |
2. | The following financial statement schedule is included in this Report: |
Financial Statement Schedule | Page in this Report |
Information required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable to us.
3. | The following exhibits are filed with this Report or incorporated by reference: |
3.1 | Restated Certificate of Incorporation of the Company, dated January 14, 2015-filed herewith. |
3.2 | Bylaws of the Company, as amended effective October 3, 2013-Incorporated by reference to Exhibit 3.6 of the Company’s Current Report on Form 8-K, dated October 4, 2013. |
4.1 | Indenture, dated as of December 31, 1997, between Lennar Corporation and Bank One Trust Company, N.A., as trustee-Incorporated by reference to Exhibit 4 of the Company’s Registration Statement on Form S-3, Registration No. 333-45527, filed with the Commission on February 3, 1998. |
4.2 | Indenture, dated April 28, 2005, between Lennar and J.P. Morgan Trust Company, N.A., as trustee (relating to Lennar’s 5.60% Senior Notes due 2015)-Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-4, Registration No. 333-127839, filed with the Commission on August 25, 2005. |
4.3 | Indenture, dated April 26, 2006, between Lennar and J.P. Morgan Trust Company, N.A., as trustee (relating to Lennar’s 6.50% Senior Notes due 2016)-Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, dated April 26, 2006. |
4.4 | Indenture, dated April 30, 2009, between Lennar and The Bank of New York Mellon, as trustee (relating to Lennar’s 12.25% Senior Notes due 2017)-Incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K, dated April 30, 2009. |
4.5 | Indenture, dated May 4, 2010, between Lennar and The Bank of New York Mellon, as trustee (relating to Lennar’s 6.95% Senior Notes due 2018)- Incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-4, Registration No. 333-167622, filed with the Commission on June 18, 2010. |
4.6 | Indenture, dated November 10, 2010, between Lennar and The Bank of New York Mellon, as trustee (relating to Lennar’s 2.75% Convertible Senior Notes due 2020)-Incorporated by reference to Exhibit 4.10 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2010. |
4.7 | Indenture, dated November 23, 2011, between Lennar and The Bank of New York Mellon, as trustee (relating to Lennar’s 3.25% Convertible Senior Notes due 2021)-Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K, dated February 1, 2012. |
4.8 | Indenture, dated July 20, 2012, between Lennar and The Bank of New York Mellon Trust Company, N.A., as trustee (relating to Lennar’s 4.75% Senior Notes due 2017)-Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-4, Registration No. 333-183755, filed with the Commission on September 6, 2012. |
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4.9 | Indenture, dated October 23, 2012, between Lennar and The Bank of New York Mellon Trust Company, N.A., as trustee (relating to Lennar’s 4.750% Senior Notes due 2022). |
4.10 | Indenture, dated February 4, 2013, between Lennar and The Bank of New York Mellon Trust Company, N.A., as trustee (relating to Lennar’s 4.125% Senior Notes due 2018)-Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 10-Q for the quarter ended February 28, 2013. |
4.11 | Eighth Supplemental Indenture, dated as of February 12, 2014, among Lennar Corporation, each of the guarantors identified therein and The Bank of New York Mellon, as trustee, including the form of 4.50% Senior Notes due 2019-Incorporated by reference to Exhibit 4.12 of the Company’s Current Report on Form 8-K, dated February 13, 2014. |
4.12 | Ninth Supplemental Indenture, dated as of November 25, 2014, among Lennar Corporation, each of the guarantors identified therein and The Bank of New York Mellon, as trustee, including the form of 4.50% Senior Notes due 2019-Incorporated by reference to Exhibit 4.13 of the Company’s Current Report on Form 8-K, dated November 25, 2014. |
10.1* | Lennar Corporation 2007 Equity Incentive Plan, as amended effective January 12, 2012-Incorporated by reference to Exhibit 1 of the Company’s Proxy Statement on Schedule 14A dated March 2, 2012. |
10.2* | Lennar Corporation 2012 Incentive Compensation Plan-Incorporated by reference to Exhibit 2 of the Company’s Proxy Statement on Schedule 14A dated March 2, 2012. |
10.3* | Lennar Corporation Nonqualified Deferred Compensation Plan-Incorporated by reference to Exhibit 10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2002. |
10.4* | Aircraft Time-Sharing Agreement, dated August 17, 2005, between U.S. Home Corporation and Stuart Miller-Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, dated August 17, 2005. |
10.5* | Amendment No. 1 to Aircraft Time-Sharing Agreement, dated September 1, 2005, between U.S. Home Corporation and Stuart Miller-Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2005. |
10.6* | Amended and Restated Aircraft Dry Lease Agreement, dated December 1, 2008, between U.S. Home Corporation and Stuart Miller-Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, dated February 18, 2009. |
10.7 | Membership Interest Purchase Agreement, dated as of November 30, 2007, by and among Lennar, Lennar Homes of California, Inc., the Sellers named in the agreement and MS Rialto Residential Holdings, LLC.-Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007. |
10.8* | Aircraft Time-Sharing Agreement, dated January 26, 2011, between U.S. Home Corporation and Richard Beckwitt -Incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2010. |
10.9 | Amended and Restated Credit Agreement, dated as of June 11, 2013, among Lennar Corporation, as borrower, JPMorgan Chase Bank, N.A., as swingline lender, issuing lender, and administrative agent, the several lenders from time to time parties thereto, and the other parties and agents thereto-Incorporated by reference to Exhibit 10.18 of the Company’s Current Report on Form 8-K, dated June 14, 2013. |
10.10 | Amended and Restated Guarantee Agreement, dated as of June 11, 2013, among certain of Lennar Corporation’s subsidiaries in favor of guaranteed parties referred to therein-Incorporated by reference to Exhibit 10.19 of the Company’s Current Report on Form 8-K, dated June 14, 2013. |
10.11 | Second Amended and Restated Credit Agreement, dated as of June 25, 2014, among Lennar Corporation, as borrower, JPMorgan Chase Bank, N.A., as swingline lender, issuing lender, and administrative agent, the several lenders from time to time parties thereto, and the other parties and agents thereto-Incorporated by reference to Exhibit 10.21 of the Company’s Current Report on Form 8-K, dated June, 30, 2014. |
10.12 | Second Amended and Restated Guarantee Agreement, dated as of June 25, 2014, among certain of Lennar Corporation’s subsidiaries in favor of guaranteed parties referred to therein -Incorporated by reference to Exhibit 10.22 of the Company’s Current Report on Form 8-K, dated June, 30, 2014. |
10.13 | Indenture, dated November 14, 2013, among Rialto Holdings, LLC, Rialto Corporation, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee, including the form of 7.000% Senior Notes due 2018-Incorporated by reference to Exhibit 10.20 of the Company’s Current Report on Form 8-K, dated November 14, 2013. |
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10.14 | Master Repurchase Agreement, dated November 21, 2013, among JPMorgan Chase Bank, N.A., as a Buyer and as Administrative Agent for the Buyers named from time to time thereunder, the Buyers party thereto, and Universal American Mortgage Company of California and Universal American Mortgage Company, LLC, as Sellers, as amended-filed herewith. |
10.15 | Amended and Restated Administration Agreement, dated as of December 20, 2014, by and among JPMorgan Chase Bank, N.A., as a Buyer and as Administrative Agent for the Buyers named from time to time thereunder, and Universal American Mortgage Company of California and Universal American Mortgage Company, LLC, as Sellers-filed herewith. |
10.16* | 2013 Award Agreements for Stuart Miller, Rick Beckwitt, Jonathan Jaffe, Bruce Gross and Mark Sustana -Incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2013. |
10.17* | 2014 Award Agreements for Stuart Miller, Rick Beckwitt, Jonathan Jaffe, Bruce Gross and Mark Sustana -Incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2013. |
10.18* | 2015 Award Agreements for Stuart Miller, Rick Beckwitt, Jonathan Jaffe, Bruce Gross and Mark Sustana -filed herewith. |
21 | List of subsidiaries. |
23 | Consent of Independent Registered Public Accounting Firm. |
31.1 | Rule 13a-14a/15d-14(a) Certification of Stuart A. Miller. |
31.2 | Rule 13a-14a/15d-14(a) Certification of Bruce E. Gross. |
32 | Section 1350 Certifications of Stuart A. Miller and Bruce E. Gross. |
101 | The following financial statements from Lennar Corporation Annual Report on Form 10-K for the year ended November 30, 2014, filed on January 23, 2015, formatted in XBRL (Extensible Business Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements (1). |
* Management contract or compensatory plan or arrangement.
(1) | In accordance with Rule 406T of Regulation S-T, the XBRL related to information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LENNAR CORPORATION | ||
/S/ STUART A. MILLER | ||
Stuart A. Miller | ||
Chief Executive Officer and Director | ||
Date: | January 23, 2015 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Principal Executive Officer: | ||
Stuart A. Miller | /S/ STUART A. MILLER | |
Chief Executive Officer and Director | Date: | January 23, 2015 |
Principal Financial Officer: | ||
Bruce E. Gross | /S/ BRUCE E. GROSS | |
Vice President and Chief Financial Officer | Date: | January 23, 2015 |
Principal Accounting Officer: | ||
David M. Collins | /S/ DAVID M. COLLINS | |
Controller | Date: | January 23, 2015 |
Directors: | ||
Irving Bolotin | /S/ IRVING BOLOTIN | |
Date: | January 23, 2015 | |
Steven L. Gerard | /S/ STEVEN L. GERARD | |
Date: | January 23, 2015 | |
Theron I. (“Tig”) Gilliam, Jr. | /s/ THERON I. (“TIG”) GILLIAM, JR. | |
Date: | January 23, 2015 | |
Sherrill W. Hudson | /S/ SHERRILL W. HUDSON | |
Date: | January 23, 2015 | |
R. Kirk Landon | /S/ R. KIRK LANDON | |
Date: | January 23, 2015 | |
Sidney Lapidus | /S/ SIDNEY LAPIDUS | |
Date: | January 23, 2015 | |
Teri McClure | /S/ TERI MCCLURE | |
Date: | January 23, 2015 | |
Armando Olivera | ||
Date: | January 23, 2015 | |
Jeffrey Sonnenfeld | /S/ JEFFREY SONNENFELD | |
Date: | January 23, 2015 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Lennar Corporation
We have audited the consolidated financial statements of Lennar Corporation and subsidiaries (the “Company”) as of November 30, 2014 and 2013, and for each of the three years in the period ended November 30, 2014, and the Company’s internal control over financial reporting as of November 30, 2014, and have issued our reports thereon dated January 23, 2015; such consolidated financial statements and reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP |
Certified Public Accountants |
Miami, Florida |
January 23, 2015 |
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LENNAR CORPORATION AND SUBSIDIARIES
Schedule II—Valuation and Qualifying Accounts
Years Ended November 30, 2014, 2013 and 2012
Additions | |||||||||||||||
(In thousands) | Beginning balance | Charged to costs and expenses | Charged (credited) to other accounts | Deductions | Ending balance | ||||||||||
Year ended November 30, 2014 | |||||||||||||||
Allowances deducted from assets to which they apply: | |||||||||||||||
Allowances for doubtful accounts and notes and other receivables | $ | 3,067 | 207 | 323 | (340 | ) | 3,257 | ||||||||
Allowance for loan losses and loans receivable | $ | 24,687 | 57,207 | — | (19,790 | ) | 62,104 | ||||||||
Allowance against net deferred tax assets | $ | 12,706 | — | — | (4,677 | ) | 8,029 | ||||||||
Year ended November 30, 2013 | |||||||||||||||
Allowances deducted from assets to which they apply: | |||||||||||||||
Allowances for doubtful accounts and notes and other receivables | $ | 3,183 | 605 | 407 | (1,128 | ) | 3,067 | ||||||||
Allowance for loan losses and loans receivable | $ | 21,353 | 16,744 | (167 | ) | (13,243 | ) | 24,687 | |||||||
Allowance against net deferred tax assets | $ | 88,794 | — | — | (76,088 | ) | 12,706 | ||||||||
Year ended November 30, 2012 | |||||||||||||||
Allowances deducted from assets to which they apply: | |||||||||||||||
Allowances for doubtful accounts and notes and other receivables | $ | 3,376 | 558 | (101 | ) | (650 | ) | 3,183 | |||||||
Allowance for loan losses and loans receivable | $ | 6,868 | 28,828 | 52 | (14,395 | ) | 21,353 | ||||||||
Allowance against net deferred tax assets | $ | 576,890 | — | 51,259 | (539,355 | ) | 88,794 | ||||||||
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Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
LENNAR CORPORATION
1.The Corporation’s present name is Lennar Corporation. The Corporation was originally incorporated under the name Pacific Classic Corporation on September 6, 1991.
2.This restated Certificate of Incorporation was adopted by the Board of Directors of the Corporation on January 14, 2015 in accordance with Section 245 of the Delaware General Corporation Law.
3.This restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Corporation’s Certificate of Incorporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this restated Certificate of Incorporation.
4.The effective time of this restated Certificate of Incorporation will be the time when it is filed with the Secretary of State of the State of Delaware.
5.The Corporation’s Certificate of Incorporation at the effective time of this restated Certificate of Incorporation is as follows:
ARTICLE I.
NAME
The name of this Corporation shall be Lennar Corporation.
ARTICLE II.
REGISTERED OFFICE AND REGISTERED AGENT
The name and address of this Corporation’s registered agent in the State of Delaware, County of New Castle, is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware.
ARTICLE III.
NATURE OF BUSINESS
The general nature of the business and activities to be transacted and carried on by this Corporation are as follows:
(a)To purchase or otherwise acquire, or obtain the use of and to hold, own, maintain, develop, sell, lease, exchange, hire, convey, mortgage or otherwise dispose of or turn to account lands and leaseholds and any interest, estates and rights in real property and any personal or mixed property, and any rights, licenses and privileges appurtenant to such property; to erect, construct, make, improve and operate or aid or subscribe toward the erection, construction, making, improvement and operation of any and all plants, factories, buildings, warehouses, agencies, depots, offices, houses, equipment and facilities whatsoever in connection with its property or which may appertain to or appear necessary, useful, convenient or appropriate in connection with any of its business or the business of any corporation, association, co-partnership or individual in which the Corporation shall be in any manner interested.
(b)To acquire by purchase, gift, devise, bequest or otherwise, to manufacture or construct, to own, use, hold and develop, to dispose of by sale, exchange or otherwise, to lease, mortgage, pledge, assign and generally to deal in and with real and personal property of every sort and description, services, goodwill, franchises, inventions, patents, copyrights, trademarks, trade names and licenses, and interests of any sort in any such property.
(c)To enter into and perform contracts of every sort and description, with any person, firm, association, corporation, municipality, county, state, nation or other body politic, or with any colony, dependency or agency of any of the foregoing.
(d)To issue, execute, deliver, endorse, buy, sell, draw, accept and discount notes, drafts, letters of credit, checks and other bills of exchange and other evidences of indebtedness.
(e)To borrow money, to lend money and extend credit, without limit in either case as to amount, in such amounts as the Board of Directors may from time to time determine, to guarantee and act as surety with respect to the debts of any other person, firm, association or corporation without regard to the interest of this Corporation in any debt so guaranteed or assured or in such other person, firm, association or corporation; and to secure any direct or contingent indebtedness of the Corporation by the execution and delivery of mortgages, pledges, assignments, transfers in trust or other instruments appropriate for encumbering any or all of the property of the Corporation, or any interest therein.
(f)To acquire, by purchase, merger or otherwise, all or any part of the goodwill, rights, property and business of any person, firm, association or corporation, in connection therewith to assume liabilities of any person, firm, association, or corporation, and, in consideration of any such acquisition, to pay cash, to deliver stock, bonds, other securities, or property of any other kind.
(g)To issue, execute, deliver, guarantee, endorse, purchase, hold, sell, transfer, mortgage, pledge, assign and otherwise deal in and with shares of capital stock, bonds, debentures, other evidences of indebtedness and any and all other securities of any description created, issued or delivered by this Corporation or by any other corporation, association, person or firm of the State of Delaware or of any other state or nation, and, while owner thereof, to exercise, to the extent permitted by law, all the rights, powers and privileges of ownership including, without limitation, the right to vote stock or other securities having voting rights as attributes.
(h)In general, to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
(i)To perform every act necessary or proper for the accomplishment of the objects and purposes enumerated or for the protection and benefit of the Corporation.
(j)The objects and purposes specified in the foregoing clauses of this Article shall, unless expressly limited, not be limited or restricted by reference to, or inference from, any provision in this or any other Article of this Certificate of Incorporation, shall be regarded as independent objects and purposes and shall be construed as powers as well as objects and purposes.
ARTICLE IV.
STOCK
The total authorized number of shares of stock of the Corporation is 490,500,000 shares. Of these, 300,000,000 shares are classified as Class A Common Stock, par value $.10 per share, 90,000,000 shares are classified as Class B Common Stock, par value $.10 per share, 100,000,000 shares are classified as Participating Preferred Stock, par value $.10 per share, and 500,000 shares are classified as Preferred Stock, par value $10.00 per share. As used in this Certificate of Incorporation, the term “Class A Common Stock ” refers to Class A Common Stock, par value $.10 per share, and includes shares that before April 9, 2003 were referred to as “Common Stock;” the term “Class B Common Stock” refers to Class B Common Stock, par value $.10 per share; the term “Common Stock” without specification of a class refers to the Class A Common Stock and the Class B Common Stock together; the term “Participating Preferred Stock” refers to Participating Preferred Stock, par value $.10 per share; and the
term “Preferred Stock” refers to Preferred Stock, par value $10 per share, and does not include Participating Preferred Stock.
The description of the classes of stock and the relative rights, voting power, preferences and restrictions of the shares of each class which are fixed by the Certificate of Incorporation and the express grant of authority to the Board of Directors of the Corporation (hereinafter referred to as
the “Board of Directors”) to fix by resolution or resolutions the dividend rate, the redemption price, the liquidation price, the conversion rights, if any, and the sinking or purchase fund rights of shares of any class or of any series of any class or the number of shares constituting any series of any class are as follows:
Preferred Stock
(a)The 500,000 shares of Preferred Stock may be issued from time to time in one or more series, each of such series to have such relative rights, voting power, preferences and restrictions as are stated herein and in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors as hereinafter provided.
(b)Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Article, to authorize from time to time the issuance of one or more series of Preferred Stock, and with respect to each series to fix or alter from time to time as to shares then unallotted, by resolution or resolutions providing for the issuance of such series:
(1)The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors;
(2)The dividend rate or rates to which shares of such series shall be entitled; the restrictions, conditions and limitations upon the payment of such dividends; whether such dividends shall be cumulative and, if cumulative, the date or dates from which such dividends shall be cumulative and the dates on which such dividends if declared shall be payable;
(3)The manner of selecting shares for redemption, the redemption price and the manner of redemption and the effect thereof;
(4)The amount payable on shares of such series in the event of any liquidation, dissolution or winding up of the Corporation, which amount may vary at different dates and may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary;
(5)The obligation, if any, of the Corporation to maintain a purchase, retirement or sinking fund for shares of such series and the provisions with respect thereto;
(6) The terms and conditions of the rights, if any, of the holders of such series to convert such shares into shares of a class of Common Stock, into shares of Participating Preferred Stock or into shares of another class or series of Preferred Stock;
(7)The terms and conditions of the rights, if any, of the holders of shares of such series to vote such shares;
(8)Any other rights, preferences, powers and restrictions not inconsistent with applicable law or the provisions hereof.
(c)All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. All series of Preferred Stock shall be of equal rank and be identical in all respects, except as permitted by paragraph (b) of this provision regarding Preferred Stock.
(d)The holders of the Preferred Stock of each series shall be entitled to receive such dividends in cash, when and as declared by the Board of Directors, to be paid out of earned surplus or out of paid-in surplus or out of net earnings legally available for the payment thereof, as they may be
entitled to in accordance with the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series, payable on such dates as may be fixed in such resolution or resolutions. No dividends, whether in cash or property, shall be paid or declared, nor shall any distribution be made, in any year on any class of Common Stock unless and until the full dividends on the Preferred Stock of all series required to be paid in that year have been paid or declared but not paid, and if declared but not paid, unless a sum sufficient for the payment thereof has been set apart. In addition so long as there shall be outstanding any shares of Preferred Stock of any series entitled to cumulative dividends pursuant to the resolution or resolutions providing for the issuance of such series, no dividends, whether in cash or property, shall be paid, nor shall any distribution be made on any class of Common Stock, nor shall any shares of any class of Common Stock be purchased, redeemed or otherwise
acquired for value by the Corporation, unless and until the full cumulative dividends on the Preferred Stock of all series entitled to cumulative dividends for all past dividend periods shall have been paid or declared, and if declared but not paid, unless a sum sufficient for the payment thereof has been set apart, and the Corporation shall have set aside all amounts, if any, theretofore required to be set aside as and for a purchase, retirement or sinking fund, if any, for the Preferred Stock of all series for the then current year and all defaults, if any, in complying with any such purchase, retirement or sinking fund requirements in respect of previous years shall have been made good. The foregoing provisions of this
Paragraph shall not, however, apply to a dividend payable in Participating Preferred Stock or in one or more classes of Common Stock or to the acquisition of shares of any class of Common Stock in exchange for, or through application of the proceeds of the sale of, shares of any class of Common Stock. Accruals of dividends shall not bear interest.
(e)The holders of the Preferred Stock of each series shall be entitled in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, to be paid as a liquidating dividend, before any distribution or payment is made to the holders of Participating Preferred Stock or any class of Common Stock, the amount per share provided for in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series. When such payments shall have been made in full to the holders of the Preferred Stock, they shall have no further rights in respect of their shares or the assets of the Corporation. If upon any liquidation or dissolution or winding up of the Corporation the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the shares of Preferred Stock of each series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable in respect of the Preferred Stock of that series were paid in full. Neither the statutory merger nor consolidation of the Corporation into or with any other corporation, nor the statutory merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation shall be deemed a liquidation, dissolution or winding up of the Corporation within the meaning of this paragraph.
(f)The Corporation at the option of the Board of Directors may at any time redeem the whole or from time to time may redeem any part of any series of Preferred Stock for the consideration provided in and in accordance with the terms and conditions of the resolution or resolutions of the Board of Directors authorizing such series.
(g)At all meetings of stockholders of the Corporation, each holder of record of Preferred Stock shall have such voting rights, if any, as may be provided in resolutions adopted by the Board of Directors providing for the issuance of each series.
Participating Preferred Stock
(a) | Voting Rights and Powers. |
With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, (1) the holders of the outstanding shares of Participating Preferred Stock, the holders of the outstanding shares of Class A Common Stock and the holders of the
outstanding shares of Class B Common Stock will vote together without regard to class, and (2) each holder of record of Participating Preferred Stock will be entitled to one vote for each share of Participating Preferred Stock held in the holder’s name, except that (i) any amendment to this
Certificate of Incorporation (except an amendment described in paragraph (c) of the section captioned “Class A Common Stock and Class B Common Stock”) which would change the number of authorized shares, the par value or the voting rights of, the restriction on dividends upon, or any other provision of this Certificate of Incorporation relating to, any class of Common Stock or the Participating Preferred Stock, in addition to being adopted as required by law, must be approved by the affirmative vote of a majority of the shares of Participating Preferred Stock and Class A Common Stock, voting together without regard to class, which are voted with regard to the amendment and (ii) in addition to any other vote required by this Certificate of Incorporation, the Corporation’s by-laws, any rule of any securities exchange or otherwise, any merger, consolidation or other business combination involving the Corporation that is submitted for approval of the Corporation’s stockholders (x) will require the affirmative vote of a majority of the shares of Participating Preferred Stock which are voted with regard to the transaction, unless the type and amount of the consideration received by the holder of a share of Participating Preferred Stock in the transaction is the same as that received by the holder of a share of Class A Common Stock and (y) will require the affirmative vote of a majority of the shares of Participating Preferred Stock and Class A Common Stock, voting together without regard to class, which are voted with regard to the transaction, unless the type and amount of the consideration received by the holder of a share of Participating Preferred Stock in the transaction is the same as that received by the holder of a share of Class B Common Stock; provided however, that if stockholders are given the right to elect among different kinds of consideration in a business combination, the holder of a share of Participating Preferred Stock, Class A Common Stock or Class B Common Stock will be deemed to receive the same type and amount of consideration as the holder of a share of stock of another class if the holder of a share of Participating Preferred Stock, Class A Common Stock or Class B Common Stock is given the same rights of election (including without limitation proration rights) as the holder of a share of stock of the other class.
(b) | Dividends and Distributions. |
(1) Cash Dividends. No cash dividends may be paid in a calendar year with regard to a share of any class of Common Stock until cash dividends totaling $0.0125 per share have been paid, or declared and set aside for payment, in that year with regard to each outstanding share of Participating Preferred Stock. After dividends totaling $0.0125 per share have been paid, or declared and set aside for payment, in a calendar year with regard to each outstanding share of Participating Preferred Stock, no further cash dividends may be paid in that year with regard to a share of Participating Preferred Stock until dividends totaling $0.0125 per share have been paid, or declared and set aside for payment, in that year with regard to each outstanding share of Class A Common Stock. Any dividends in excess of $0.0125 per share paid in a calendar year to the holders of the Participating Preferred Stock or the holders of the Class A Common Stock will be paid with regard to the shares of both those classes on an
equal per share basis without regard to class.
(2) Other Dividends and Distributions. Each dividend or distribution made to the holders of the Participating Preferred Stock or either class of Common Stock, other than cash dividends or distributions upon liquidation of the Corporation, will be distributable to the holders of the Participating Preferred Stock, the Class A Common Stock and the Class B Common Stock without regard to class, except that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, the Board of Directors may determine that the stock distributed with respect to the Participating Preferred Stock will be additional shares of Participating Preferred Stock, the stock distributed with regard to the Class A Common Stock will be additional shares of Class A Common Stock and the stock distributed with regard to the Class B Common Stock will be additional shares of Class B Common Stock.
(c) | Stock Splits, Stock Dividends and Share Consolidations. |
The Corporation may not (i) pay a dividend with regard to its Participating Preferred Stock in additional shares of Participating Preferred Stock, or divide or consolidate its outstanding Participating Preferred Stock into a greater or lesser number of shares, unless it pays the same per share dividend with regard to its Class A Common Stock (but payable in additional shares of Common Stock of either class instead of additional shares of Participating Preferred Stock) or divides or consolidates its outstanding Class A Common Stock in the same manner in which it divides or consolidates its Participating Preferred Stock or (ii) pay a dividend with regard to its Class A Common Stock in additional shares of Class A Common Stock, or divide or consolidate its outstanding Class A Common Stock into a greater or lesser number of shares, unless it pays the same per share dividend with regard to its Participating Preferred Stock (but payable in additional shares of Participating Preferred Stock instead of additional shares of Common Stock) or divides or consolidates its outstanding Participating Preferred Stock in the same manner in which it divides or consolidates its Class A Common Stock.
(d) | Liquidation. |
No assets of the Corporation may be distributed upon liquidation of the Corporation to the holders of shares of Class A Common Stock or Class B Common Stock until the holders of the Participating Preferred Stock have received liquidating distributions totaling $10.00 per share. When
the holders of the Participating Preferred Stock have received liquidating distributions totaling $10.00 per share, no further assets of the Corporation may be distributed to the holders of the Participating Preferred Stock upon liquidation of the Corporation until the holders of the Class A Common Stock have received liquidating distributions totaling $10.00 per share. Any liquidating distributions in excess of $10.00 per share to the holders of the Participating Preferred Stock or the holders of the Class A Common Stock will be made to the holders of both those classes and of the Class B Common Stock on an equal per share basis without regard to class. If assets distributed upon liquidation of the Corporation are other than cash, the amount distributed to the holders of the Participating Preferred Stock, the Class A Common Stock and the Class B Common Stock will include the value of the non-cash assets as determined in good faith by the Board of Directors of the Corporation.
(e) | Other Rights. |
Except as otherwise provided in this Certificate of Incorporation or provided by law, each share of Participating Preferred Stock and each share of Class A Common Stock will have identical rights, powers, preferences and restrictions, and copies of all reports and other communications which are sent by the Corporation to the holders of the Class A Common Stock must also be sent to the holders of the Participating Preferred Stock.
Class A Common Stock and Class B Common Stock
(a) | Voting Rights and Powers. |
With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, (1) the holders of the outstanding shares of Class A Common Stock, the holders of the outstanding shares of Class B Common Stock and the holders of the
outstanding shares of Participating Preferred Stock will vote together without regard to class, (2) each holder of record of Class A Common Stock will be entitled to one vote for each share of Class A Common Stock held in the holder’s name, and (3) each holder of record of Class B Common Stock will be entitled to ten votes for each share of Class B Common Stock held in the holder’s name, except that (i) any amendment to this Certificate of Incorporation (except an amendment described in paragraph (c)) which would change the number of authorized shares, the par value or the voting rights of, the restriction on dividends upon, or any other provision of this Certificate of Incorporation relating to, the Class A
Common Stock, the Class B Common Stock or the Participating Preferred Stock, in addition to being adopted by the holders of a majority in voting power of the outstanding shares of Class A Common Stock, Class B Common Stock and Participating Preferred Stock voting together without regard to class, must be approved by holders of a majority of the shares of Class A Common Stock and Participating Preferred Stock, voting together without regard to class, which are voted with regard to the
amendment; and (ii) in addition to any other vote required by this Certificate of Incorporation, the Corporation’s by-laws, by any rule of any securities exchange or otherwise, any merger, consolidation or other business combination involving the Corporation that is submitted for approval of the Corporation’s stockholders (x) will require the affirmative vote of a majority of the issued and outstanding shares of Class A Common Stock which are voted with regard to the transaction, unless the type and amount of the consideration received by the holder of a share of Class A Common Stock in the transaction is the same as that received by the holder of a share of Participating Preferred Stock, and (y) will require the affirmative vote of a majority of the outstanding Participating Preferred Stock and the outstanding Class A Common Stock, voting together without regard to class, unless the type and amount of consideration received by the holder of a share of Class A Common Stock in the transaction is the same as that received by the holder of a share of Class B Common Stock; provided, however that if stockholders are given the right to elect among different kinds of consideration in a business combination, the holder of a share of Participating Preferred Stock, Class A Common Stock or Class B Common Stock will be deemed to receive the same type and amount of consideration as the holder of a share of stock of another class if the holder of the share of Participating Preferred Stock, Class A Common Stock or Class B Common Stock is given the same rights of election (including without limitation proration rights) as the holder of a share of stock of the other class.
(b) | Dividends and Distributions. |
Each dividend or distribution made to the holders of the Class A Common Stock or the Class B Common Stock in cash or otherwise will be distributable to the holders of the Class A Common Stock and Class B Common Stock without regard to class, except that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, the Board of Directors may determine that the stock distributed with respect to the Class A Common Stock will be additional shares of Class A Common Stock and the stock distributed with respect to the Class B Common Stock will be additional shares of Class B Common Stock.
(c) | Termination of Class Rights and Powers. |
If at any time (i) the number of outstanding shares of Class B Common Stock is less than 10% of the number of outstanding shares of Class A Common Stock and Class B Common Stock taken together, or (ii) the holders of a majority of the outstanding shares of Class B Common Stock vote to cause all the Class B Common Stock to be converted into Class A Common Stock, the Class B Common Stock will automatically be converted into, and become for all purposes, shares of Class A Common Stock, and the Corporation will no longer be authorized to issue Class B Common Stock. When the Class B Common Stock is converted into Class A Common Stock as provided in this paragraph, the name of the
Class A Common Stock will automatically be changed to “Common Stock,” the number of shares of the renamed Common Stock the Corporation is authorized to issue will automatically be changed to 390,000,000 shares and the Corporation will file with the Secretary of State of Delaware a Certificate of Amendment or Restated Certificate of Incorporation reflecting these changes. After the Class B Common
Stock is converted into Class A Common Stock as provided in this paragraph, the Company may issue certificates which represent Class A Common Stock (renamed Common Stock) in exchange for certificates which represented Class B Common Stock. However, the automatic conversion of Class B Common Stock into Common Stock will be effective whether or not certificates are exchanged and each certificate that represented shares of Class B Common Stock will automatically represent the same number of shares of Class A Common Stock (renamed Common Stock).
(d) | Other Rights. |
Except as otherwise provided in this Certificate of Incorporation, or provided by law, each share of Class A Common Stock and each share of Class B Common Stock will have identical powers, preferences and rights, including rights in liquidation, and copies of all reports and other communications which are sent by the Corporation to the holders of the Class A Common Stock or the Class B Common Stock must also be sent to the holders of the other class of Common Stock.”
ARTICLE V.
NUMBER OF DIRECTORS
The business of this corporation shall be managed by a board of directors consisting of not fewer than three, and not more than fifteen, persons, the exact number to be determined from time to time in accordance with the By-Laws. The directors will serve for a term of one year, and until their successors are elected and qualified, or with regard to any director until that director’s earlier death or resignation. If there is a vacancy, including a vacancy because of a newly created directorship, the person elected to fill that vacancy will serve until the next annual meeting of stockholders and until that person’s successor is elected and qualified.
No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the preceding sentence, a director of the Corporation shall not be liable to the fullest extent permitted by any amendment to the Delaware General Corporation Law hereafter enacted that further limits the liability of a director.
ARTICLE VI.
OFFICERS
The Corporation shall have a President, a Vice-President, a Secretary and a Treasurer, and may have such other officers and agents as are prescribed by the By-Laws or determined by the Board of Directors. A person may hold more than one office except that the President may not also be the Secretary or an Assistant Secretary.
ARTICLE VII.
BY-LAWS
The Board of Directors shall adopt By-Laws for the Corporation. The By-Laws may be amended, altered or repealed by the stockholders or Directors in any manner permitted by the By-Laws.
ARTICLE VIII.
AMENDMENT
The Certificate of Incorporation may be amended in any manner now or hereafter provided for by law and all rights conferred upon stockholders hereunder are granted subject to this reservation.
ARTICLE IX.
TRANSACTIONS IN WHICH DIRECTORS OR OFFICERS ARE INTERESTED
(a)No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its Directors or officers are Directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:
(1)The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or
(2)The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or
(3)The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders.
(b)Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.
ARTICLE X.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a)The Corporation shall indemnify any person who is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.
(b)The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
(c)To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections (a) and (b) of this Article or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.
(d)Any indemnification under Sections (a) and (b) of this Article (unless ordered by a Court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in said Sections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested Directors so directs, by independent legal counsel (compensated by the Corporation) in a written opinion, or (3) by the Stockholders.
(e)Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Section (d) of this Article upon receipt of an undertaking by or on behalf of the Director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article.
(f)The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
(g)The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article.
/S/ MARK SUSTANA | |
Name: Mark Sustana Title: Secretary | |
Date: January 14, 2015
Exhibit 10.14
MASTER REPURCHASE AGREEMENT
among
JPMorgan Chase Bank, N.A.,
as a Buyer and as Administrative Agent for the Buyers from time to time party hereto
the Buyers
party hereto and
Universal American Mortgage Company of California
and
Universal American Mortgage Company, LLC, jointly and severally, as Sellers
and
J.P. MORGAN SECURITIES LLC
Sole Bookrunner and Sole Lead Arranger
Dated November 21, 2013
MASTER REPURCHASE AGREEMENT
Dated as of November 21, 2013
THIS MASTER REPURCHASE AGREEMENT dated as of November 21, 2013 (as it may be supplemented, amended or restated from time to time, this “Agreement”) is by and among UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC (“UAMC LLC”) and UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA (“UAMC CA”) (UAMC LLC and
UAMC CA, together with their respective successors and assigns, are each individually referred to herein as “Seller” and collectively “Sellers”), JPMORGAN CHASE BANK, N.A., a national banking association (“Chase”), as administrative agent for the Buyers (in that capacity, Chase is herein referred to as the “Administrative Agent”) and as a Buyer, and the other Buyers party hereto from time to time pursuant to the Administration Agreement (collectively with Chase, the “Buyers”).
1. | Applicability |
From time to time prior to the Termination Date, the Parties hereto may enter into transactions in which Sellers agree to transfer to Administrative Agent, as agent and representative of Buyers, Mortgage Loans (including their Servicing Rights) on a servicing released basis against the transfer by Administrative Agent of Buyers funds to Sellers in the amount of the sum of the Purchase Prices therefor, with the simultaneous agreement by Sellers to repurchase those Mortgage Loans (including the Servicing Rights thereto) on a servicing released basis at a date certain or on demand, against the transfer of funds by Sellers to Administrative Agent for Buyers’ account. Each such transaction shall be referred to in this Agreement as a “Transaction” and shall be governed by this Agreement. Buyers and Administrative Agent shall have no obligation to enter into any Transaction on or after the Termination Date.
2. | Definitions; Interpretation |
(a)Definitions. As used in this Agreement and (unless otherwise defined differently therein) in each other Transaction Document, the following terms have these respective meanings.
“1934 Act” is defined in Section 28(a).
“Accounts” means, collectively, the Cash Pledge Account, the Collection Account, the Funding Account and the Operating Account, any interest, additions and proceeds due or to become due on such Accounts, which Accounts are held at Financial Institution and include all of the above described deposits, deposit accounts, payment intangibles, financial assets and other obligations of Financial Institution, whether they are deposit accounts, negotiable or non- negotiable or book entry certificates of deposit, book entry investment time deposits, savings accounts, money market accounts, transaction accounts, time deposits, negotiable order of withdrawal accounts, share draft accounts, demand deposit accounts, instruments, general intangibles, chattel paper or otherwise, and all funds held in or represented by any of the foregoing, and any successor Accounts howsoever numbered and all Accounts issued in renewal, extension or increase or decrease of or replacement or substitution for any of the foregoing; and all
promissory notes, checks, cash, certificates of deposit, passbooks, deposit receipts, instruments, certificates and other records from time to time representing or evidencing the Accounts described above and any supporting obligations relating to any of the foregoing property.
“Act of Insolvency” means with respect to any Person (a) the commencement by that Person as
debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or a request by that Person for the appointment of a receiver, trustee, custodian or similar official for that Person or any substantial part of its property; (b) the commencement of any such case or proceeding against that Person, or another’s seeking such appointment, or the filing against that Person of an application for a protective decree which (i) is consented to or not contested by that Person within twenty (20) days (or such later time as may be agreed by the petitioning creditor(s)), or (ii) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having similar effect, or (iii) is not dismissed within sixty (60) days; (c) the making by that Person of a general assignment for the benefit of creditors; (d) the admission in writing by that Person that it is unable to pay its debts as they become due, or the nonpayment of its debts generally as they become due; or (e) the board of directors, managers, members or partners, as the case may be, of that Person taking any action in furtherance of any of the foregoing.
“Additional Purchased Mortgage Loans” means Mortgage Loans provided by Sellers to Administrative Agent pursuant to Section 4(a).
“Adjusted LIBOR Rate” has the meaning set forth in the Side Letter.
“Adjusted Tangible Net Worth” means, with respect to Sellers in the aggregate and their Subsidiaries on a consolidated basis at any date, an amount equal to (i) the Tangible Net Worth of Sellers and their Subsidiaries on a consolidated basis at such date, plus (ii) the lesser of (A) one percent (1%) of the unpaid principal balances of all Mortgage Loans at such date for which Sellers and their Subsidiaries own the Servicing Rights and (B) the capitalized value of Sellers’ and their Subsidiaries’ Servicing Rights, plus (iii) the unpaid principal amount of all Qualified Subordinated Debt of Sellers and their Subsidiaries at such date, plus (iv) the lesser of (A) an amount equal to 50% of the net book value of Mortgage Loans held by Sellers for investment purposes at such date and (B) $20,000,000, minus (v) an amount equal to 100% of the net book value of Mortgage Loans held by Sellers for investment purposes at such date, minus (vi) an amount equal to 50% of the net book value of net REO Property held by Sellers at such date, minus (vii) an amount equal to 50% of the net book value of other illiquid investments held by Sellers at such date, minus
(viii) advances of loans to Affiliates, investments in Affiliates, assets pledged to secure any liabilities not included in the Debt of such Person (or to Sellers in the aggregate) and any other assets which would be deemed by Administrative Agent, CL or the Agencies to be unacceptable in calculating tangible net worth.
“Administration Agreement” means an agreement dated as of the date hereof and entered into among Sellers, Buyers and Administrative Agent when a Buyer in addition to Chase joins in this Agreement providing for pro rata allocation of the Purchased Mortgage Loans to Buyers and administration by Administrative Agent of this facility, the Mortgage Assets, this Agreement and the other Repurchase Documents.
“Administrative Agent” is defined in this Agreement’s preamble.
“Affiliate” means, as to a specified Person, any other Person (a) that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with the specified Person; (b) that is a director, manager, trustee, general partner or executive officer of the specified Person or serves in a similar capacity in respect of the specified Person; (c) that, directly or indirectly through one or more intermediaries, is the beneficial owner of ten percent (10%) or more of any class of equity securities of the specified Person; or (d) of which the specified Person is directly or indirectly the owner of ten percent (10%) or more of any class of equity securities (or equivalent equity interests).
“Aged Loan” means, on any day, a Purchased Mortgage Loan that is not a Jumbo Loan and whose Purchase Date was more than forty-five (45) days but not more than sixty (60) days before that day.
“Agency” (and, with respect to two or more of the following, “Agencies”) means FHA, Fannie Mae, Ginnie Mae, Freddie Mac, RHS or VA.
“Agency Guidelines” means those requirements, standards and procedures which may be adopted by the Agencies from time to time with respect to their purchase or guaranty of residential mortgage loans, which requirements govern the Agencies’ willingness to purchase or guaranty such loans.
“Aggregate Purchase Price” means, at any time, the sum of the Purchase Prices paid by Buyers for all Purchased Mortgage Loans that are subject to Transactions outstanding at that time.
“Agreement” means this Master Repurchase Agreement (including any supplemental terms or conditions contained in the Exhibits and Schedules, the Side Letter and the Administration Agreement), as amended, restated, supplemented or otherwise modified from time to time.
“Anti-corruption Laws” means all laws, rules, and regulations of any jurisdiction applicable to any Seller or its Subsidiaries from time to time concerning or relating to bribery or corruption.
“Appraised Value Alternative” means with respect to (i) refinanced Mortgage Loans underwritten with the use of the Fannie Mae direct underwriting system with respect to which a property inspection waiver has been issued, (ii) DU Refinance Loans and (iii) Open Access Mortgage Loans, the value entered by Seller into Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector system, as applicable. In the case of FHA Streamline Loans, “Appraised Value Alternative” means the appraised value reported in the FHA Connection system for the Mortgagor’s previous loan that is being refinanced by the subject Loan.
“Approved DU Jumbo Takeout Investor” means an Approved Takeout Investor that has been specifically approved in writing by Administrative Agent for purchases of DU Jumbo Loans.
“Approved Takeout Investor” means any of (i) Fannie Mae, Freddie Mac and any of the other entities listed on Schedule I, as such schedule is updated from time to time by Administrative Agent, in its sole discretion, with written notice to any Seller; (ii) CL or (iii) an entity which is acceptable to Administrative Agent, as indicated by Administrative Agent to any Seller in writing; provided, however, that, notwithstanding the foregoing, any entity described in the foregoing clauses (i) through (iii) that fails to perform any of its obligations under its Takeout Agreement shall cease to be an Approved Takeout Investor automatically upon such failure.
“Assignment of Mortgage” means an assignment of the Mortgage, notice of transfer or equivalent instrument in recordable form sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to effect the transfer of the Mortgage to the party indicated therein.
“Authorized Signers” means, with respect to a Seller, each of the officers of such Seller listed on Schedule II hereto or otherwise designated by the officer of such Seller who is such Seller’s administrator with respect to the MWF Web, as such schedule may be updated by such Seller from time to time with prior written notice to Administrative Agent.
“Available Warehouse Facilities” means, (i) at any time, the aggregate amount of used and unused
available warehouse lines of credit, purchase facilities, repurchase facilities, early purchase program facilities and off-balance sheet funding facilities (whether committed or uncommitted) to finance Mortgage Loans available to Sellers in the aggregate at such time or (ii) such warehouse lines of credit, purchase facilities, repurchase facilities, early purchase program facilities and off- balance sheet funding facilities themselves.
“Bailee Letter” means a bailee letter in the form attached hereto as Exhibit J or such other form as is satisfactory to Administrative Agent in its sole discretion.
“Bankruptcy Code” means Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended by the Bankruptcy Reform Act and as further amended from time to time, or any successor statute.
“Bankruptcy Reform Act” means the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective as of October 17, 2005.
“Blanket Bond Required Endorsement” means, as to any Seller, endorsement of Seller’s mortgage banker’s blanket bond insurance policy to (i) provide that for any loss affecting Buyers’ or Administrative Agent’s interest, Administrative Agent will be named on the loss payable draft as its interest may appear and (ii) provide Administrative Agent access to coverage under the theft of secondary market institution’s money or collateral clause of policy.
“Business Day” means a day other than a Saturday or Sunday when (i) banks in Dallas, Texas, Houston, Texas and New York, New York are generally open for commercial banking business and (ii) federal funds wire transfers can be made.
“Capitalized Lease” of a Person means any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP.
“Capitalized Lease Obligations” means, as to any Person, any obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.
“Cash Equivalents” means any of the following: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within three (3) months or less after the date of the applicable financial statement reporting such amounts; and (b) certificates of deposit, time deposits or Eurodollar time deposits having maturities of three
(1)months or less after the date of the applicable financial statement reporting such amounts, or overnight bank deposits, issued by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $500,000,000 and rated at least A- by S&P or A3 by Moody’s.
“Cash Pledge Account” means, with respect to Sellers jointly and severally, the blocked Seller’s account (under the sole dominion and control of Administrative Agent) with Chase styled as follows:
JPMorgan Chase Bank, N.A., Agent, Secured Party
Cash Pledge Account for Universal American Mortgage Company, LLC
“Change in Control” means, with respect to any Seller, Lennar Corporation does not, directly or indirectly, own more than fifty percent (50%) of the outstanding voting stock (or equivalent equity interests) of such Seller.
“Change in Management” means, with respect to UAMC, LLC, James T. Timmons, or any successor approved by Administrative Agent, ceases to be President of UAMC, LLC.
“Change in Requirement of Law” means (a) the adoption of a Requirement of Law after the date of this Agreement, (b) any change after the date of this Agreement in a Requirement of Law or in its interpretation or application or (c) compliance by Administrative Agent or any Buyer (or by any applicable lending office of Buyer) with any Requirement of Law made or issued after the date of this Agreement; provided that, notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines and directives thereunder, issued in connection therewith or in implementation thereof, and (ii) all requests, rules, guidelines and directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, shall in each case be deemed to be a Change in Requirement of Law regardless of the date enacted, adopted, issued or implemented.
“Chase” is defined in this Agreement’s preamble.
“CL”, when used as a noun, means Chase, operating through either its unincorporated division commonly known as its Correspondent Lending group or its unincorporated division commonly known as Chase Rural Housing. When CL is used as an adjective modifying a type of Mortgage Loan, it means that such Mortgage Loan meets CL’s underwriting guidelines and is covered by a best efforts Takeout Commitment issued by CL.
“Closing Protection Letter” means a letter of indemnification from a title insurer addressed to a Seller, with coverage that is customarily acceptable to Persons engaged in the Origination of Mortgage Loans, identifying the Settlement Agent covered thereby and indemnifying such Seller against losses incurred due to issues with respect to title arising from the malfeasance or fraud by the Settlement Agent or the failure of the Settlement Agent to follow the specific closing instructions specified by such Seller in the escrow letter with respect to the closing of one or more Mortgage Loans. The Closing Protection Letter shall be either with respect to the individual Mortgage Loan being purchased pursuant hereto or a blanket Closing Protection Letter that covers closings conducted by the relevant Settlement Agent in the jurisdiction in which the closing of such Mortgage Loan takes place.
“Collection Account” means, with respect to Sellers jointly and severally, the blocked Seller’s account (under the sole dominion and control of Administrative Agent) with Chase styled as follows:
JPMorgan Chase Bank, N.A., Agent, Secured Party
Collection Account for Universal American Mortgage Company, LLC
“Combined Loan-to-Value Ratio” or “CLTV” means, for each Mortgage Loan as of its Purchase Date, a fraction (expressed as a percentage) having as its numerator the sum of (i) the original principal amount of the Mortgage Note plus (ii) the original principal amount of each other Mortgage Loan that is secured by a junior Lien against the related Mortgaged Property, and as its denominator the lesser of (x) the sales price of the related Mortgaged Property and (y) either (1) the appraised value of the related Mortgaged Property indicated in the appraisal obtained in connection with the Origination of such Mortgage Loan if an appraisal is required by the relevant Agency Guidelines or Approved Takeout Investor or (2) the value set forth in the Appraised Value Alternative with respect to those Mortgage Loans for which an appraisal is not required under the relevant Agency Guidelines.
“Completed Repurchase Advice” means with respect to any Purchased Mortgage Loan, receipt by
Administrative Agent of:
(i)funds into the Funding Account in an amount equal to or greater than (x) the Repurchase Price of such Purchased Mortgage Loan minus (y) any unpaid Price Differential to be paid by Sellers on the next Remittance Date;
(ii)if the funds deposited into the Funding Account for repurchase of a Purchased Mortgage Loan or MBS are less than the amount specified in clause (i) above, confirmation that funds in an amount equal to such deficiency are on deposit in the Operating Account and available for withdrawal by Administrative Agent after taking into account all other payments required to be made by Sellers out of funds on deposit in the Operating Account;
(iii)confirmation, in a form acceptable to Administrative Agent in its sole discretion, from the related Approved Takeout Investor, if applicable, that the funds received in the Funding Account are for the purchase of that Purchased Mortgage Loan; and
(iv)an updated Loan Purchase Detail from a Seller showing the removal of that Purchased Mortgage Loan from the list of Purchased Mortgage Loans subject to the outstanding Transactions under this Agreement.
“Compliance Certificate” means a compliance certificate substantially in the form of Exhibit C, completed, executed and submitted by the chief financial officer of a Seller to Administrative Agent.
“Confirmation” means a confirmation substantially in the form attached hereto as Exhibit A and delivered pursuant to Section 3.
“Contingent Obligation” of a Person, means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the Indebtedness of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person to enable such person to pay Indebtedness, or otherwise assures any creditor with respect to Indebtedness of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract, “put” agreement or other similar arrangement, provided that, without limitation of the foregoing, a “bad acts” or completion guarantee or similar arrangement shall not constitute a Contingent Obligation except to the extent of amounts then due and payable thereunder.
“Conventional Conforming Loan” means a Mortgage Loan which conforms to Agency Guidelines. The term Conventional Conforming Loan shall not include a Mortgage Loan which is a Government Loan.
“Cooperative Corporation” means with respect to any Cooperative Loan, the cooperative apartment corporation that holds legal title to the related Cooperative Project and grants occupancy rights to units therein to stockholders through Proprietary Leases or similar arrangements.
“Cooperative Loan” means a Mortgage Loan that is secured by a Lien on and perfected security interest in Cooperative Shares and the related Proprietary Lease granting exclusive rights to occupy the related Cooperative Unit in the building owned by the related Cooperative Corporation.
“Cooperative Project” means, with respect to any Cooperative Loan, all real property and improvements thereto and rights therein and thereto owned by a Cooperative Corporation including without limitation the land, separate dwelling units and all common elements, all of which shall be located in any state of the United States or the District of Columbia.
“Cooperative Shares” means, with respect to any Cooperative Loan, the shares of stock issued by a Cooperative Corporation and allocated to a Cooperative Unit and represented by a stock certificate.
“Cooperative Unit” means, with respect to a Cooperative Loan, a specific unit in a Cooperative Project.
“Credit File” means, with respect to a Mortgage Loan, all of the paper and documents required to be maintained pursuant to the related Takeout Commitment or the related Hedging Arrangement, as applicable, and all other papers and records of whatever kind or description, whether developed or created by a Seller or others, required to Originate, document or service the Mortgage Loan.
“Debt” means, with respect to any Person, at any date (a) all indebtedness or other obligations of such Person (and, if applicable, that Person’s Subsidiaries, on a consolidated basis) which, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of such Person at such date; and (b) all indebtedness or other obligations of such Person (and, if applicable, that Person’s Subsidiaries, on a consolidated basis) for borrowed money or for the deferred purchase price of property or services; provided, however, that, for purposes of this Agreement, there shall be excluded from Debt at any date loan loss reserves, deferred taxes arising from capitalized excess service fees, operating leases and Qualified Subordinated Debt.
“Default” means any condition or event that, with the giving of notice or lapse of time or both, would constitute an Event of Default.
“Defaulted Loan” means a Mortgage Loan (i) as to which any principal or interest payment, escrow payment, or part thereof, remains unpaid for thirty (30) days or more from the original due date for such payment (whether or not the applicable Seller has allowed any grace period or extended the due date thereof by any means), (ii) as to which another material default has occurred and is continuing, including the commencement of foreclosure proceedings; (iii) as to which an Act of Insolvency has occurred with respect to the Mortgagor thereof or any cosigner, guarantor, endorser, surety, assumptor or grantor with respect thereto, or (iv) which, consistent with the applicable Seller’s collection policies, has been or should be written off as uncollectible in whole or in part.
“Defective Mortgage Loan” means (i) a Mortgage Loan that is not an Eligible Mortgage Loan or (ii) a Purchased Mortgage Loan in which Administrative Agent (as agent and representative of Buyers) does not have a valid and perfected first priority security interest or that is not free and clear of any other Lien other than Liens expressly permitted hereunder.
“DU Jumbo Loan” means an OATI Jumbo Loan underwritten by a Seller pursuant to underwriting authority delegated to such Seller by an Approved DU Jumbo Takeout Investor.
“Early Repurchase Date” has the meaning set forth in Section 3(i)(ii).
“Electronic Signature” means an electronic sound, symbol, or process attached to, or associated with, a contract or other record and adopted by a person with the intent to sign, authenticate or accept such contract or record.
“Electronic Tracking Agreement” means the Electronic Tracking Agreement dated on or about the date hereof, by and among, Administrative Agent, Sellers, MERS and MERSCORP Holdings, Inc. (the “Electronic Agent”), as amended, supplemented or otherwise modified from time to time.
“Eligible Mortgage Loan” means, on any date of determination, a Mortgage Loan:
(i)for which each of the representations and warranties set forth on Exhibit B are true and correct as of such date of determination;
(ii)which is either a Conventional Conforming Loan, a Government Loan or a Jumbo Loan;
(iii)which was Originated within thirty (30) days prior to the Purchase Date for the initial Transaction in which that Mortgage Loan was purchased by Administrative Agent (as agent and representative of Buyers);
(iv)which is eligible for sale to an Approved Takeout Investor under its Takeout Guidelines;
(v)that has a scheduled Repurchase Date not later than the following number of days after the Purchase Date for the initial Transaction to which that Mortgage Loan was subject:
Type of Mortgage Loan | Number of days |
Aged Loan | 60 |
Conventional Conforming Loan | 45 |
Government Loan | 45 |
Jumbo Loan | 45 |
(vi)which does not have a Combined Loan-to-Value Ratio in excess of (i) 105% in the case of a Government Loan (other than an RHS Loan, an FHA Streamline Loan),
(i)110% in the case of an FHA Streamline Loan, (iii) 102.04% in the case of an RHS Loan or (iv) 95% in the case of a Conventional Conforming Loan (or, in each case, such other percentage determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time) and, if its Loan-to-Value Ratio is in excess of 80% (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time), it has private mortgage insurance in an amount required by the applicable Agency Guidelines, unless pursuant to Agency Guidelines in existence at the time such Mortgage Loan was originated, private mortgage insurance is not required for such Mortgage Loan;
(i)which, if a Government Loan, the related Mortgagor has a FICO Score of at least 620 (or such lower minimum FICO Score as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time);
(ii)which, if a Conventional Conforming Loan, the related Mortgagor has a FICO Score of at least 620 (or such lower minimum FICO Score as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time);
(iii)for which a complete Loan File has been delivered to Administrative Agent, or, in the case of a Wet Loan, for which the items listed in items (i) through (iv) of the definition of Loan File have been delivered to Administrative Agent;
(iv)for which, if a Wet Loan on the applicable Purchase Date, all applicable items listed
in items (v) through (xii) of the definition of Loan File have been delivered to Administrative Agent at or prior to its Wet Funding Deadline;
(v)which, if a Wet Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other Wet Loans that are then subject to Transactions is less than or equal to (i) 60% (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to Seller from time to time) of the Facility Amount on any day that is one of the first five (5) or the last five (5) Business Days of any calendar month and (ii) 30% (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to Seller from time to time) of the Facility Amount on any day other than a day contemplated by clause (i) above;
(vi)which, if an FHA Streamline Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other FHA Streamline Loans that are then subject to Transactions, is less than or equal to Ten Million Dollars ($10,000,000) (or such greater amount or percentage of the Facility Amount as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time);
(vii)for which, if not a CL Loan, Administrative Agent has approved the underwriting, the Takeout Commitment or Hedging Arrangement, as applicable, the appraisal and other related information;
(viii)which, unless subject to a Hedging Arrangement, is not (a) subject to a Takeout Agreement with respect to which the applicable Seller is in default, or (b) rejected or excluded for any reason (other than default by Administrative Agent) from the related Takeout Commitment by the Approved Takeout Investor;
(ix)which, unless subject to a Takeout Commitment, is not (a) subject to a Hedging Arrangement with respect to which the Seller is in default, or (b) rejected or excluded for any reason (other than default by Administrative Agent) from the related Hedging Arrangement by the Person with whom such Hedging Arrangement is maintained;
(x)which is not a Mortgage Loan that a Seller has failed to repurchase or cause to be repurchased when required by the terms of this Agreement;
(xi)for which, unless subject to a Hedging Arrangement, the Takeout Commitment, if applicable, has not expired or been terminated or cancelled by the Approved Takeout Investor;
(xii)for which, unless subject to a Takeout Commitment, the related Hedging Arrangement has not expired or been terminated or cancelled by the Person with whom such Hedging Arrangement is maintained;
(xiii)for which the related Mortgage Note has not been out of the possession of Administrative Agent pursuant to a Trust Release Letter for more than five (5) Business Days after the date of that Trust Release Letter;
(xiv)for which neither the related Mortgage Note nor the Mortgage has been out of the possession of Administrative Agent pursuant to a Bailee Letter for more than the number of days specified in such Bailee Letter;
(xv) | which is not a Defaulted Loan; |
(xvi)which, if a Jumbo Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other Jumbo Loans that are then subject to Transactions, is less than or equal to $12,500,000 at any one time;
(xvii)which, if an RHS Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other RHS Loans that are then subject to Transactions, is less than or equal to twenty percent (20%) (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time) of the Facility Amount;
(xviii)which, if an Investor Loan, its Purchase Price, when added to the sum of the Purchase Prices of all Investor Loans and Second Home Loans that are then subject to Transactions, is less than or equal to ten percent (10%) (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time) of the Facility Amount;
(xix)which, if a Second Home Loan, its Purchase Price, when added to the sum of the Purchase Prices of all Second Home Loans and Investor Loans that are then subject to Transactions, is less than or equal to ten percent (10%) (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time) of the Facility Amount;
(xx)which, if an Aged Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other Aged Loans that are then subject to Transactions, is less than or equal to five percent (5%) (or such greater percentage as may be determined by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time) of the Facility Amount;
(xxi)which, if a Manufactured Home Loan, its Purchase Price, when added to the sum of the Purchase Prices of all other Manufactured Home Loans that are then subject to Transactions, is less than or equal to $12,500,000 at any one time.
“ERISA” means the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated thereunder, as amended from time to time and any successor statute, rules and regulations.
“Event of Default” has the meaning set forth in Section 12.
“Excluded Liens” means Liens securing obligations of Parent or a Parent Subsidiary to any third party in connection with (i) Profit and Participation Agreements, (ii) any option or right of first refusal to purchase real property granted to a developer or seller of real property that arises as a result of the non-use or non-development of such real property by Parent or a Parent Subsidiary, or (iii) joint development agreements with third parties to perform and/or pay for or reimburse the costs of construction and/or development related to or benefiting Parent’s or any Parent Subsidiary’s property and property belonging to such third parties, in each case entered into in the ordinary course of Parent’s or such Parent Subsidiary’s business.
“Executive Order” is defined in the definition of “Sanctions Laws and Regulations”.
“Facility Amount” has the meaning set forth in the Side Letter.
“Facility Fee” has the meaning set forth in the Side Letter.
“Fannie Mae” means the Federal National Mortgage Association or any successor.
“FDIA” means the Federal Deposit Insurance Act, as amended from time to time.
“FDICIA” means the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended from time to time.
“FHA” means the Federal Housing Administration, which is a sub-division of HUD, or any successor. The term “FHA” is used interchangeably in this Agreement with the term “HUD”.
“FHA Streamline Loan” means a Mortgage Loan that is insured by FHA and meets current FHA Streamline Refinance requirements and whose Loan-to-Value Ratio is in excess of 105% but not more than 110%.
“FICO Score” means, with respect to any Mortgagor, the statistical credit score prepared by Fair Isaac Corporation, Experian Information Solutions, Inc., TransUnion LLC or such other Person as may be approved in writing by Administrative Agent in its sole discretion.
held.
“Financial Institution” means Chase in its capacity as the bank at which the Accounts are
“Foreign Buyer” is defined in Section 11(e)(ii).
“Freddie Mac” means the Federal Home Loan Mortgage Corporation or any successor.
“Funding Account” means, with respect to Sellers jointly and severally, the blocked Seller’s account (under the sole dominion and control of Administrative Agent) with Chase styled as follows:
JPMorgan Chase Bank, N.A., Agent, Secured Party
Funding Account for Universal American Mortgage Company, LLC
“GAAP” means generally accepted accounting principles consistently applied in the United States.
“Ginnie Mae” means the Government National Mortgage Association or any successor.
“GLB Act” means the Gramm-Leach Bliley Act of 1999 (Public Law 106-102, 113 Stat 1338), as it may be amended from time to time.
“Government Loan” means a Mortgage Loan which is insured by the FHA or guaranteed by the VA or RHS. The term Government Loan shall not include any Mortgage Loan which is a Conventional Conforming Loan.
“Governmental Authority” means and includes the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to government, any governmental or quasi-governmental department, commission, board, bureau or instrumentality, any court, tribunal or arbitration panel, and, with respect to any Person, any private body having regulatory jurisdiction over any Person or its business or assets (including any insurance company or underwriter through whom that Person has obtained insurance coverage).
“Hedging Arrangement” means any forward sales contract, forward trade contract, interest rate swap agreement, interest rate cap agreement, or other contract pursuant to which a Seller has protected itself from the consequences of a loss in the value of a Mortgage Loan or its portfolio of Mortgage Loans because of changes in interest rates or in the market value of mortgage loan assets.
“Hedging Obligations” of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), (a) under any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, commodity prices, exchange rates or forward rates applicable to such party’s assets, liabilities, or exchange transaction, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (b) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing.
“HUD” means the U.S. Department of Housing and Urban Development or any successor department or agency. The term “HUD” is used interchangeably in this Agreement with the term “FHA”.
“Income” means, with respect to any Purchased Mortgage Loan, (i) all payments of principal, payments of interest, proceeds of Takeout Commitments, proceeds of Hedging Arrangements, cash collections, dividends, sale or insurance proceeds and other cash proceeds received relating to the Purchased Mortgage Loan and other Mortgage Assets, (ii) any other payments or proceeds received in relation to the Purchased Mortgage Loan and other Mortgage Assets (including any liquidation or foreclosure proceeds with respect to the Purchased Mortgage Loan and payments under any guarantees or other contracts relating to the Purchased Mortgage Loan) and (iii) all other “proceeds” as defined in Section 9-102(64) of the UCC; provided that Income does not include any escrow withholds or escrow payments for Property Charges.
“Indebtedness” of any Person at any date, means without duplication, (a) all liabilities and obligations, contingent or otherwise, of such Person, (i) in respect of borrowed money, (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except (A) those incurred in the ordinary course of its business that would constitute ordinarily a trade payable to trade creditors and (B) liabilities related to consolidated inventory not owned (but specifically excluding from such exception the deferred purchase price of real property), (iv) evidenced by bankers’ acceptances, (v) consisting of obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, except Excluded Liens; (vi) consisting of Capitalized Lease Obligations (including any Capitalized Leases entered into as a part of a sale/leaseback transaction), (vii) consisting of liabilities and obligations under any receivable sales transactions, (viii) consisting of a letter of credit (but excluding Performance Letters of Credit and performance or surety bonds) or a reimbursement obligation of such Person with respect to any letter of credit (but excluding Performance Letters of Credit and performance or surety bonds), (ix) consisting of Hedging Obligations, (x) consisting of Off-Balance Sheet Liabilities or (xi) consisting of Contingent Obligations; and (b) obligations of such Person to purchase securities or other property arising out of or in connection with the sale of the same or substantially similar securities
or property.
“Indemnified Party” has the meaning set forth in Section 16(b).
“Interim Servicing Term” has the meaning set forth in Section 13(a).
“Investor Loan” means a Conventional Conforming Loan secured by a single family residence that is not occupied by the Mortgagor, which has been underwritten by the Approved Takeout Investor who issued a Takeout Commitment that covers it and whose underwriting, Takeout Commitment, appraisal and all related documentation that Administrative Agent elects to review are approved by Administrative Agent, or which is subject to a Hedging Arrangement.
“IRC” means the Internal Revenue Code of 1986, as amended from time to time and any successor statute.
“IRS” means the United States Internal Revenue Service.
“Jumbo Loan” means a Mortgage Loan that conforms to (i) all of the Agency Guidelines’ requirements for a Conventional Conforming Loan except that its original principal amount exceeds the maximum allowed by Agency Guidelines and (ii) the maximum CLTV and minimum
FICO Score criteria specified on Schedule IV, which criteria may be adjusted by Administrative Agent in its sole and absolute discretion by written notice to Sellers.
“Last Endorsee” means with respect to each Mortgage Loan, the last Person to whom such Mortgage Loan was assigned or the related Mortgage Note was endorsed, as applicable.
“Leverage Ratio” means that ratio of a Person’s Debt (including off balance sheet financings) to its Adjusted Tangible Net Worth.
“Lien” means any security interest, mortgage, deed of trust, charge, pledge, hypothecation, assignment as security for an obligation, deposit arrangement as security for an obligation, equity, encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including any conditional sale or other title retention arrangement, any financing lease arrangement having substantially the same economic effect as any of the foregoing and the security interest evidenced or given notice of by the filing of any financing statement under the UCC (other than any such financing statement filed for informational purposes only) or comparable law of any jurisdiction.
“Liquidity” means, at any time, with respect to Sellers in the aggregate, Sellers’ unencumbered and unrestricted cash and Cash Equivalents (including the balance on deposit in the Cash Pledge Account, but excluding any restricted cash or cash pledged to third parties) at such time plus, with respect to any Purchased Mortgage Loans then subject to outstanding Transactions, the excess, if any, of (x) the sum of the maximum Purchase Prices available to Sellers pursuant to the terms hereof for such Purchased Mortgage Loans over (y) the Aggregate Purchase Price at such time.
“Litigation” means, as to any Person, any action, lawsuit, investigation, claim, proceeding, judgment, order, decree or resolution pending or, to such Person’s knowledge, threatened against or affecting such Person or the business, operations, properties or assets of such Person before, or by, any
Governmental Authority.
“Loan File” means, with respect to each Mortgage Loan, the following documents:
(i)if a Wet Loan, a fully executed Closing Protection Letter from the related Settlement Agent involved in the Wet Funding of that Mortgage Loan;
(ii)if a Government Loan, a valid eligibility certification from VA, FHA or RHS, as applicable, or such other documentation as may be required by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time, with respect to such Purchased Mortgage Loan;
(iii)if a Conventional Conforming Loan, a valid eligibility certification from Fannie Mae or Freddie Mac, as applicable, or such other documentation as may be required by Administrative Agent in its sole discretion and specified in a written notice from Administrative Agent to any Seller from time to time, with respect to such Mortgage Loan;
(iv)evidence satisfactory to Administrative Agent, in its sole discretion, that such Mortgage Loan is subject to a valid and binding Takeout Commitment or Hedging
Arrangement, which may include a copy of the related Takeout Agreement or Hedging Arrangement and such other documents required by Administrative Agent in its sole discretion;
(v)the original Mortgage Note, endorsed in blank without recourse by the Last Endorsee thereof, together with all intervening endorsements showing an unbroken chain of endorsement from the originator of such Mortgage Loan to the Last Endorsee, or, if the original has been lost, a lost note affidavit in form and substance acceptable to Administrative Agent and executed by the Last Endorsee;
(vi)evidence satisfactory to Administrative Agent that such Mortgage Loan is a MERS Designated Mortgage Loan, and if such Mortgage Loan (x) was a MOM Loan at Origination, a copy of the original Mortgage having on its face both such Mortgage’s MIN and language indicating that the Mortgage Loan is a MOM Loan or (y) was not a MOM Loan at Origination, the original or a copy of (i) the Mortgage, (ii) its MIN and (iii) its assignment to MERS and the originals or copies of all intervening assignments;
(vii)the original recorded Mortgage, or, if the original has been lost or if such Mortgage is in the process of being recorded, a copy of the original Mortgage together with an Officer’s Certificate (which may be included on the face of such copy) certifying (x) that such copy is a true, correct and complete copy and (y) that such Mortgage has been transmitted to the appropriate recording office for recordation;
(viii)the originals of all assumption, modification, consolidation, substitution and extension agreements, if any, with evidence of recordation thereon, or copies of such original agreements together with an Officer’s Certificate certifying (x) that such copy is a true, correct and complete copy and (y) that such agreements have been transmitted to the appropriate recording office for recordation;
(ix)the originals or copies of all guarantees, security agreements or other supporting
agreements, if any, received with respect to, or supporting repayment of, such Purchased Mortgage Loan;
(x)(1) unless waived by Administrative Agent in writing as to one or more particular Purchased Mortgage Loans, a copy of the DU/DO/LP approval cover page or,
(2) for a CL Jumbo Loan, a copy of the related CHL Correspondent Channel Approval Memorandum, (3) for an RHS Loan, a copy of the related Conditional Commitment for Single Family Housing Loan Guarantee 1980-18 or, (4) for an OATI Jumbo Loan that is not a DU Jumbo Loan, evidence of underwriting approval by the related Approved Takeout Investor, or for a DU Jumbo Loan, evidence of the Seller’s internal underwriting approval and evidence of the Approved DU Jumbo Takeout Investor’s approval of the appraisal for the loan;
(xi)the original, or a copy (together with an Officer’s Certificate, which may be included on the face of such copy, certifying that such copy is a true, correct and complete copy) of the policy of lender’s title insurance described in item (p) of Exhibit B or of a commitment to issue such title insurance;
(xii)if, at any point in the future, Administrative Agent so designates, by giving at least thirty (30) days written notice to a Seller, that Sellers will, on a going forward basis, be responsible for giving the same (it being understood and agreed that unless and until Administrative Agent gives such notice to a Seller, Administrative Agent will be responsible for giving such notices to Mortgagors as are required by the Truth in Lending Act of 1968, as amended, and this item will not be included in the Loan Files), a notice letter in form and substance acceptable to Administrative Agent in its sole discretion, delivered at Administrative Agent’s request by a Seller on behalf of Administrative Agent to Mortgagor setting forth the information regarding Administrative Agent as the “new creditor” and such other information required by Section 404 of The Helping Families Save Their Homes Act of 2009 (amending the Truth in Lending Act of 1968 (as amended)), and acknowledged in writing by Mortgagor unless Administrative Agent has notified any Seller in writing that such notice is no longer required;
(xiii) | if a Cooperative Loan: |
(A)the original Cooperative Shares with original Stock Power with a signature guarantee in form and substance satisfactory to Administrative Agent;
(B) | a copy of the Proprietary Lease; |
(C) | a copy of the Recognition Agreement; and |
(D)an acknowledgement copy of the UCC-1 financing statement filed in connection with the Mortgage related thereto; and
(xiv)such additional documents, if any, as shall be required by Administrative Agent in its sole discretion from time to time by written notice to any Seller.
“Loan Purchase Detail” means a data tape or schedule of information prepared and transmitted electronically by a Seller to Administrative Agent in the format and with such fields of information set forth in Exhibit I regarding the Purchased Mortgage Loans, as such required format or information fields may be changed from time to time by Administrative Agent with prior written notice to any Seller.
“Loan-to-Value Ratio” or “LTV” means, for each Mortgage Loan as of the related Purchase Date,
a fraction (expressed as a percentage) having as its numerator the original principal amount of the Mortgage Note and as its denominator the lesser of (x) the sales price of the related Mortgaged Property and (y) either (1) the appraised value of the related Mortgaged Property of such Mortgage Loan indicated in the appraisal obtained in connection with the Origination of such Mortgage Loan if an appraisal is required by the relevant Agency Guidelines or Takeout Investor or (2) the value set forth in the Appraised Value Alternative with respect to those Mortgage Loans for which an appraisal is not required under the relevant Agency Guidelines.
“Manufactured Home Loan” means a Conventional Conforming Loan or Government Loan secured by a single-family home constructed at a factory and shipped in one or more sections to a housing site, which has been underwritten by the Approved Takeout Investor who issued a Takeout Commitment that covers it and whose underwriting, Takeout Commitment, appraisal and
all related documentation that Administrative Agent elects to review are approved by Administrative Agent, or which is subject to a Hedging Arrangement.
“Margin Amount” means at any time with respect to any Purchased Mortgage Loan, the amount equal to (a) the applicable Margin Percentage for that Purchased Mortgage Loan at that time multiplied by (b) the Market Value for that Purchased Mortgage Loan at that time.
“Margin Deficit” has the meaning specified in Section 4(a).
“Margin Percentage” has the meaning set forth in the Side Letter.
“Margin Stock” has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time.
“Market Value” means, at any time with respect to any Purchased Mortgage Loan, the fair market value of such Purchased Mortgage Loan at such time as determined by Administrative Agent in its sole discretion.
“Material Adverse Effect” means any (i) material adverse effect upon the validity, performance or enforceability of any Transaction Document, (ii) material adverse effect upon the properties, business or condition of Sellers, taken as a whole (and their Subsidiaries, on a consolidated basis), (iii) material adverse effect upon the ability of any Seller to fulfill its obligations under this Agreement, or (iv) material adverse effect on the value or salability of the Purchased Mortgage Loans subject to this Agreement, taken as a whole.
“Materially False Representation” is defined in Section 12(a)(ii).
“Material Subsidiary” means as of any date, a Subsidiary of Parent that has a Net Worth (excluding ownership interests in, or intercompany indebtedness of, other Parent Subsidiaries) of
$10,000,000 or more as of such date.
“MERS” means Mortgage Electronic Registration Systems, Inc. and its successors and assigns.
“MERS Designated Mortgage Loan” means a Mortgage Loan that satisfies the definition of the term “MERS Designated Mortgage Loan” contained in the Electronic Tracking Agreement.
“MERS® System” has the meaning given that term in the Electronic Tracking Agreement.
“MIN” means the eighteen digit MERS Identification Number permanently assigned to each MERS Designated Mortgage Loan.
“MOM Loan” means a MERS Designated Mortgage Loan that was registered on the MERS® System at the time of its Origination and for which MERS appears as the record mortgagee or beneficiary on the related Mortgage.
“Moody’s” means Moody’s Investors Service and any successor.
“Mortgage” means a mortgage, deed of trust or other security instrument creating a Lien on the Mortgaged Property.
“Mortgage Assets” has the meaning specified in Section 6.
“Mortgage Banking Subsidiary” means a Subsidiary of Parent which is engaged or hereafter engages in the mortgage banking business, including the origination, servicing, packaging and/or selling of mortgages on residential single-and multi-family dwellings and/or commercial property.
“Mortgage Loan” means a whole mortgage loan or Cooperative Loan which is secured by a Mortgage on residential real estate, and shall include all Servicing Rights with respect thereto.
“Mortgage Loan Documents” means the Mortgage Note, the Mortgage and all other documents evidencing, securing, guaranteeing or otherwise related to a Mortgage Loan.
“Mortgage Note” means the original, executed promissory note or other primary evidence of indebtedness of a Mortgagor on a Mortgage Loan.
“Mortgaged Property” means the residential real estate securing the Mortgage Note, which shall be either (i) in the case of a Mortgage Loan that is not a Cooperative Loan, a fee simple estate in the real property located in any state of the United States (including, without limitation, all buildings, improvements and fixtures thereon and all additions, alterations and replacements made at any time with respect to the foregoing) purchased with the proceeds of the Mortgage Loan or
(i)in the case of a Cooperative Loan, the Proprietary Lease and related Cooperative Shares.
“Mortgagor” means the obligor on a Mortgage Note or the grantor or mortgagor on a Mortgage, as the context requires.
“MWF Web” means the website maintained by Administrative Agent and used by Sellers and Administrative Agent to administer the Transactions, the notices and reporting requirements contemplated by the Transaction Documents and other related arrangements.
“Net Worth” means at any date, with respect to any Person, the amount of consolidated stockholders’ equity, less intangible assets, of such Person and its consolidated Subsidiaries as shown on its balance sheet as of such date in accordance with GAAP.
“Non-Recourse Indebtedness” means Indebtedness of Parent or a Parent Subsidiary for which its liability is limited to the asset or property upon which it grants a Lien to the holder of such Indebtedness as security therefor.
“OATI” is an adjective that, when used to modify a type of Mortgage Loan, means that it both (i)
satisfies CL’s underwriting guidelines and (ii) is committed to be sold to an Approved Takeout Investor other than CL.
“OFAC” is defined in the definition of “Sanctions”.
“Off-Balance Sheet Liabilities” of a Person means (a) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable sold by such Person or any of its Subsidiaries, (b) any liability of such Person or any of its Subsidiaries under any financing lease, any synthetic lease (under which all or a portion of the rent payments made by the lessee are treated, for tax purposes, as payments of interest, notwithstanding that the lease may constitute an operating lease under GAAP) or any other similar lease transaction, or (c) any obligations of such Person or any of its Subsidiaries arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing and which has an actual or implied interest component but which does not constitute a liability on the consolidated balance sheets of such Person and its Subsidiaries.
“Officer’s Certificate” means a certificate signed by a Responsible Officer of the applicable Seller and delivered to Administrative Agent.
“Operating Account” means, with respect to Sellers jointly and severally, the blocked Seller’s account (under the sole dominion and control of Administrative Agent) with Chase styled as follows:
JPMorgan Chase Bank, N.A., Agent, Secured Party
Operating Account for Universal American Mortgage Company, LLC
“Originate” or “Origination” means a Person’s actions in taking applications for, underwriting and closing Mortgage Loans.
“Origination Date” means the date of the Mortgage Note and the related Mortgage.
“Outstanding Principal Balance” of a Mortgage Loan means, at any time, the then unpaid outstanding principal balance of such Mortgage Loan.
“Parent” means Lennar Corporation, a Delaware corporation.
“Parent Subsidiary” means each wholly-owned Subsidiary of Parent except Mortgage Banking Subsidiaries, Rialto Subsidiaries, and any Subsidiary that is not a Material Subsidiary.
“Party” means, with respect to this Agreement and the other Transaction Documents, any of Administrative Agent and Sellers (collectively, the “Parties”).
“Performance Letter of Credit” means a letter of credit issued to insure (i) the completion of improvements and infrastructure; (ii) maintenance of improvements and infrastructure; or (iii) other similar obligations incurred in the ordinary course of business, in each case only to the extent such letter of credit does not insure obligations constituting Indebtedness.
“Person” means an individual, partnership, corporation (including a business trust), joint-stock company, limited liability company, trust, unincorporated association, joint venture, any Governmental Authority or other entity.
“Plans” is defined in Section 10(a)(xviii).
“Post-Origination Period” means the period of time between a Mortgage Loan’s Origination Date and its Repurchase Date.
“Price Differential” means with respect to any Transaction hereunder, for each month (or portion thereof) during which that Transaction is outstanding, the sum of the following amount for each day during that month (or portion thereof): the weighted average of the applicable Pricing Rates for such day multiplied by the Aggregate Purchase Price on such day divided by 360. The Price Differential for each Transaction shall accrue during the period commencing on (and including) the day on which the Purchase Price is transferred into the Funding Account (or otherwise paid to Seller) for such Transaction and ending on (but excluding) the date on which the Repurchase Price is paid.
“Pricing Rate” means the per annum percentage rate (or rates) to be applied to determine the Price Differential, which rate (or rates) shall be determined in accordance with the Side Letter.
“Prime Rate” means the rate of interest per annum announced from time to time by Chase as its prime rate. The Prime Rate is a variable rate and each change in the Prime Rate is effective from and including the date the change is announced as being effective. THE PRIME RATE IS A REFERENCE RATE AND MAY NOT BE CHASE’S LOWEST RATE.
“Prior Chase-only MRA” means the Amended and Restated Master Repurchase Agreement dated July 30, 2011, between Seller and Chase, as amended.
“Privacy Requirements” means (a) Title V of the GLB Act, (b) federal regulations implementing such act codified at 12 CFR Parts 40, 216, 332 and 573, (c) the Interagency Guidelines Establishing Standards For Safeguarding Customer Information and codified at 12 CFR Parts 30, 208, 211, 225, 263, 308, 364, 568 and 570 and (d) any other applicable federal, state and local laws, rules, regulations and orders relating to the privacy and security of Sellers’ Customer Information, as such statutes, regulations, guidelines, laws, rules and orders may be amended from time to time.
“Profit and Participation Agreement” means an agreement, secured by a deed of trust, mortgage or other Lien against a property or asset, with respect to which the purchaser of such property or asset agrees to pay the seller of such property or asset a profit, price, premium participation or other similar amount in respect of such property or asset.
“Property Charges” means all taxes, fees, assessments, water, sewer and municipal charges (general or special) and all insurance premiums, leasehold payments or ground rents.
“Proprietary Lease” means the lease on a Cooperative Unit evidencing the possessory interest of the owner of the Cooperative Shares in such Cooperative Unit.
“Purchase Date” means the date with respect to each Transaction on which the Mortgage Loans subject to such Transaction are transferred by Seller to Administrative Agent hereunder; provided that for Purchased Mortgage Loans purchased by Chase under the Prior Chase-only MRA and transferred to Administrative Agent by Chase pursuant to the provisions of Section 35(b), “Purchase Date” means the date on which those Purchased Mortgage Loans were transferred by Seller to Chase under the Prior Chase-only MRA.
“Purchase Price” has the meaning set forth in the Side Letter.
“Purchased Mortgage Loans” means, with respect to any Transaction, the Mortgage Loans sold by
a Seller to Administrative Agent (as agent and representative of Buyers) in such Transaction hereunder (each of which sales shall be on a servicing released basis), including any Additional Purchased Mortgage Loans delivered pursuant to Section 4(a) and excluding any Purchased Mortgage Loans repurchased by a Seller or transferred to a Seller. Unless the context shall otherwise require, the term “Purchased Mortgage Loans” shall refer to all Purchased Mortgage Loans under all Transactions.
“Qualified Subordinated Debt” means, with respect to any Person, all unsecured Debt of such Person, for borrowed money, which is, by its terms or by the terms of a subordination agreement (which terms shall have been approved by Administrative Agent), in form and substance satisfactory to Administrative Agent, effectively subordinated in right of payment to all other present and future obligations and all indebtedness of such Person, of every kind and character, owed to Administrative Agent and Buyers hereunder and which terms or subordination agreement, as applicable, include, among other things, standstill and blockage provisions approved by Administrative Agent, restrictions on amendments without the consent of Administrative Agent, non-petition provisions and maturity date or dates for any principal thereof at least 395 days after the date hereof.
“Recognition Agreement” means, with respect to a Cooperative Loan, an agreement among a Cooperative Corporation, a lender and a Mortgagor whereby such parties (i) acknowledge that such lender may make, or intends to make, such Cooperative Loan and (ii) make certain agreements with respect to such Cooperative Loan.
“Remittance Date” means the 15th day of each month, or if such day is not a Business Day, the next succeeding Business Day.
“REO Property” means a Mortgaged Property acquired by a Seller through foreclosure or deed in lieu of foreclosure.
“Repurchase Date” means, with respect to each Transaction, the date on which a Seller is required to repurchase (or the earlier date, if any, on which a Seller electively repurchases) from Administrative Agent the Purchased Mortgage Loans which are subject to that Transaction. The Repurchase Date shall occur (i) for Transactions terminable on a date certain, on the date specified in the Confirmation, (ii) for Transactions terminable on demand, the earlier to occur of (a) the date specified in Administrative Agent’s demand or (b) the date specified in the Confirmation on which a Seller is required to repurchase the Purchased Mortgage Loans if no demand is sooner made and
(ii)for repurchases of Defective Mortgage Loans under Section 3(k), the Early Repurchase Date; provided, however, that in any case, the Repurchase Date with respect to each Transaction shall occur no later than the earlier of (1) the Termination Date and (2) (i) for each Aged Loan, sixty
(60) days after its Purchase Date, or (ii) for each Transaction of any other type of Purchased Mortgage Loan, the date that is forty-five (45) days after the Purchase Date of such Transaction.
“Repurchase Price” means, for each Purchased Mortgage Loan on any day, the price for which such Purchased Mortgage Loan is to be resold by Administrative Agent (as agent and
representative of Buyers to a Seller upon termination of the Transaction in which Administrative Agent purchased it (including a Transaction terminable on demand), that is (x) its Purchase Price minus (y) the sum of all cash, if any, theretofore paid by Seller into the Operating Account to cure the portion of any Margin Deficit that Administrative Agent, using any reasonable method of allocation, attributes to such Purchased Mortgage Loan plus (z) its accrued and unpaid Price Differential on that day; provided that such accrued Price Differential may be paid on a day other than the Repurchase Date in accordance with the terms of this Agreement.
“Required Amount” has the meaning set forth in Section 5(b).
“Requirement(s) of Law” means any law, treaty, ordinance, decree, requirement, order, judgment, rule, regulation (or interpretation of any of the foregoing) of any Governmental Authority having jurisdiction over any Buyer, Administrative Agent, any Seller or any Approved Takeout Investor, any of their respective Subsidiaries or their respective properties or any agreement by which any of them is bound.
“Rescission” means the Mortgagor’s exercise of any right to rescind the related Mortgage Note and related documents pursuant to applicable law.
“Responsible Officer” means, as to any Person, the chief executive officer or, with respect to financial matters, the chief financial officer of such Person; provided, however, that in the event any such officer is unavailable at any time he or she is required to take any action hereunder, Responsible Officer means any officer authorized to act on such officer’s behalf as demonstrated by a certificate of corporate resolution or similar document and an incumbency certificate.
“RHS” means the Rural Housing Service of the Rural Development Agency of the United States Department of Agriculture or its successor.
“RHS Loan” means an Eligible Mortgage Loan guaranteed by RHS that conforms to all CL rural housing mortgage loan guidelines.
“Rialto Subsidiaries” means as of any date, a Subsidiary of Parent which is engaged or hereafter engages in originating, underwriting, acquiring, owning, financing, selling, managing and/or servicing real estate assets, third party capital, commercial and residential real estate loans and/or mortgage backed securities.
“S&P” means Standard and Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor.
“Sanctions” means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State.
“Sanctioned Country” means, at any time, a country or territory which is the subject or target of any Sanctions.
“Sanctioned Person” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person controlled by any such Person.
“SEC” is defined in Section 28(a).
“Second Home Loan” means a Conventional Conforming Loan secured by a single family residence that is occupied by the Mortgagor but is not the Mortgagor’s principal residence and whose underwriting, Takeout Commitment, appraisal and all related documentation that Administrative Agent elects to review are approved by Administrative Agent.
“Sellers’ Accounts” means each of the Funding Account and the Operating Account.
“Seller’s Customer” means any natural person who has applied to a Seller for a financial product or service, has obtained any financial product or service from a Seller or has a Mortgage Loan that is serviced or subserviced by a Seller.
“Sellers’ Customer Information” means with respect to Sellers, any information or records in any form (written, electronic or otherwise) containing a Seller’s Customer’s personal information or identity, including such Seller’s Customer’s name, address, telephone number, loan number, loan payment history, delinquency status, insurance carrier or payment information, tax amount or payment information and the fact that such Seller’s Customer has a relationship with a Seller.
“Servicing File” means with respect to each Mortgage Loan, all documents relating to the servicing thereof, which may consist of (i) copies of the documents contained in the related Credit File and Loan File, as applicable, (ii) the credit documentation relating to the underwriting and closing of such Mortgage Loan(s), (iii) copies of all related documents, correspondence, notes and all other materials of any kind, (iv) copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation and payment history records, (v) all other information or materials necessary or required to board such Mortgage Loan onto the applicable servicing system and (vi) all other related documents required to be delivered pursuant to any of the Transaction Documents.
“Servicing Records” means all servicing records created and/or maintained by a Seller in its capacity as interim servicer for Administrative Agent (as agent and representative of Buyers) with respect to a Purchased Mortgage Loan, including but not limited to any and all servicing agreements, files, documents, records, databases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records and any other records relating to or evidencing the servicing thereof.
“Servicing Rights” means all rights and interests of a Seller or any other Person, whether contractual, possessory or otherwise to service, administer and collect Income with respect to Mortgage Loans, and all rights incidental thereto.
“Settlement Agent” means a title company, title insurance agent, escrow company or attorney that is acceptable to Administrative Agent in its sole discretion and that is (i) unaffiliated
with any Seller, (ii) a division, subsidiary or licensed agent of a title insurance underwriter reasonably acceptable to Administrative Agent and (iii) insured against errors and omissions in such amounts and covering such risks as are at all times customary for its business and with industry standards, to which the proceeds of any purchase of a Mortgage Loan are to be wired in accordance with local law and practice in the jurisdiction where such Mortgage Loan is being Originated.
“Shipping Instructions” means the advice in the form of Exhibit D, sent by a Seller to Administrative Agent electronically through the MWF Web, which instructs Administrative Agent to send one or more Mortgage Notes and the related Mortgages to an Approved Takeout Investor.
“Side Letter” means the letter agreement dated the date hereof among Administrative Agent and Sellers, as the same may be amended, restated, supplemented or otherwise modified from time to time.
“SIPA” is defined in Section 28(a).
“Stock Power” means, with respect to a Cooperative Loan, an assignment of the stock certificate or an assignment of the Cooperative Shares issued by the Cooperative Corporation.
“Subservicer” has the meaning set forth in Section 13(a)(ii).
“Subservicer Instruction Letter” means a letter agreement between a Seller and each Subservicer substantially in the form of Exhibit H.
“Subservicing Agreement” has the meaning set forth in Section 13(a)(ii).
“Subsidiary” means any corporation, association or other business entity in which more than fifty percent (50%) of the total voting power or shares of stock (or equivalent equity interest) entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof.
“Successor Servicer” has the meaning set forth in Section 13(e).
“Takeout Agreement” means an agreement, in form and substance acceptable to Administrative Agent, between an Approved Takeout Investor and a Seller, pursuant to which such Approved Takeout Investor has committed to purchase from a Seller certain of the Purchased Mortgage Loans, as such agreement may be amended, restated, supplemented or otherwise modified from time to time with the prior written consent of Administrative Agent. If any Takeout Agreement is supplemented, amended or restated in any material respect (other than through ordinary course changes to Takeout Guidelines), Sellers shall provide Administrative Agent notice of such supplement, amendment or restatement and Administrative Agent shall have the right to suspend approval of the Approved Takeout Investor with respect to Takeout Commitments after the effective date thereof until Administrative Agent has received such supplement, amendment or restatement and approved it in writing.
“Takeout Commitment” means, with respect to each Approved Takeout Investor, the commitment to purchase a Purchased Mortgage Loan from a Seller pursuant to a Takeout Agreement, and that specifies (a) the type of Purchased Mortgage Loan to be purchased, (b) a purchase date or purchase deadline date and (c) a purchase price or the criteria by which the purchase price will be determined.
“Takeout Guidelines” means (i) the eligibility requirements established by the Approved Takeout Investor that must be satisfied by a Mortgage Loan originator to sell Mortgage Loans to the Approved Takeout Investor and (ii) the specifications that a Mortgage Loan must meet, and the requirements that it must satisfy, to qualify for the Approved Takeout Investor’s program of Mortgage Loan purchases, as such requirements and specifications may be revised, supplemented or replaced from time to time.
“Takeout Value” means, (i) with respect to any Purchased Mortgage Loan subject to a Takeout Commitment, the price that an Approved Takeout Investor has agreed to pay the applicable Seller for such Purchased Mortgage Loan, and (ii) with respect to any Purchased Mortgage Loan subject to a Hedging Arrangement, the weighted average price of portfolio hedges or forward trades for such Purchased Mortgage Loans.
“Tangible Net Worth” means, with respect to any Person or to Sellers in the aggregate at any date, the sum of total shareholders’ or members’ equity in such Person (including capital stock, additional paid-in capital and retained earnings, but excluding treasury stock, if any), each as determined in accordance with GAAP on a consolidated basis; provided, however, that, for purposes of this definition, there shall be excluded from assets the following: the aggregate book value of all intangible assets of such Person (as determined in accordance with GAAP), including, without limitation, goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, franchises, capitalized servicing rights, excess capitalized servicing rights, each to be determined in accordance with GAAP consistent with those applied in the
preparation of such Person’s financial statements; and advances or loans to shareholders or Affiliates, advances or loans to employees (unless such advances are against future commissions).
“Tax and Insurance Amount” means, at any time, the amount determined by Administrative Agent from time to time in its sole discretion with written notice to any Seller, as the amount approximately equal to the escrowed tax and insurance payments made by the Mortgagors with respect to the Purchased Mortgage Loans, at that time.
“Termination Date” means the earliest of (i) that Business Day which Administrative Agent (solely in accordance with Section 36) designates as the Termination Date, (ii) that Business Day which any Seller designates as the Termination Date by written notice to Administrative Agent at least fifteen (15) days prior to such date, (iii) the date of declaration of the Termination Date pursuant to Section 12(b), and (iv) 364 days after the date hereof, as such date may be extended by written agreement of Administrative Agent and Sellers.
“Third Party Originator” means any Person, other than a permanent employee of a Seller, who engages in the solicitation, procurement, packaging, processing or performing of any other Origination function with regard to a Mortgage Loan.
“TPO Loan” means a Mortgage Loan which has been solicited, procured, packaged, processed or otherwise Originated by a Third Party Originator.
“Transaction” has the meaning set forth in Section 1 of this Agreement.
“Transaction Documents” means this Agreement (including all exhibits and schedules attached hereto), each Confirmation, each Bailee Letter, each Trust Release Letter, the Side Letter, the Administrative Agreement, the Electronic Tracking Agreement, each Takeout Agreement, each Takeout Commitment, each Closing Protection Letter and each deposit account control agreement, other agreement, document or instrument executed or delivered in connection therewith, in each case as amended, restated, supplemented or otherwise modified from time to time.
“Transfer” is defined in Section 11(m).
“Trust Release Letter” means a letter in substantially the form of Exhibit L, appropriately completed and authenticated by a Seller, or such other form as may be approved by Administrative Agent in writing in its sole discretion.
“UCC” means the Uniform Commercial Code, as amended from time to time, as in effect in the relevant jurisdiction.
“VA” means the U.S. Department of Veterans Affairs or any successor department or agency.
“Wet Funding” means the purchase by Administrative Agent (as agent and representative of Buyer) of a Mortgage Loan that is Originated by a Seller on the Purchase Date under escrow arrangements satisfactory to Administrative Agent pursuant to which a Seller is permitted to use the Purchase Price proceeds to close the Mortgage Loan prior to Administrative Agent’s receipt of the complete Loan File.
“Wet Funding Deadline” means, with respect to any Wet Loan, the fifth (5th) Business Day after the Origination Date for such Wet Loan, or such later Business Day as Administrative Agent, in its sole discretion, may specify from time to time.
“Wet Loan” means a Mortgage Loan for which the completed Loan File was not delivered to Administrative Agent prior to funding of the related Purchase Price.
(b)Interpretation. Headings are for convenience only and do not affect interpretation. The following rules of this Section 2(b) apply unless the context requires otherwise. The singular includes the plural and conversely. A gender includes all genders. Where a word or phrase is defined, its other grammatical forms have a corresponding meaning. Any capitalized term used in the Side Letter and used, but not defined differently, in this Agreement has the same meaning here as there. A reference in this Agreement to a Section, subparagraph, Exhibit or Schedule is, unless otherwise specified, a reference to a Section or subparagraph of, or an Exhibit or Schedule to, this Agreement. “Indorse” and correlative terms used in the Uniform Commercial Code may be spelled with an initial “e” instead of “i”. A reference to a party to this Agreement or another agreement or document includes the party’s successors and permitted substitutes or assigns. A reference to
an agreement or document is to the agreement or document as supplemented, amended, novated, restated or replaced, except to the extent prohibited by any Transaction Document. A reference to legislation or to a provision of legislation includes a modification or re-enactment of it, a legislative provision substituted for it and a regulation or statutory instrument issued under it. A reference to writing includes a facsimile or electronic transmission and any other means that permits the recipient to reproduce words in a tangible and visible form. Delivery of an executed counterpart of a signature page of this Agreement or any other Transaction Document by telecopy, emailed pdf or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Agreement. The words “execution,” “signed,” “signature,” “delivery,” and words of like import in or relating to any document to be signed in connection with this Agreement and the transactions contemplated hereby shall be deemed to include Electronic Signatures, deliveries or the keeping of records in electronic form, each of which shall have the same legal effect, validity or enforceability as a manually executed signature, physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. A reference to conduct includes an omission, statement or undertaking, whether or not in writing. An Event of Default exists until it has been waived in writing by the appropriate Person or Persons or has been timely cured or the circumstances giving rise to such Event of Default no longer exist. The words “hereof”, “herein”, “hereunder” and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” and correlative terms are not limiting and mean “including without limitation”, whether or not that phrase is stated. In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”, the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including”. If a day for payment or performance specified by, or determined in accordance with, the provisions of this Agreement is not a Business Day, then the payment or performance will instead be due on the Business Day next following that day. Unless otherwise specifically provided, all determinations by Administrative Agent shall be in its sole, absolute and unfettered discretion. This Agreement may use several different limitations, tests or measurements to regulate the same or similar matters; all such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if Sellers or Administrative Agent gives notice to the other of them that it requests an amendment to any provision hereof to eliminate the effect of any change occurring after the effective date of this Agreement in GAAP or in its application on the operation of such provision, whether any such notice is given before or after such change in GAAP or in its application, then such provision shall be
interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. Unless otherwise specifically provided, all accounting calculations shall be made on an unconsolidated basis. Except where otherwise provided in this Agreement, references herein to “fiscal year” and “fiscal quarter” refer to such fiscal periods of the Sellers. Except where otherwise provided in this Agreement, any determination, statement or certificate by Administrative Agent or an authorized officer of Administrative Agent or any of its Affiliates provided for in this Agreement that is made in good
faith and in the manner provided for in this Agreement shall be conclusive and binding on the parties in the absence of manifest error. A reference to an agreement includes a security agreement, guarantee, agreement or legally enforceable arrangement, whether or not in writing. A reference to a document includes an agreement (as so defined) in writing or a certificate, notice, instrument or document or any information recorded on a computer drive or other electronic media form. Where a Seller is required by this Agreement to provide any document to Administrative Agent, it shall be provided in writing or printed form unless Administrative Agent requests otherwise, and at Administrative Agent’s request, the document shall be provided in electronic form or in both printed and electronic form. This Agreement and the other Transaction Documents are the result of negotiations between Buyers and Administrative Agent on the one hand and Sellers (and Sellers’ related parties) on the other, and are the product of all Parties. In the interpretation of this Agreement and the other Transaction Documents, no rule of construction shall apply to disadvantage one Party on the ground that such Party originated, proposed, drafted, presented or was involved in the preparation of any particular provision of this Agreement or of any other Transaction, or of this Agreement or such other Transaction Document itself. Sellers and Buyers may be party to other mutual agreements and nothing in this Agreement shall be construed to restrict or limit any right or remedy under any such other agreement, and nothing in any such other agreement shall be construed to restrict or limit any right or remedy under this Agreement, except to the extent, if any, specifically provided herein or therein. Except where otherwise expressly stated or as required by applicable law (including any implied duty of good faith under common law), Administrative Agent may (i) give or withhold, or give conditionally, approvals and consents, (ii) be satisfied or unsatisfied and (iii) form opinions and make determinations, in each case in Administrative Agent’s sole and absolute discretion. A reference to “good faith” means good faith as defined in §1-201(19) of the UCC as in effect in the State of New York. Any requirement of good faith, reasonableness, discretion or judgment by Administrative Agent or any Buyer shall not be construed to require Administrative Agent or such Buyer to request or await receipt of information or documentation not immediately available from or with respect to Seller or any other Person or the Purchased Mortgage Loans themselves. Administrative Agent may waive, relax or strictly enforce any applicable deadline at any time and to such extent as Administrative Agent shall elect, and no waiver or relaxation of any deadline shall be applicable to any other instance or application of that deadline or any other deadline, and no such waiver or relaxation, no matter how often made or given, shall be evidence of or establish a custom or course of dealing different from the express provisions and requirements of this Agreement.
3. | Initiation; Confirmations; Termination; Sellers as Agents |
(a)Initiation. Any agreement to enter into a Transaction shall be made in writing at the initiation of a Seller through the MWF Web prior to the Termination Date. In the event that a Seller desires to enter into a Transaction hereunder, a Seller shall deliver to Administrative Agent no earlier than three (3) Business Days prior to, and no later than 3:30 p.m., Houston, Texas time, on, the date of the proposed Purchase Date, a request for Administrative Agent (as agent and representative of Buyers) to purchase an amount of Eligible Mortgage Loans on such Purchase Date. All such purchases shall be on a servicing released basis and shall include the Servicing Rights with respect to such Eligible Mortgage Loan. Such request shall state the Purchase Price and shall include the Confirmation related to the proposed Transaction.
(b)Purchase by Administrative Agent. Subject to the terms of the Side Letter, the Administration
Agreement and satisfaction of the conditions precedent set forth in this Section 3 and in Section 7, on the requested Purchase Date for each Transaction, each Buyer (acting by and through Administrative Agent) shall transfer to a Seller - for a newly Originated Eligible Mortgage Loan, by transferring funds to the designated Settlement Agent - an amount of Buyers’ funds equal to such Buyer’s Purchase Price Share (as such term is defined in the Administration Agreement) for purchase of each Eligible Mortgage Loan that is the subject of such Transaction on that Purchase Date, less any amounts to be netted against such Purchase Price in accordance with the Transaction terms. The transfer of funds to the Settlement Agent to be used to fund the Mortgage Loan, and if applicable, the netting of amounts for value, on the Purchase Date for any Transaction will constitute full payment by Buyers of the Purchase Price for such Mortgage Loan. Within five (5) days following the Purchase Date, a Seller shall (i) take such steps as are necessary and appropriate to effect the transfer to Administrative Agent on the MERS® System of the Purchased Mortgage Loans so purchased, and to cause Administrative Agent to be designated as “Interim Funder” on the MERS® System with respect to each such Purchased Mortgage Loan and
(ii) in the case of a Wet Funding, deliver all remaining items of the related Loan File to Administrative Agent. Notwithstanding anything to the contrary in this Agreement or any other Transaction Document, Administrative Agent and Buyers shall have no obligation to enter into any Transaction on or after the Termination Date. A Seller may (i) initially request less than one hundred percent (100%) of the Purchase Price for any one or more Purchased Mortgage Loans,
(ii) repay part of the Purchase Price therefor to Administrative Agent (for Buyers’ account) or (iii) both, and may subsequently request (through Administrative Agent) that Buyers fund (or re-fund) the balance of the Purchase Price to Seller, and in either case so long as no Default or Event of Default has occurred and is continuing, Buyers, acting through Administrative Agent, will fund (or re-fund) so much of such balance as such Seller shall request.
(c)Confirmations. The Confirmation for each Transaction shall (i) include the Loan Purchase Detail with respect to the Mortgage Loans subject to such Transaction, (ii) identify Administrative Agent and Seller and (iii) set forth (A) the Purchase Date, (B) the Purchase Price,
(A)the Repurchase Date, (D) the Pricing Rate applicable to the Transaction and (E) any additional terms or conditions of the Transaction mutually agreeable to Administrative Agent and Seller. In the event of any conflict between the terms of a Confirmation and this Agreement, such Confirmation shall prevail.
(d)Failed Fundings. Sellers agree to report to Administrative Agent by facsimile transmission or electronic mail as soon as practicable, but in no event later than one (1) Business Day after each Purchase Date any Mortgage Loans which failed to be funded to the related Mortgagor, otherwise failed to close for any reason or failed to be purchased hereunder. Sellers further agree to (i) return, or cause the Settlement Agent to return, to the Funding Account, for refunding to Administrative Agent for Buyers’ accounts, the portion of the Purchase Price allocable to such Mortgage Loans as soon as practicable, but in no event later than one (1) Business Day after the related Purchase Date, and (ii) indemnify Buyers and Administrative Agent for any loss, cost or expense incurred by them as a result of the failure of such Mortgage Loans to close or to be delivered to Administrative Agent.
(e)Accrual and Payment of Price Differential. The Price Differential for each Transaction shall accrue during the period commencing on (and including) the day when the
Purchase Price is transferred into the Funding Account (or otherwise paid to any Seller) for such Transaction and ending on (but excluding) the day when the Repurchase Price is paid to Administrative Agent. Accrued Price Differential for each Purchased Mortgage Loan shall be due and payable (i) on each Remittance Date and (ii) on demand after any Event of Default occurs and so long as it is continuing, to and including the day that the Repurchase Price therefor shall be paid to Administrative Agent.
(f)Repurchase Required. A Seller shall repurchase Purchased Mortgage Loans from Administrative Agent on or prior to each related scheduled Repurchase Date. Each obligation to repurchase exists without regard to any prior or intervening liquidation or foreclosure with respect to any Purchased Mortgage Loan. A Seller is obligated to obtain the Purchased Mortgage Loans from Administrative Agent or its designee at Sellers’ expense on the related Repurchase Date.
(g)Termination of Transaction by Repurchase; Transfer of Purchased Mortgage Loans. On the Repurchase Date, termination of the Transaction will be effected by resale to a Seller or its designee by Administrative Agent (as agent and representative of Buyers) of the Purchased Mortgage Loans on a servicing released basis against Seller’s submission to Administrative Agent of a Completed Repurchase Advice, all in form and substance satisfactory to Administrative Agent. After receipt of the payment (for Buyers’ accounts) of the Repurchase Price from a Seller, Administrative Agent shall transfer such Purchased Mortgage Loans to such Seller or its designee and deliver, or cause to be delivered, to Seller or its designee all Mortgage Loan Documents previously delivered to Administrative Agent or its designee and take such steps as are necessary and appropriate to effect the transfer of the Purchased Mortgage Loan to such Seller or its designee on the MERS® System. All such transfers from Administrative Agent to Seller are and shall be without recourse and without any of the transfer warranties of UCC §3-417 or other warranty, express or implied other than that the transferred Mortgage Loans are free and clear of any claim or right by or through Administrative Agent.
(h)No Obligation to Transfer Purchased Mortgage Loans after their Liquidation or after Termination of Agreement. Notwithstanding the foregoing or any other provision to the contrary in this Agreement or any other Transaction Document, Administrative Agent shall not be obligated to transfer any Purchased Mortgage Loans to Seller after the termination of this Agreement or liquidation by Administrative Agent (as agent and representative of Buyers) of the Purchased Mortgage Loans, in each case pursuant to Section 12.
(i)Completed Repurchase Advice. If Administrative Agent receives the Completed Repurchase Advice with respect to a Purchased Mortgage Loan at or prior to 3:00 p.m. Houston, Texas time, on any Business Day, then the Repurchase Date will occur with respect to such Purchased Mortgage Loan on such day. If Administrative Agent receives the Completed Repurchase Advice with respect to any Purchased Mortgage Loan after 3:00 p.m. Houston, Texas time, on any Business Day, then the Repurchase Date will occur with respect to such Purchased Mortgage Loan on the next Business Day. In connection with any repurchase pursuant to a Completed Repurchase Advice, Administrative Agent will debit the Funding Account and the Operating Account, if applicable, for the amount of the Repurchase Price (less any amount of Price Differential to be paid on the next Remittance Date). Without limiting Sellers’ obligations hereunder, at any time after the occurrence and during the continuance of a Default or an Event of Default, except for repurchases of individual Mortgage Loans or pools of Mortgage Loans being
sold to Approved Takeout Investors permitted by Administrative Agent in its sole and absolute discretion, Sellers shall not be permitted to repurchase less than all of the Purchased Mortgage Loans relating to all Sellers without the prior written consent of Administrative Agent, which may be granted or withheld in Administrative Agent’s sole discretion.
(j)Reliance. With respect to any Transaction, Administrative Agent may conclusively rely upon, and shall incur no liability to any Seller in acting upon, any request or other communication that Administrative Agent reasonably believes to have been given or made by a Person authorized to enter into a Transaction on behalf of any Seller.
(k) | Defective Mortgage Loans. |
(i)If, after Administrative Agent purchases a Mortgage Loan, Administrative Agent (as agent and representative of Buyers) determines or receives notice (whether from a Seller or otherwise) that a Purchased Mortgage Loan is (or has become) a Defective Mortgage Loan, Administrative Agent shall promptly notify any Seller, and a Seller shall repurchase such Purchased Mortgage Loan at the Repurchase Price on the Early Repurchase Date (as such term is defined below).
(ii)If Sellers become obligated to repurchase a Mortgage Loan pursuant to Section 3(k)(i) above, Administrative Agent shall promptly give notice of such repurchase obligation to any Seller and a calculation of the Repurchase Price therefor. On the same day a Seller receives such notice (the “Early Repurchase Date”), Sellers shall repurchase the Defective Mortgage Loan by paying Administrative Agent for Buyers’ accounts the Repurchase Price therefor, and shall submit a Completed Repurchase Advice. Administrative Agent is authorized to charge any of Sellers’ Accounts for such amount unless the Parties have agreed in writing to a different method of payment and Sellers have paid such amount by such agreed method. If Sellers’ Accounts do not contain sufficient funds to pay in full the amount due Buyers under this Section 3(k)(ii), or if the amount due is not paid by any applicable alternative method of payment previously agreed to by the Parties, Sellers shall promptly deposit funds in the Operating Account sufficient to pay such amount due Buyers and notify Administrative Agent of such deposit. After receipt of the payment of the Repurchase Price therefor from Sellers, Administrative Agent shall transfer such Purchased Mortgage Loans to Seller and deliver, or cause to be delivered, to Seller all documents for the Mortgage Loan previously delivered to Administrative Agent and take such steps as are necessary and appropriate to effect the transfer of the Purchased Mortgage Loan to Sellers on the MERS® System.
(l)Sellers as Agents. Each Seller hereby appoints all other Sellers, individually and collectively, as its agents for purposes of initiating Transactions, confirming Transactions, communicating with or receiving communications from Administrative Agent, satisfying the margin maintenance provisions hereunder and for all other purposes under this Agreement and the other Transaction Documents. Each Seller hereby accepts its appointment as agent for the other Sellers. Each Seller acknowledges and agrees that (i) the appointments and acceptances contemplated hereby are made for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, (ii) a Seller, acting as agent, can bind any and all Sellers, (iii) Administrative Agents’ actions with respect to any agent shall bind all Sellers, whether or not
Administrative Agent knows the applicable Seller is acting in an agency capacity and (iv) the agency appointments contemplated hereby shall not relieve any Seller of its obligations hereunder and shall not diminish the joint and several liability of all Sellers hereunder. For the avoidance of doubt but not by way of limitation, the Parties agree that a Transaction may be initiated by, and a Confirmation may be addressed to, any Seller whether or not such Seller is the Party selling the Purchased Mortgage Loans subject to such Transaction or Confirmation.
4. | Margin Maintenance |
(a)Margin Deficit. If at any time the sum of the Margin Amounts of all Purchased Mortgage Loans then subject to Transactions is less than the sum of their Repurchase Prices, a margin deficit (a
“Margin Deficit”) will exist, and Administrative Agent, by notice to Seller (a “Margin Call”), may require Sellers to transfer to Administrative Agent (for Buyers’ accounts) (x) cash or (y) if Administrative Agent is willing to accept them in lieu of cash, additional Eligible Mortgage Loans reasonably acceptable to Administrative Agent (“Additional Purchased Mortgage Loans”) or (z) a combination, to the extent (if any) acceptable to Administrative Agent, of cash and Additional Purchased Mortgage Loans, so that immediately after such transfer(s) the sum of
(i)such cash, if any, so transferred to Administrative Agent (for Buyers’ accounts) plus (ii) the aggregate of the Margin Amounts of all Purchased Mortgage Loans for all Transactions outstanding at that time, including any such Additional Purchased Mortgage Loans, will be at least equal to the sum of their Repurchase Prices at that time.
(b)Margin Maintenance. If the notice to be given by Administrative Agent to any Seller under Section (a) above is given at or prior to 10:00 a.m. Houston, Texas time on a Business Day, Sellers shall transfer cash or Additional Purchased Mortgage Loans to Administrative Agent prior to 5:00 p.m. Houston, Texas time on the date of such notice, and if such notice is given after 10:00 a.m. Houston, Texas time, Sellers shall transfer cash or Additional Purchased Mortgage Loans prior to 9:30 a.m. Houston, Texas time on the Business Day following the date of such notice. All cash required to be delivered to Administrative Agent pursuant to this Section 4(b) shall be deposited by Sellers into the Operating Account and, provided that no Event of Default has occurred and is continuing, shall be applied by Buyers to reduce pro rata the Repurchase Prices of all Purchased Mortgage Loans that are then subject to outstanding Transactions. Following the occurrence and during the continuance of any Event of Default, any such cash may be applied to reduce the Repurchase Price of such Purchased Mortgage Loans as Administrative Agent shall select, with the amount to be applied to the Repurchase Price of any particular Purchased Mortgage Loan to be determined by Administrative Agent, using such reasonable method of allocation as Administrative Agent shall elect in its sole discretion at the time. Administrative Agent’s election, in its sole and absolute discretion, not to make a Margin Call at any time there is a Margin Deficit shall not in any way limit or impair its right to make a Margin Call at any other time a Margin Deficit exists (or still exists).
(c)Margin Excess. If on any day after a Seller has transferred cash or Additional Purchased Mortgage Loans to Administrative Agent pursuant to Section (b) above, the sum of (i) the cash paid to Administrative Agent and (ii) the aggregate of the Margin Amounts of all Purchased Mortgage Loans for all Transactions at that time, including any such Additional Purchased Mortgage Loans, exceeds the Aggregate Purchase Price, then at the request of a Seller, Buyers (acting through Administrative Agent) shall return a portion of the cash or Additional
Purchased Mortgage Loans to a Seller so that the remaining sum of (i) and (ii) does not exceed the Aggregate Purchase Price; provided that the sum of the cash plus the value of Additional Purchased Mortgage Loans returned shall be strictly limited to an amount, after the return of which, no Margin Deficit will exist.
(d)Market Value Determinations. Administrative Agent may determine the Market Value of any Purchased Mortgage Loans from time to time and with such frequency (which, for the avoidance of doubt, may be daily), and taking into consideration such factors, as it may elect, in its sole good faith discretion, including, but not limited to, current market conditions and the fact that the Purchased Mortgage Loans may be sold or otherwise disposed of under circumstances where any Seller is in default under this Agreement; provided, however, that a Market Value of zero shall be assigned to any Purchased Mortgage Loan that, at the time of determination, is not an Eligible Mortgage Loan. Administrative Agent’s determination of Market Value of Purchased Mortgage Loans will be made using Administrative Agent’s customary methods for determining the price of comparable mortgage loans under the market conditions
and each Seller’s status prevailing at the time of determination, will not be equivalent to a determination of the fair market value of the Purchased Mortgage Loans made by obtaining competing bids under circumstances where the bidders have adequate opportunity to perform customary mortgage loan and servicing due diligence and, if (1) any Default or Event of Default has occurred and is continuing, (2) Administrative Agent in good faith believes that a secondary market Mortgage Loan purchaser would materially discount the likelihood of realization on any of a Seller’s Mortgage Loan transfer warranties or (3) the market for comparable Mortgage Loans is illiquid or otherwise disorderly at the time, such determination will not be equivalent to a determination by Administrative Agent of the Market Value of the Purchased Mortgage Loans made when, as applicable in the circumstances, (A) the originator/servicer is not in default, (B) the likelihood of realization on Seller’s transfer warranties is not materially discounted and/or (C) the market for comparable Mortgage Loans is not illiquid or otherwise disorderly. Administrative Agent’s good faith determination of Market Value shall be conclusive upon the Parties.
5. | Accounts; Income Payments |
(a)Accounts. Prior to the date hereof, Sellers shall jointly and severally establish or cause to be established each of the Accounts at Financial Institution. UAMC LLCs’ taxpayer identification number will be designated as the taxpayer identification number for each Account and Sellers shall be jointly and severally responsible for reporting and paying taxes on any income earned with respect to the Accounts. Each Account shall be under the sole dominion and control of Administrative Agent, and each Seller agrees that (i) no Seller shall have any right or authority to withdraw or otherwise give any directions with respect to the Accounts or the disposition of any funds held in the Accounts; provided that any Seller may cause amounts to be deposited into any Account at any time, and (ii) Financial Institution may comply with instructions originated by Administrative Agent directing disposition of the funds in the Accounts without further consent of any Seller, which instructions Administrative Agent shall give only in accordance with the terms of this Agreement. Only employees of Administrative Agent shall be signers with respect to the Accounts. Pursuant to Section 6, Sellers have pledged, assigned, transferred and granted a security interest to Administrative Agent in all Accounts (as agent and representative of Buyers) in which any Seller has rights or power to transfer rights and all Accounts in which any Seller later acquires ownership, other rights or the power to transfer rights. Sellers and Administrative Agent hereby
agree that Administrative Agent, as agent and representative of Buyers, has “control” of the Accounts within the meaning of Section 9-104 of the UCC. Any provision hereof to the contrary notwithstanding and for the avoidance of doubt, Sellers agree and acknowledge that Administrative Agent is not required to return funds on deposit in an Account to any Seller if any amounts are owed to Buyers or Administrative Agent hereunder by any Seller or Sellers in the aggregate.
(b)Cash Pledge Account. On or prior to the date hereof, Sellers shall jointly and severally deposit an amount equal to 1.00% of the Facility Amount (the “Required Amount”) into the Cash Pledge Account. Sellers shall cause an amount not less than the Required Amount to be on deposit in the Cash Pledge Account at all times. If on any Remittance Date, the amount on deposit in the Cash Pledge Account is greater than the Required Amount, provided that no Default or Event of Default has occurred, upon a Seller’s request such excess will be disbursed to a Seller on such Remittance Date after application by Administrative Agent and Buyers to the payment of any amounts owing by any Seller or Sellers in the aggregate to Administrative Agent or Buyers on such date. At any time upon or after the occurrence of an Event of Default, Administrative Agent, in its sole discretion, may apply the amounts on deposit in the Cash Pledge Account in accordance with the provisions of Section 5(f).
(c)Funding Account. The Funding Account shall be used for fundings of the Purchase Price and
the Repurchase Price with respect to each Purchased Mortgage Loan in accordance with Section 3. Sellers shall jointly and severally cause all amounts to be paid in respect of the related Takeout Commitments to be remitted by the Approved Takeout Investors directly to the Funding Account without any notice to or consent of any Seller. On each Repurchase Date which occurs pursuant to Section 3(f) with respect to any Purchased Mortgage Loan, Administrative Agent will apply the applicable amounts on deposit in the related Funding Account to the unpaid Repurchase Price due to Buyers for such Purchased Mortgage Loan and, unless an Event of Default has occurred, Administrative Agent will transfer the remaining balance, if any, in the Funding Account to the Operating Account. At any time upon or after the occurrence of an Event of Default, Administrative Agent, in its sole discretion, may apply the amounts on deposit in the Funding Account in accordance with the provisions of Section 5(f).
(d)Collection Account. At any time after the occurrence of an Event of Default, Administrative Agent may require that Sellers jointly and severally establish the Collection Account and then and thereafter maintain on deposit in the Collection Account an amount at least equal to the Tax and Insurance Amount, as determined by Administrative Agent from time to time. If then or at any time thereafter, Administrative Agent gives notice to Sellers that the amount on deposit in the Collection Account is less than the Tax and Insurance Amount, Sellers shall promptly deposit additional funds in the Collection Account sufficient to increase its balance to equal the Tax and Insurance Amount. At any time after the occurrence of an Event of Default, Administrative Agent, in its sole discretion, may apply the amounts on deposit in the Collection Account in accordance with the provisions of Paragraph 5(f).
(e) | Operating Account. |
(i)The Operating Account shall be used for the purposes of (1) Sellers’ payment of Price Differential and any other amounts owing to Buyers under this
Agreement, the Side Letter or any other Transaction Document, (2) Sellers’ funding of any shortfall between (x) the proceeds of an Eligible Mortgage Loan being purchased by Administrative Agent (as agent and representative of Buyers) that are to be disbursed at its Origination and (y) the Purchase Price to be paid by Administrative Agent (as agent and representative of Buyers) for that Eligible Mortgage Loan, (3) Sellers’ payment of any difference between the Repurchase Price and the amount received by Administrative Agent from the applicable Approved Takeout Investor in connection with the repurchase of a Purchased Mortgage Loan pursuant to Section 3(g) and (4) for any cash payments made by Seller to satisfy Margin Calls pursuant to Section 4(b).
(ii)On or before the fourth (4th) Business Day before each Remittance Date, Administrative Agent will notify any Seller in writing of the Price Differential and other amounts due Administrative Agent and Buyers on that Remittance Date. On or prior to the Business Day preceding each Remittance Date, Sellers shall jointly and severally deposit into the Operating Account an amount sufficient to pay all amounts due Administrative Agent and Buyers on that Remittance Date. On each Remittance Date, Administrative Agent shall withdraw funds from the Operating Account to effect such payment to the extent of funds then available in the Operating Account. If the funds on deposit in the Operating Account are insufficient to pay the amounts then due Administrative Agent and Buyers in full, Sellers shall jointly and severally pay the deficiency amount on the date such payment is due by wire transfer of such amount to the Operating Account, and Administrative Agent shall withdraw the funds so deposited to pay such deficiency to the extent of the funds deposited.
(iii)Funds deposited by Sellers in the Operating Account to cover the shortfall, if any,
referred to in clause (2) of Section 5(e)(i) will be disbursed by Administrative Agent to the Settlement Agent along with the Purchase Price of the related Eligible Mortgage Loan being purchased by Administrative Agent (as agent and representative of Buyers) to fund the Origination of such Mortgage Loan as provided in Section 3(b).
(iv)At any time after a Margin Call, if Seller fails to satisfy such Margin Call in accordance with the provisions of Section 4, Administrative Agent may withdraw funds from the Operating Account to pay such Margin Call and shall apply the funds so withdrawn for that purpose to reduce the Repurchase Prices of Purchased Mortgage Loans then subject to outstanding Transactions as provided in Section 4(b). At any time after the occurrence and during the continuance of an Event of Default, Administrative Agent, in its sole discretion, may apply the amounts on deposit in the Operating Account in accordance with the provisions of Section 5(f).
(v)Unless (1) a Default or an Event of Default has occurred and is continuing or (2) any amounts are then owing to Administrative Agent, Buyers or any Indemnified Party under this Agreement or another Transaction Document, on any Seller’s request, Administrative Agent will transfer the Operating Account balance to an account designated by such Seller.
(f)Application of Funds. After the occurrence and during the continuance of an Event of Default, at such times as Administrative Agent may direct in its sole discretion, Administrative
Agent shall apply all Income and such other amounts on deposit in all or any of the Accounts other than escrow amounts held in the Collection Account or another account of Sellers required to be used for the payment of taxes and insurance on any Purchased Mortgage Loan, in the same order and manner as is provided in Section 12(e) for proceeds of dispositions of Purchased Mortgage Loans not repurchased by Seller.
(g)Income. Where a particular Transaction’s term extends over the date on which Income is paid by the Mortgagor on any Purchased Mortgage Loan subject to that Transaction, that Income will be the property of Buyers until Sellers, acting pursuant to their joint and several obligations hereunder, have paid Administrative Agent the full Repurchase Price in respect of such Transaction to Administrative Agent (for Buyers’ accounts). Notwithstanding the foregoing, and provided no Default or Event of Default has occurred and is continuing and no Margin Deficit then exists, Administrative Agent agrees that a Seller or its designee shall be entitled to receive and retain that Income to the full extent it would be so entitled if the Purchased Mortgage Loans had not been sold to Buyers; provided that any Income received by a Seller while the related Transaction is outstanding shall be deemed to be held by Sellers solely in trust for Administrative Agent (as agent and representative of Buyers) pending the payment of the Repurchase Price in respect of such Transaction and the repurchase of the related Purchased Mortgage Loans. If a Default or an Event of Default has occurred and is continuing, or a Margin Deficit exists that Seller has not satisfied in accordance with the provisions of Section 4, as of the date Income is paid on a Purchased Mortgage Loan subject to a Transaction hereunder, if directed by Administrative Agent, Sellers, acting pursuant to their joint and several obligations hereunder, shall cause such Income to be deposited directly into the Collection Account or to such other account as Administrative Agent may direct.
(h)Sellers’ Obligations. The provisions of this Section 5 shall not relieve any Seller from its joint and several obligations to pay the Repurchase Price on the applicable Repurchase Date and to satisfy any other payment obligation of Sellers hereunder or under any other Transaction Document.
6. | Security Interest; Assignment of Takeout Commitments |
(a)Security Interest. Although the Parties intend that all Transactions hereunder be absolute sales and purchases and not loans, to secure the payment and performance by Sellers of their joint and several obligations, liabilities and indebtedness under each such Transaction and Sellers’ joint and several obligations, liabilities and indebtedness hereunder and under the other Transaction Documents, each Seller hereby pledges, assigns, transfers and grants to Administrative Agent, as agent and representative of Buyers, a security interest in the Mortgage Assets in which such Seller (individually or collectively with the other Sellers) has rights or power to transfer rights and all of the Mortgage Assets in which such Seller (individually or collectively with the other Sellers) later acquires ownership, other rights or the power to transfer rights. “Mortgage Assets” means (i) the Purchased Mortgage Loans with respect to all related Transactions hereunder (including, without limitation, all Servicing Rights with respect thereto),
(ii)all Servicing Records, Loan Files, Mortgage Loan Documents, including, without limitation, the Mortgage Note and Mortgage, and all of Seller’s claims, liens, rights, title and interests in and to the Mortgaged Property related to such Purchased Mortgage Loans, (iii) all Liens securing repayment of such Purchased Mortgage Loans, (iv) all Income with respect to such Purchased
Mortgage Loans, (v) the related Accounts, (vi) the Takeout Commitments and Takeout Agreements to the extent such Seller’s rights thereunder relate to the Purchased Mortgage Loans,
(vii) the Closing Protection Letters to the extent Seller’s rights thereunder relate to Mortgage Loans whose Originations were funded or intended to be funded in whole or in part with funds transferred by Administrative Agent to the related Settlement Agent, (viii) all Hedging Arrangements to the extent relating to the Purchased Mortgage Loans, and (ix) all proceeds of the foregoing, including, without limitation, to the extent constituting proceeds of the foregoing, all mortgage backed securities, and the right to have and receive such mortgage backed securities when issued, that are, in whole or in part, based on, backed by or created from Purchased Mortgage Loans for which the full Repurchase Price has not been received by Administrative Agent, irrespective of whether such Purchased Mortgage Loans have been released from this security interest. Each Seller hereby authorizes Administrative Agent to file such financing statements and amendments relating to the Mortgage Assets as Administrative Agent may deem appropriate, and irrevocably appoints Administrative Agent as such Seller’s attorney-in-fact to take such other actions as Administrative Agent deems necessary or appropriate to perfect and continue the Lien granted hereby and to protect, preserve and realize upon the Mortgage Assets. Sellers agree, jointly and severally, to pay all fees and expenses associated with perfecting such Liens including, without limitation, the cost of filing financing statements and amendments under the UCC, registering each Purchased Mortgage Loan with MERS and recording assignments of the Mortgages as and when required by Administrative Agent in its sole discretion.
(b)Assignment of Takeout Commitment. The sale of each Mortgage Loan to Buyers shall include the related Seller’s rights (but none of the obligations) under the applicable Takeout Commitment and Takeout Agreement to deliver the Mortgage Loan to the Approved Takeout Investor and to receive the net sum therefor specified in the Takeout Commitment from the Approved Takeout Investor. Effective on and after the Purchase Date for each Mortgage Loan purchased by Buyers hereunder, each Seller assigns to Administrative Agent as agent and representative of Buyers, free and clear of any Lien (subject to the last grammatical paragraph of Section 12(a)), all of such Seller’s right, title and interest in any applicable Takeout Commitment and Takeout Agreement for such Mortgage Loan; provided that Administrative Agent and Buyers shall not assume or be deemed to have assumed any of the obligations of any Seller under any Takeout Agreement or Takeout Commitment.
7. | Conditions Precedent |
(a)Conditions Precedent to the Effectiveness of this Agreement. The effectiveness of this
Agreement shall be subject to the satisfaction of each of the following conditions precedent (any of which Administrative Agent may electively waive, in Administrative Agent’s sole discretion):
(i)on or before the date hereof, Sellers shall deliver or cause to be delivered each of the documents listed on Exhibit E signed by or on behalf of each Seller (as applicable) and in form and substance satisfactory to Administrative Agent and its counsel;
(ii)as of the date hereof, there has been no Material Adverse Effect on the financial condition of any Seller since the most recent financial statements of such Person delivered to Administrative Agent and Buyers;
(iii)as of the date hereof, no Litigation is pending which, if adversely determined, could reasonably be expected to have a Material Adverse Effect;
(iv)Sellers shall have delivered to Administrative Agent opinions of counsel substantially in the form of Exhibit F and in form and substance satisfactory to Administrative Agent and its counsel;
(v)Sellers shall have delivered to Administrative Agent such other documents, opinions of counsel and certificates as Administrative Agent may reasonably request;
(vi)Sellers shall have established, jointly and severally, the Accounts at Financial Institution and shall have deposited the Required Amount to the Cash Pledge Account;
(vii)Each Seller shall have acquired licenses to originate Mortgage Loans in all states where it originates them; and
(viii)on or before the date hereof, Sellers, jointly and severally, shall have paid to the extent due all fees and out-of-pocket costs and expenses (including, without limitation, due diligence fees and expenses and reasonable legal fees and expenses) required to be paid hereunder and under the other Transaction Documents.
(b)Conditions Precedent to Each Transaction. Buyers’ obligation to pay the Purchase Price for each Transaction shall be subject to the satisfaction of each of the following conditions precedent:
(i)with respect to each Purchase Date, Sellers shall have delivered to Administrative Agent a Confirmation and the Loan Purchase Detail with respect to the Purchased Mortgage Loans subject to such Transaction;
(ii)in the case of a Mortgage Loan subject to a Wet Funding, Administrative Agent shall have received the documents described in items (i) through (iv) of the definition of Loan File, and, in the case of any other Mortgage Loan subject to such Transaction, Administrative Agent shall have received the complete Loan File for such Mortgage Loan, in each case in form and substance satisfactory to Administrative Agent;
(iii) | no Default or Event of Default shall have occurred and be continuing; |
(iv)no Margin Deficit shall exist either before or after giving effect to such Transaction;
(v)this Agreement and each of the other Transaction Documents shall remain in full force and effect, and the Termination Date shall not have occurred;
(vi)each Mortgage Loan subject to such Transaction shall be an Eligible Mortgage Loan;
(vii)the representations and warranties of each Seller in this Agreement and each of the other Transaction Documents to which it is a party and in any Officer’s Certificate delivered to Administrative Agent in connection therewith shall be true and correct on and as of the date hereof and such Purchase Date, with the same effect as though such representations and warranties had been made on and as of such date (except for those representations and warranties and Officer’s Certificates which are specifically made only as of a different date, which representations and warranties and Officer’s Certificates shall be correct on and as of the date made), and each Seller shall have complied with all the agreements and satisfied all the conditions under this Agreement, each of the other Transaction Documents and the Mortgage Loan Documents to which it is a party on its part to be performed or satisfied at or prior to the related Purchase Date;
(viii)no Requirement of Law would prohibit the consummation of any transaction contemplated hereby, or would impose limits on the amounts that Administrative Agent may legally receive or would impose a material tax or levy on such Transaction or the Purchase Price, Repurchase Price or any payments received in respect thereof;
(ix)no action, proceeding or investigation shall have been instituted or threatened, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority to set aside, restrain, enjoin or prevent the consummation of any Transaction contemplated hereby or seeking material damages against Administrative Agent in connection with the transactions contemplated by the Transaction Documents;
(x)after giving effect to such Transaction, as of the related Purchase Date and as of the proposed Repurchase Date for such Transaction, no Purchased Mortgage Loan subject to a Transaction was originated more than thirty (30) days prior to such Purchase Date and such proposed Repurchase Date;
(xi)Administrative Agent shall have determined that the amounts on deposit in the Operating Account are sufficient to fund any shortfall between (x) the amount the Seller is to fund to Originate or otherwise acquire each Mortgage Loan to be purchased by Buyers in such Transaction and (y) the Purchase Price to be paid by Buyers therefor, after taking into account the other obligations of all Sellers to be satisfied with the amounts on deposit in the Operating Account on such Transaction’s Purchase Date;
(xii)after giving effect to such Transaction, the aggregate Purchase Price for all outstanding Transactions shall not exceed the Facility Amount;
(xiii)Administrative Agent shall have received such other documents, information, reports and certificates as it shall have reasonably requested; and
(xiv)Sellers shall have jointly and severally deposited the amounts required by Section 5 into each of the Collection Account and the Cash Pledge Account.
The acceptance by a Seller, or by any Settlement Agent at the direction of any Seller, of any Purchase Price proceeds shall be deemed to constitute a representation and warranty by all Sellers that the foregoing conditions have been satisfied.
8. | Change in Requirement of Law |
(a)If any Change in Requirement of Law shall:
(i)impose, modify or deem applicable any reserve, special deposit, liquidity or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Buyer (except any such reserve requirement reflected in the Adjusted LIBOR Rate); or
(ii)impose on any Buyer, Administrative Agent or the London interbank market any other condition (other than Taxes, as defined in Section 11(e)(ii)(A), affecting this Agreement or Transactions entered into by Buyers or Administrative Agent (for Buyers’ accounts);
and the result of any of the foregoing shall be to increase the cost to Buyers or Administrative Agent of making or maintaining any purchase hereunder (or of maintaining its obligation to enter into any Transaction) or to increase the cost or to reduce the amount of any sum received or receivable by Buyers or Administrative Agent (whether of Repurchase Price, Price Differential or otherwise), then Sellers, jointly and severally, will pay to Administrative Agent (for Buyers’ and its own accounts) such additional amount or amounts as will compensate Buyers and Administrative Agent for such additional costs incurred or reduction suffered.
(b)If any Buyer or Administrative Agent reasonably determines that any Change in Requirement of Law regarding capital requirements has or would have the effect of reducing the rate of return on such Buyer’s capital or on the capital of such Buyer’s holding company as a consequence of this Agreement or the purchases made by such Buyer to a level below that which such Buyer or such Buyer’s holding company could have achieved but for such Change in Requirement of Law (taking into consideration such Buyer’s policies with respect to capital adequacy) by an amount deemed by such Buyer in good faith to be material, then from time to time Sellers, jointly and severally, will pay to Administrative Agent for the account of each such Buyer such additional amount or amounts as will compensate such Buyer or such Buyer’s holding company for any such reduction suffered.
(c)A certificate of such Buyer setting forth the amount or amounts necessary to compensate such Buyer or its holding company, as the case may be, as specified in Section 8(a) or 8(b) shall be delivered to Administrative Agent and Seller and shall be conclusive absent manifest error. Sellers, jointly and severally, shall pay Administrative Agent, for the account of each such Buyer, the amount shown as due on any such certificate within ten (10) days after receipt thereof.
(d)Failure or delay on the part of any Buyer to demand compensation pursuant to this Section 8 shall not constitute a waiver of such Buyer’s right to demand such compensation; provided that Seller shall not be required to compensate any Buyer pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Buyer notifies any Seller of the Change in Requirement of Law giving rise to such increased costs or reductions
and of such Buyer’s intention to claim compensation therefor; provided further that, if the Change in Requirement of Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.
9. | Segregation of Documents Relating to Purchased Mortgage Loans |
All documents relating to Purchased Mortgage Loans in the possession of a Seller shall be segregated from other documents and securities in its possession and shall be identified as being subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Sellers’ interest in the Purchased Mortgage Loans (including, without limitation, the Servicing Rights) shall pass to
Administrative Agent (as agent and representative of Buyers) on the Purchase Date and nothing in this Agreement shall preclude Administrative Agent (as agent and representative of Buyers) from engaging in repurchase transactions with the Purchased Mortgage Loans or otherwise selling, transferring, pledging or hypothecating the Purchased Mortgage Loans, but no such transaction shall relieve Administrative Agent of its obligations to transfer the Purchased Mortgage Loans to a Seller pursuant to Section 3 or Section 4.
10. | Representations and Warranties. |
(a)To induce Buyers and Administrative Agent to enter into this Agreement and the Transactions hereunder, Sellers represent and warrant as of the date of this Agreement and as of each Purchase Date with respect to each Seller that each of the following statements is and shall remain true and correct throughout the term of this Agreement and until all obligations, liabilities and indebtedness of all Sellers under this Agreement and the other Transaction Documents are paid in full.
(i)Representations and Warranties Concerning Purchased Mortgage Loans. By each delivery of a Confirmation, Seller shall be deemed, as of the Purchase Date of the described sale of each Purchased Mortgage Loan (or, if another date is expressly provided in such representation or warranty, as of such other date), and as of each date thereafter that such Purchased Mortgage Loan remains subject to this Agreement, to represent and warrant that each Purchased Mortgage Loan then sold to Administrative Agent (as agent and representative of Buyers) is an Eligible Mortgage Loan.
(ii)Organization and Good Standing. Seller and each of its Subsidiaries is, in the case of UAMC LLC, a limited liability company and, in the case of UAMC CA, a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction under which it was organized, has full legal power and authority to own its property and to carry on its business as currently conducted, and is duly qualified as a foreign corporation or entity to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on the business, operations, assets or financial condition of Seller or any such Subsidiary. For the purposes hereof, good standing shall include qualification for any and all licenses
and payment of any and all taxes required in the jurisdiction of its organization and in each jurisdiction in which Seller or a Subsidiary transacts business. Seller has no Subsidiaries except those identified by Seller to Administrative Agent in Exhibit G. With respect to Seller and each such Subsidiary, Exhibit G correctly states its name as it appears in its articles of formation filed in the jurisdiction of its organization, address, place of organization, each state in which it is qualified as a foreign corporation or entity, and in the case of the Subsidiaries, the percentage ownership (direct or indirect) of Seller in such Subsidiary.
(iii)Authority and Capacity. Seller has all requisite power, authority and capacity to enter into this Agreement and each other Transaction Document and to perform the obligations required of it hereunder and thereunder. This Agreement constitutes a valid and legally binding agreement of Seller enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization, conservatorship and similar laws, and by equitable principles. No consent, approval, authorization, license or order of or registration or filing with, or notice to, any Governmental Authority is required under any Requirement of Law prior to the execution, delivery and performance of or compliance by Seller with this Agreement or any
other Transaction Document or the consummation by Seller of any transaction contemplated thereby, except for those which have already been obtained by Seller, and the filings and recordings in respect of the Liens created pursuant to this Agreement and the other Transaction Documents. If Seller is a depository institution, this Agreement shall be maintained in Seller’s official records.
(iv)No Conflict. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated by this Agreement, nor compliance with its terms and conditions, shall conflict with or result in the breach of, or constitute a default under, or result in the creation or imposition of any Lien (other than Liens created pursuant to this Agreement and the other Transaction Documents) of any nature upon the properties or assets of Seller, any of the terms, conditions or provisions of Seller’s organizational documents, or any mortgage, indenture, deed of trust, loan or credit agreement or other agreement or instrument to which Seller is now a party or by which it is bound (other than this Agreement).
(v)Performance. Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform, and Seller intends to perform, each and every covenant which it is required to perform under this Agreement and the other Transaction Documents, the failure of which to perform could reasonably be expected to have a Material Adverse Effect.
(vi)Ordinary Course Transaction. The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of Seller, and neither the sale, transfer, assignment and conveyance of Mortgage Loans to Administrative Agent(as agent and representative of Buyers) nor the pledge, assignment, transfer and granting of a security interest to Administrative Agent (as agent and representative of Buyers) in the Mortgage Assets, by Seller pursuant to this Agreement are subject to the bulk transfer or any similar Requirement of Law in effect in any applicable jurisdiction.
(vii)Litigation; Compliance with Laws. There is no Litigation that could reasonably be expected to have a Material Adverse Effect or that might materially and adversely affect the Mortgage Loans sold or to be sold pursuant to this Agreement. Seller has not violated any Requirement of Law applicable to Seller which, if violated, would materially and adversely affect the Mortgage Loans to be sold pursuant to this Agreement or could reasonably be expected to have a Material Adverse Effect.
(viii)Statements Made. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of Seller to Buyers or Administrative Agent in connection with the negotiation, preparation or delivery of this Agreement and the other Transaction Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of Seller to Buyers or Administrative Agent in connection with this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect on the date as of which such information is stated or certified or (in the case of projections) based on estimates that are believed to be reasonable as of the respective dates of such estimates. There is no fact known to a Responsible Officer that, after due inquiry, could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Transaction Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to Buyers or Administrative Agent for use in connection with the
transactions contemplated hereby or thereby.
(ix)Approved Company. Seller currently holds all approvals, authorizations and other licenses from the Approved Takeout Investors and the Agencies required under the Takeout Guidelines (or otherwise) to Originate, purchase, hold, service and sell Mortgage Loans of the types to be offered for sale hereunder to Administrative Agent (as agent and representative of Buyers).
(x)Fidelity Bonds. Seller has purchased fidelity bonds and policies of insurance, all of which are in full force and effect, insuring Seller, Administrative Agent (as agent and representative of Buyers) and their successors and assigns in the greatest of
(a)$500,000, (b) the amount required by the Approved Takeout Investor and (c) the amount required by any other Takeout Guidelines, against loss or damage from any breach of fidelity by Seller or any officer, director, employee or agent of Seller, and against any loss or damage from loss or destruction of documents, fraud, theft, misappropriation, or errors or omissions.
(xi)Solvency. As of the date hereof and immediately after giving effect to each Transaction hereunder, the fair value of the assets of Seller is greater than the fair value of the liabilities (including, without limitation, contingent liabilities if and to the extent required to be recorded as a liability on the financial statements of Seller in accordance with GAAP) of Seller, and Seller is and will be solvent, is, will be able and intends, to pay its debts as they mature and does not and will not have an unreasonably small capital to
engage in the business in which it is engaged and proposes to engage. Seller does not intend to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. Seller is not transferring any Loans with any intent to hinder, delay or defraud any Person.
(xii)Reporting. In its financial statements, Seller intends to report each sale of a Mortgage Loan hereunder as a financing in accordance with GAAP. Seller has been advised by or confirmed with its independent public accountants that such sales can be so reported under GAAP on its financial statements.
(xiii)Financial Condition. The balance sheets of Seller provided to Buyers and Administrative Agent pursuant to Section 11(g) (and, if applicable, its Subsidiaries, on a consolidated and consolidating basis) as at the dates of such balance sheets, and the related statements of income, changes in stockholders’ equity and cash flows for the periods ended on the dates of such balance sheets heretofore furnished to Buyers and Administrative Agent, fairly present the financial condition of Seller and its Subsidiaries as of such dates and the results of its and their operations for the periods ended on such dates. On the dates of such balance sheets, Seller had no known material liabilities, direct or indirect, fixed or contingent, matured or unmatured, or liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against on, said balance sheets and related statements, and at the present time there are no material unrealized or anticipated losses from any loans, advances or other commitments of Seller except as heretofore disclosed to Buyers and Administrative Agent in writing. Said financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. Since the date of such balance sheet, there has been no Material Adverse Effect, nor is Seller aware of any state of facts particular to Seller which (with or without notice or lapse of time or both) could reasonably be expected to have a Material Adverse Effect.
(xiv)Regulation U. Seller is not engaged principally, or as one of its important activities,
in the business of extending credit for the purpose of purchasing or carrying margin stock, and no part of the proceeds of any sales made hereunder will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.
(xv)Investment Company Act. Neither Seller nor any of its Subsidiaries is an “investment company” or controlled by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
(xvi)Agreements. Neither Seller nor any of its Subsidiaries is a party to any agreement, instrument or indenture, or subject to any restriction, materially or adversely affecting its business, operations, assets or financial condition, except as disclosed in the financial statements described in Section 11(g). None of Seller’s Subsidiaries is subject to any dividend restriction imposed by a Governmental Authority other than those under applicable statutory law. Neither Seller nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, instrument or indenture which default could reasonably be
expected to have a Material Adverse Effect. No holder of any Debt of Seller or of any of its Subsidiaries has given notice of any alleged default thereunder, or, if given, the same has been cured or will be cured by Seller or the relevant Subsidiary within the cure period provided therein. No Act of Insolvency with respect to Seller or any of its Subsidiaries or any of their respective properties is pending, contemplated or, to the knowledge of Seller, threatened.
(xvii)Title to Properties. Seller and each Subsidiary of Seller has good, valid, insurable (in the case of real property) and marketable title to all of its properties and assets (whether real or personal, tangible or intangible) reflected on the financial statements described in Section 11(g), and the Mortgage Assets are free and clear of all Liens other than those created or permitted hereunder.
(xviii)ERISA. All plans (“Plans”) of a type described in Section 3(3) of ERISA in respect of which Seller or any Subsidiary of Seller is an “employer,” as defined in Section 3(5) of ERISA, are in substantial compliance with ERISA, and none of such Plans is insolvent or in reorganization, has an accumulated or waived funding deficiency within the meaning of Section 412 of the IRC, and neither Seller nor any Subsidiary of Seller has incurred any material liability (including any material contingent liability) to or on account of any such Plan pursuant to Sections 4062, 4063, 4064, 4201 or 4204 of ERISA. No proceedings have been instituted to terminate any such Plan, and no condition exists which presents a material risk to Seller or a Subsidiary of Seller of incurring a liability to or on account of any such Plan pursuant to any of the foregoing Sections of ERISA. No Plan or trust forming a part thereof has been terminated since December 1, 1974.
(xix)Proper Names. Seller does not operate in any jurisdiction under a trade name, division, division name or name other than those names previously disclosed in writing by Seller to Administrative Agent, and all such names are utilized by Seller only in the jurisdiction(s) identified in such writing. The only names used by Seller in its tax returns for the last ten years are set forth in Exhibit K.
(xx)No Undisclosed Liabilities. Other than as disclosed in the financial statements delivered pursuant to Section 11(g), Seller does not have any liabilities or Debt, direct or contingent.
(xxi)Tax Returns and Payments. (A) all U.S. federal, state and local income, excise, property and other tax returns required to be filed with respect to Seller’s operations and those of its Subsidiaries in any jurisdiction where such returns are required have been filed on or before the due date thereof (plus any applicable extensions); and (B) all such returns are true and correct; all taxes, assessments, fees and other governmental charges upon Seller, and Seller’s Subsidiaries and upon their respective properties, income or franchises, which are due and payable have been paid, including, without limitation, all Federal Insurance Contributions Act (FICA) payments and withholding taxes, if appropriate, other than those which are being contested in good faith by appropriate proceedings, diligently pursued and as to which Seller has established adequate reserves determined in accordance with GAAP, consistently applied, with respect to items (A) and
(A) | above, and other than with respect to any tax returns, taxes, assessments, fees and other |
governmental charges the failure of which to pay and/or file, as applicable, could not be reasonably expected to have a Material Averse Effect or otherwise result in a Lien upon a Purchased Mortgage Loan. The amounts reserved, as a liability for income and other taxes payable, in the financial statements described in Section 11(g) are sufficient for payment of all unpaid federal, state and local income, excise, property and other taxes, whether or not disputed, of Seller and its Subsidiaries, accrued for or applicable to the period and on the dates of such financial statements and all years and periods prior thereto and for which Seller and Seller’s Subsidiaries may be liable in their own right or as transferee of the assets of, or as successor to, any other Person.
(xxii)No Warrants; Shares Valid, Paid and Non-assessable. Seller has not issued, and does not have outstanding, any warrants, options, rights or other obligations to issue or purchase any shares of its capital stock or other securities (or other equity equivalent). The outstanding shares of capital stock (or other equity equivalent) of Seller have been duly authorized and validly issued and are fully paid and non-assessable.
(xxiii)Credit Information. Seller has full right and authority and is not precluded by law or contract from furnishing to Administrative Agent the applicable consumer report (as defined in the Fair Credit Reporting Act, Public Law 91-508) and all other credit information relating to each Purchased Mortgage Loan sold hereunder, and Administrative Agent will not be precluded from furnishing such materials to the related Approved Takeout Investor by such laws. Neither the foregoing nor any other provision of this Agreement or any other Transaction Document shall be construed to impose any obligation on Administrative Agent or any Buyer to keep the above described materials confidential or to otherwise comply with the Fair Credit Reporting Act or any similar laws.
(xxiv)No Discrimination. Seller makes credit accessible to all qualified applicants in accordance with all Requirements of Law. Seller has not discriminated, and will not discriminate, against credit applicants on the basis of any prohibited characteristic, including race, color, religion, national origin, sex, marital or familial status, age (provided that the applicant has the ability to enter into a binding contract), handicap, sexual orientation or because all or part of the applicant’s income is derived from a public assistance program or because of the applicant’s good faith exercise of rights under the Federal Consumer Protection Act. Furthermore, Seller has not discouraged, and will not discourage, the completion of any credit application based on any of the foregoing prohibited bases. In addition, Seller has complied with all anti-redlining provisions and equal credit opportunity laws applicable under all Requirements of Law.
(xxv)Home Ownership and Equity Protection Act. There is no Litigation outstanding against or relating to Seller, relating to any violation of the Home Ownership and Equity Protection Act or any state, city or district high cost home mortgage or predatory lending law.
(xxvi)Place of Business and Formation. The principal place of business of Seller is located at the address set forth for Seller in Section 15. As of the date hereof, and during the four (4) months immediately preceding that date, the chief executive office of Seller and the office where it keeps its financial books and records relating to its property and all
contracts relating thereto and all accounts arising therefrom is and has been located at the address set forth for Seller in Section 15. As of the date hereof, Seller’s jurisdiction of organization is the state specified in Section 15.
(xxvii)No Adverse Selection. Seller used no selection procedures that identified the Purchased Mortgage Loans offered to Administrative Agent (as agent and representative of Buyers) for purchase hereunder as being less desirable or valuable than other comparable Mortgage Loans owned by Seller.
(xxviii)MERS. Seller and each Approved Takeout Investor is a member of MERS in good standing.
(xxix) | Seller is Principal. Seller is engaging in the Transactions as a principal. |
(xxx) | No Default. No Default or Event of Default has occurred. |
(b)Mortgage Loan Representations. Each Seller represents and warrants to Administrative Agent with respect to all Mortgage Loans that (i) each Purchased Mortgage Loan is an Eligible Mortgage Loan on and as of the Purchase Date therefor, (ii) each Mortgage Loan to be transferred from a Seller to Administrative Agent as an Additional Purchased Mortgage Loan is an Eligible Mortgage Loan on and as of the date of transfer thereof and (iii) each Purchased Mortgage Loan identified as an Eligible Mortgage Loan by a Seller in any report or other information delivered to Administrative Agent is an Eligible Mortgage Loan. Each Seller further makes the representations and warranties regarding all Purchased Mortgage Loans (including all Additional Purchased Mortgage Loans) as are set forth in Exhibit B.
(c)Survival of Representations. All the representations and warranties made by any Seller to Buyers and Administrative Agent in this Agreement are binding on all Sellers regardless of whether the subject matter thereof was under the control of any Seller or a third party. Each Seller acknowledges that Buyers and Administrative Agent will rely upon all such representations and warranties with respect to each Purchased Mortgage Loan purchased by Administrative Agent (as agent and representative of Buyers) hereunder, and each Seller makes such representations and warranties in order to induce Buyers (acting through Administrative Agent) to purchase the Mortgage Loans. The representations and warranties by a Seller in this Agreement with respect to a Purchased Mortgage Loan shall be unaffected by, and shall supersede and control over, any provision in any existing or future endorsement of any Purchased Mortgage Loan or in any assignment with respect to such Purchased Mortgage Loan to the effect that such endorsement or assignment is without recourse or without representation or warranty. All Seller representations and warranties shall survive delivery of the Loan Files and the Confirmations, purchase by Administrative Agent (as agent and representative of Buyers) of Purchased Mortgage Loans, transfer of the servicing for the Purchased Mortgage Loans to a successor servicer, delivery of Purchased Mortgage Loans to an Approved Takeout Investor, repurchases of the Purchased Mortgage Loans by a Seller and termination of this Agreement. The representations and warranties of a Seller in this Agreement shall inure to the benefit of Buyers, Administrative Agent and their successors and assigns, notwithstanding any examination by
Administrative Agent or any Buyer of any Mortgage Loan Documents, related files or other documents delivered to Administrative Agent.
11. | Sellers’ Covenants |
Sellers agree jointly and severally to cause each Seller to perform, and cause each of such Seller’s Subsidiaries to perform, the following duties at all times during the term of this Agreement (and Sellers agree to be jointly and severally liable for the performance by each Seller of such duties):
(a)Maintenance of Existence; Conduct of Business. Seller and each of its Subsidiaries shall preserve and maintain its existence in good standing and all of its rights, privileges, licenses and franchises necessary in the normal conduct of its business, including without limitation its eligibility as lender, seller/servicer and issuer described under Section 10(ix), except, in each case, where the failure to maintain such rights, privileges, licenses or franchises, as applicable, could not reasonably be expected to have a Material Adverse Effect; and each of Seller and its Subsidiaries shall conduct its business in an orderly and efficient manner and shall keep adequate books and records of its business activities, and make no material change in the nature or character of its business or engage in any business in which it was not engaged on the date of this Agreement. Seller will not make any material change in its accounting treatment and reporting practices except as required by GAAP. Seller shall remain a member of MERS in good standing.
(b)Compliance with Applicable Laws. Seller and each of its Subsidiaries shall comply with all Requirements of Law applicable to Seller, the Purchased Mortgage Loans or any part thereof (including, without limitation, any Agency Guidelines, all anti-money laundering laws and regulations, including, without limitation, the USA Patriot Act of 2001, as amended, the GLB Act and all consumer protection laws and regulations) or relating to the Mortgage Assets and cause the Mortgage Assets to comply with all applicable Requirements of Law, a breach of which could reasonably expected to have a Material Adverse Effect, except where contested in good faith and by appropriate proceedings, and with sufficient reserves established therefor.
(c)Inspection of Properties and Books. Seller shall permit authorized representatives of Administrative Agent to (i) discuss the business, operations, assets and financial condition of Seller and Seller’s Subsidiaries with their officers and employees and to examine their books of account, records, reports and other papers and make copies or extracts thereof, (ii) inspect all of Seller’s property and all related information and reports, and (iii) audit Seller’s operations to ensure compliance with the terms of the Transaction Documents, the GLB Act and other privacy laws and regulations, all at Seller’s expense and at such reasonable times as Administrative Agent may request; it being understood and agreed that so long as no Event of Default shall have occurred and be continuing, Administrative Agent shall give a Seller reasonable notice prior to conducting any discussion, inspection and/or audit under this paragraph (c). Seller will provide its accountants with a photocopy of this Agreement promptly after the execution hereof and will instruct its accountants to answer candidly any and all questions that the officers of Administrative Agent or any authorized representatives of Administrative Agent may address to them in reference to the financial condition or affairs of Seller and Seller’s Subsidiaries. Seller may have its representatives in attendance at any meetings between the officers or other representatives of Administrative Agent and Seller’s accountants held in accordance with this authorization.
(d)Notices. Seller will promptly notify Administrative Agent, and in any event within ten (10) Business Days of obtaining knowledge, of the occurrence of any of the following with
respect to any Seller and shall provide or cause the other Sellers to provide such additional documentation
and cooperation as Administrative Agent may request with respect to any of the following:
(i)any change in Seller’s or any of its Subsidiary’s business address and/or telephone number;
(ii)any merger, consolidation or reorganization of Seller or any of its Subsidiaries, or any changes in the ownership of Seller or any of its Subsidiaries by direct or indirect means. “Indirect” means any Change of Control;
(iii)any change of the name or jurisdiction of organization of Seller, or any of its Subsidiaries;
(iv)any material adverse change in the financial position of Seller or any of its Subsidiaries;
(v)entry of any court judgment or regulatory order in which Seller or any Subsidiary of Seller is or may be required to pay a claim or claims which could have a material adverse effect on the financial condition of Seller or any of Seller’s Subsidiaries or on Seller’s ability to perform its obligations under any Transaction Document, or on the ability of Seller or any Subsidiary of Seller to continue its operations in a manner similar to its current operations;
(vi)the filing of any petition, claim or lawsuit against Seller or any of Seller’s Subsidiaries which, if adversely decided, could have a material adverse effect on the financial condition of Seller or any Subsidiary of Seller, on Seller’s ability to perform its obligations under any Transaction Document, or on the ability of Seller or any Subsidiary of Seller to continue its operations in a manner similar to its current operations;
(vii)Seller or any Subsidiary of Seller admits to committing, or is found to have committed, a material violation of any Requirement of Law relating to its business operations, including but not limited to, its loan generation, sale or servicing operations;
(viii)the initiation of any investigations, audits, examinations or reviews of Seller or any Subsidiary of Seller by any Agency, Governmental Authority, trade association relating to the Origination, sale or servicing of mortgage loans by Seller or any Subsidiary of Seller or the business operations of Seller or any Subsidiary of Seller with the exception of normally scheduled audits or examinations by the regulators of Seller or any Subsidiary of Seller;
(ix)any disqualification or suspension of Seller or any Subsidiary of Seller by an Agency or any written notification from any Agency of any such disqualification or suspension or impending disqualification or suspension;
(x)the occurrence of any actions, inactions or events upon which an Agency may, in accordance with Agency Guidelines, disqualify or suspend Seller or any Subsidiary of Seller as a seller or servicer, including (if Seller is or becomes a Freddie Mac-approved
seller or servicer) those events or reasons for disqualification or suspension enumerated in Chapter 5 of the Freddie Mac Single Family Seller/Servicer Guide and (if Seller is or becomes a Fannie Mae-approved seller or servicer) any breach of Seller’s “Lender Contract” (as defined in the Fannie Mae Single Family 2010 Selling Guide) with Fannie Mae including the breaches described or
referred to in Section A2-3, 1-01 “Lender Breach of Contract” of the Fannie Mae Single Family 2010 Selling Guide;
(xi)the filing, recording or assessment of any federal, state or local tax Lien against it or any Subsidiary of Seller, or any of its or any such Subsidiary’s;
(xii)the occurrence of any Event of Default hereunder or the occurrence of any Default;
(xiii)the suspension, revocation or termination of any licenses or eligibility as described under Section 10(a)(ix) of Seller or any Subsidiary of Seller;
(xiv)any other action, event or condition of any nature which could reasonably be expected to have a Material Adverse Effect;
(xv)any alleged breach by Administrative Agent or any Buyer of any provision of this Agreement or of any of the other Transaction Documents; or
(xvi) | a Change in Management. |
(e) | Payment of Debt, Taxes, etc. |
(i)Seller shall pay and perform all obligations and Debt of Seller, and cause to be paid and performed all obligations and Debt of its Subsidiaries in accordance with the terms thereof, and pay and discharge or cause to be paid and discharged all taxes, assessments and governmental charges or levies imposed upon Seller, its Subsidiaries, or upon their respective income, receipts or properties, before the same shall become past due, as well as all lawful claims for labor, materials or supplies or otherwise which, if unpaid, might become a Lien upon such properties or any part thereof; provided, however, that Seller and its Subsidiaries shall not be required to pay obligations, Debt, taxes, assessments or governmental charges or levies or claims for labor, materials or supplies which are being contested in good faith and by proper proceedings that are being reasonably and diligently pursued, if such proceedings do not involve any likelihood of the sale, forfeiture or loss of any such property or any interest therein while such proceedings are pending; and provided, further, that book reserves adequate under GAAP shall have been established with respect thereto.
(ii)(A) All payments made by Seller under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities (including penalties, interest and additions to tax) with respect thereto imposed by any Governmental Authority (collectively, “Taxes”), all of which shall be paid by Seller for its own account not later than the date when due; it being understood and agreed that “Taxes” does not include (a) taxes imposed on (or
measured by) a Buyer’s net income (however denominated) or capital, branch profits taxes, franchise taxes or any other tax imposed on the net income by the United States, a state or a foreign jurisdiction under the laws of which any Buyer is organized or of its applicable lending office, or any political subdivision thereof or
(b) U.S. federal withholding taxes imposed on amounts payable to or for the account of such Buyer or Assignee with respect to an interest under this Agreement pursuant to a law
in effect on the date on which (i) such Buyer or Assignee acquires such interest hereunder or (ii) such Buyer or Assignee changes the office from which it books the Transactions, except in each case to the extent that, pursuant to Section 11(e)(ii)(A) or Section 11(e)(ii)(C), amounts with respect to such taxes were payable either to Buyer or Assignee’s assignor immediately before such Buyer or Assignee acquired an interest hereunder or to such Buyer or Assignee immediately before it changed the office from which it books the Transactions, (c) taxes attributable to such Buyer’s or Assignee’s failure to comply with Section 11(e)(ii)(D), and (d) any U.S. federal withholding taxes imposed under Sections 1471 through 1474 of the IRC, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, and any agreements entered into with a Governmental Authority pursuant thereto (including pursuant to Section 1471(b)(1) of the IRC) and any law or agreement implementing an intergovernmental approach thereto. If Seller is required by a Requirement of Law to deduct or withhold any Taxes from or in respect of any amount payable hereunder, it shall: (a) make such deduction or withholding; (b) pay the amount so deducted or withheld to the appropriate Governmental Authority not later than the date when due; (c) deliver to Administrative Agent, promptly, original tax receipts or other evidence reasonably satisfactory to Administrative Agent of the payment when due of the full amount of such Taxes; and (d) pay to Administrative Agent (for the account of such Buyer) such additional amounts as may be necessary so that such Buyer receives, free and clear of all Taxes, a net amount equal to the amount it would have received under this Agreement, as if no such deduction or withholding had been made.
(A)In addition, Seller agrees to pay to the relevant Governmental Authority in accordance with all applicable Requirements of Law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (including, without limitation, mortgage recording taxes, transfer taxes and similar fees) imposed by the United States or any taxing authority thereof or therein that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement (“Other Taxes”).
(B)Seller agrees, jointly and severally with each other Seller, to indemnify Buyers and Administrative Agent for the full amount of Taxes (including additional amounts with respect thereto) and Other Taxes, and the full amount of Taxes of any kind imposed by any jurisdiction on amounts payable under this Section 11(e), and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, provided that Administrative Agent or the
relevant Buyer(s) shall have provided a Seller with evidence, reasonably satisfactory to such Seller, of payment of Taxes or Other Taxes by the Administrative Agent or relevant Buyer(s), as the case may be, provided further, that no payment shall be required under this Section 11(e)(ii)(C) for any claim for any Tax that was paid by the Administrative Agent or the relevant Buyer(s) two hundred and seventy (270) or more days prior to the date of such claim.
(C)Any Buyer or assignee of a Buyer that is not incorporated or otherwise created under the laws of the United States, any state thereof, or the District of Columbia (a “Foreign Buyer”) shall provide Seller with properly completed IRS Form W-8BEN or W-8ECI or
any successor form prescribed by the IRS, certifying that such Foreign Buyer is entitled to benefits under an income tax treaty to which the United States is a party which eliminates or reduces the rate of withholding tax on payments pursuant to this Agreement or certifying that the payments receivable pursuant to this Agreement are effectively connected with the conduct of a trade or business in the United States on or prior to the date upon which each such Foreign Buyer becomes a purchaser of Mortgage Loans hereunder. Each Foreign Buyer will resubmit the appropriate form as soon as practicable following a “change in circumstances” with respect to such Foreign Buyer as defined in Treas. Reg. Section 1.1441-1(e)(4)(ii)(D). No Foreign Buyer shall be entitled to any “gross up” of Taxes or indemnification under this Section 11(e) for Taxes imposed on payments payable to such Foreign Buyer on the date it becomes a Buyer except to the extent that such Foreign Buyer’s assignor was entitled thereto. For any period with respect to which a Foreign Buyer has failed to provide Seller with the appropriate form or other relevant document pursuant to this subparagraph (unless such failure is due to a change in any Requirement of Law occurring subsequent to the date on which a form originally was required to be provided), such Foreign Buyer shall not be entitled to any “gross-up” of Taxes or indemnification under this Section 11(e) with respect to Taxes imposed by the United States; provided, however, that should a Foreign Buyer, that is otherwise exempt from a withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, Seller shall take such steps as such Foreign Buyer shall reasonably request to assist such Foreign Buyer to recover such Taxes.
(D)If any Party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 11(e)(ii) (including by the payment of additional amounts pursuant to this Section 11(e)(ii)(A)), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (E) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding
anything to the contrary in this paragraph (E), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph
(A)the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the indemnification payments or additional amounts giving rise to such refund had never been paid. This paragraph shall not be construed to require any indemnified party to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the indemnifying party or any other Person.
(B)Without prejudice to the survival or any other agreement of Seller hereunder, the agreements and obligations of Seller contained in this Section 11(e) shall survive the termination of this Agreement. Nothing contained in this Section 11(e) shall require any Buyer to make available any of its tax returns or other information that it deems to be
confidential or proprietary.
(C)Each Party acknowledges that it is its intent, for purposes of U.S. federal, state and local income and franchise taxes and accounting purposes, to treat each purchase transaction hereunder as indebtedness of Seller that is secured by the Purchased Mortgage Loans and that the Purchased Mortgage Loans are owned by Seller, except to the extent that Administrative Agent shall have exercised its remedies following an Event of Default by Seller. All Parties to agree to such treatment and agree to treat the transactions as described in the preceding sentence (including on any and all filings with any U.S. federal, state or local taxing authority) and agree not to take any action inconsistent with such treatment, unless required by Requirements of Law.
(f)Insurance. Seller shall, and shall cause its Subsidiaries to, maintain, at no cost Buyers or Administrative Agent (a) errors and omissions insurance or mortgage impairment insurance and blanket bond coverage, with such companies and in such amounts as to satisfy prevailing Agency Guidelines requirements applicable to a qualified mortgage originating institution, and shall cause Seller’s policy to be endorsed with the Blanket Bond Required Endorsement; (b) liability insurance and fire and other hazard insurance on its properties, with responsible insurance companies approved by Administrative Agent, in such amounts and against such risks as is customarily carried by similar businesses operating in the same vicinity; and (c) within thirty (30) days after notice from Administrative Agent, obtain such additional insurance as Administrative Agent shall reasonably require, consistent with prudent industry standards, all at the sole expense of Seller. Photocopies of such policies shall be furnished to Administrative Agent without charge upon obtaining such coverage or any renewal of or modification to such coverage.
(g)Financial Statements and Other Reports. Seller shall deliver, or cause to be delivered together with the other Sellers, to Administrative Agent:
(i)As soon as available and in any event not later than forty-five (45) days after the end of each calendar month, statements of income and changes in stockholders’ equity and cash flow of Seller and, if applicable, Seller’s Subsidiaries, on a consolidated and consolidating basis for the immediately preceding month, and related balance sheet as at the end of the immediately preceding month, all in reasonable detail, prepared in
accordance with GAAP applied on a consistent basis, and certified as to the fairness of presentation by the chief financial officer of Seller, subject, however, to normal year-end audit adjustments;
(ii)As soon as available and in any event not later than ninety (90) days after Seller’s fiscal year end, statements of income, changes in stockholders’ equity and cash flows of Seller, and, if applicable, Seller’s Subsidiaries, on a consolidated basis for the preceding fiscal year, the related balance sheet as at the end of such year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail, prepared in accordance with GAAP applied on a consistent basis throughout the periods involved, and accompanied by an opinion in form and substance satisfactory to Administrative Agent and prepared by an accounting firm reasonably satisfactory to Administrative Agent, or other independent certified public accountants of recognized standing selected by Seller and acceptable to Administrative Agent, as to said financial statements and a certificate signed by the chief financial officer of Seller stating that said financial statements fairly present the financial condition, results and cash flows of operations of Seller (and, if applicable, Seller’s Subsidiaries on a consolidated basis) as at the end of, and for, such year;
(iii)Together with each delivery of financial statements required in this Section, a Compliance Certificate executed by the chief financial officer of Seller;
(iv)Photocopies of all regular or periodic financial and other reports, if any, which Seller or any Subsidiary of Seller shall file with the SEC or any other Governmental Authority, not later than five (5) days after filing,
(v)Photocopies of any audits completed by any Agency of Seller or any of its Subsidiaries, not later than five (5) days after receiving such audit;
(vi)Not less frequently than once every week (and more often if requested by Administrative Agent), a report in form and substance satisfactory to Administrative Agent summarizing the Hedging Arrangements then in effect with respect to all Mortgage Loans then owned by Buyers and interim serviced by Seller (or a Successor Servicer);
(vii)On each Business Day, a data tape for Purchased Mortgage Loans including the information described on Exhibit I and such other information requested by Administrative Agent from time to time; and
(viii)From time to time, with reasonable promptness, such further information regarding the Mortgage Assets, or the business, operations, properties or financial condition of Seller as Administrative Agent may reasonably request.
(h)Limits on Distributions. Any Seller may declare and pay dividends so long as no Default or Event of Default exists or would result therefrom.
(i)Use of Chase’s Name. Seller shall and shall cause its Subsidiaries to, confine its use of Chases’s logo and the “JPMorgan” and “Chase” names to those uses specifically authorized by Chase in writing. Except where required by the federal Real Estate Settlement Procedures Act
or HUD’s Regulation X thereunder, or the Helping Families Save Their Homes Act of 2009, as amended from time to time, in no instance may Seller or any of its Subsidiaries disclose to any prospective Mortgagor, or the agents of the Mortgagor, that such Mortgagor’s Mortgage Loan will be offered for sale to Buyers. None of Seller or its Subsidiaries may use Chase’s name or logo to obtain any mortgage-related services without Chase’s prior written consent.
(j)Reporting. In its financial statements, Seller will report each sale of a Mortgage Loan hereunder as a financing in accordance with GAAP.
(k)Transactions with Affiliates. Seller will not and will not permit any of its Subsidiaries to (i) enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate if an Event of Default exists at such time unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of Seller’s or such Subsidiary’s business and (c) upon fair and reasonable terms no less favorable to Seller or such Subsidiary than it would obtain in a comparable arm’s-length transaction with a Person which is not an Affiliate, or (ii) make a payment that is not otherwise permitted by this Section 11 to any Affiliate if an Event of Default exists at such time or will occur as a result of such payment.
(l)Defense of Title; Preservation of Mortgage Assets. Seller warrants and will defend the right,
title and interest of Buyers and of their agent and representative, Administrative Agent in and to all Mortgage Assets against all adverse claims and demands of all Persons whomsoever. Seller shall do all things necessary to preserve the Mortgage Assets so that such Mortgage Assets remain subject to a first priority perfected Lien hereunder. Seller will not allow any default to occur for which Seller is responsible under any Mortgage Assets or any Transaction Documents and Seller shall fully perform or cause to be performed when due all of its obligations under any Mortgage Assets and the Transaction Documents.
(m)Limitation on Sale of Assets. Seller shall not convey, sell, lease, assign, transfer or otherwise dispose of (collectively, “Transfer”), all or substantially all of its property, business or assets (including, without limitation, receivables and leasehold interests) whether now owned or hereafter acquired or allow any of its Subsidiaries to Transfer all or substantially all of its assets to any Person; provided, that Seller may, after at least ten (10) days’ prior written notice to Administrative Agent, allow such action with respect to any Subsidiary which is not a material part of Seller’s overall business operations.
(n)No Amendment or Compromise. Without Administrative Agent’s prior written consent, none of Seller or those acting on Seller’s behalf shall amend or modify, or waive any term or condition of, or settle or compromise any claim in respect of, any item of the Purchased Mortgage Loans, any related rights or any of the Transaction Documents.
(o)Loan Determined to be Defaulted or Defective. Upon discovery by Seller that any Purchased Mortgage Loan sold by any Seller hereunder is a Defaulted Loan or a Defective Mortgage Loan, Seller shall promptly give notice of such discovery to Administrative Agent.
(p)Further Assurances. Seller agrees to do such further acts and things and to execute and deliver to Administrative Agent such additional assignments, acknowledgments, agreements,
powers and instruments as are reasonably required by Administrative Agent to carry into effect the intent and purposes of this Agreement and the other Transaction Documents, to perfect the interests of Administrative Agent (as agent and representative of Buyers) in the Mortgage Assets or to better assure and confirm unto Administrative Agent its rights, powers and remedies hereunder and thereunder.
(q)Hedging Arrangements. Seller shall maintain Hedging Arrangements with respect to all Mortgage Loans not the subject of Takeout Commitments reasonably satisfactory to Administrative Agent, with Persons reasonably satisfactory to Administrative Agent, in order to mitigate the risk that the Market Value of any such Mortgage Loan will change as a result of a change in interest rates or the market for mortgage loan assets before the Mortgage Loan is purchased by an Approved Takeout Investor or repurchased by Seller.
(r)Only Permitted Debt. Without the prior written consent of Administrative Agent, Seller shall not, and shall not permit any of its Subsidiaries to, guaranty any Debt in excess of
$5,000,000 other than Debt (including guaranties) incurred by a Subsidiary or a joint venture to which Seller or one of its Subsidiaries is a party for a warehouse, repurchase or similar facility for Mortgage Loans.
(s)Mortgage Loans. Seller will underwrite Eligible Mortgage Loans in compliance with its underwriting guidelines in effect on the date hereof. Seller will not change its underwriting guidelines in any material respect without the prior written consent of Administrative Agent except as may be required from time to time to comply with Agency Guidelines.
(t)No Mergers, Acquisitions, Subsidiaries. Seller will not, and will not permit any of its Subsidiaries to, consolidate or merge with or into any entity (unless Seller is the surviving entity and any
of Seller’s Subsidiaries may merge with or into Seller), consolidate, acquire any interest in any Person or create, form or acquire any Subsidiary, in each case except for any Person listed in Exhibit G.
(u)UCC. Seller will not change its name, identity, corporate structure or location (within the meaning of Section 9-307 of the UCC) unless it shall have (i) given Administrative Agent at least forty-five (45) days’ prior written notice thereof and (ii) delivered to Administrative Agent all financing statements, amendments, instruments, legal opinions and other documents requested by Administrative Agent in connection with such change. Seller will keep its principal place of business and chief executive office at the location specified in Section 15, and the office where it maintains any physical records of the Purchased Mortgage Loans at a corporate facility of Seller, or, in any such case, upon thirty (30) days’ prior written notice to Administrative Agent, at another location within the United States.
(v)Takeout Commitments. Except to the extent superseded by this Agreement, Seller covenants that it shall continue to perform all of its duties and obligations to the Approved Takeout Investor, under any applicable Takeout Commitment and Takeout Agreement and otherwise, with respect to a Purchased Mortgage Loan as if such Mortgage Loan were still owned by Seller and to be sold directly by Seller to the Approved Takeout Investor pursuant to such Takeout Commitment on the date provided therein without the intervening ownership of Administrative Agent (as agent and representative of Buyers) pursuant to this Agreement. Without limiting the generality of the
foregoing, Seller shall timely assemble all records and documents concerning the Mortgage Loan required under any applicable Takeout Commitment (except that photocopies instead of originals shall be used for those documents already provided to Administrative Agent in the Loan File) and all other documents and information that may have been required or requested by the Approved Takeout Investor, and Seller shall make all representations and warranties required to be made to the Approved Takeout Investor under the applicable Takeout Commitment and Takeout Agreement.
(w) | Financial Covenants (Applicable to Sellers in the Aggregate). |
(i)Leverage Ratio. Seller shall not permit the Leverage Ratio of all Sellers (and, if applicable, their Subsidiaries, on a consolidated basis) to exceed 10.0 to 1.0 computed as of the end of each calendar month;
(ii)Minimum Adjusted Tangible Net Worth. Seller shall not permit the Adjusted Tangible Net Worth of all Sellers (and, if applicable, their Subsidiaries, on a consolidated basis), computed as of the end of each calendar month to be less than
$50,000,000.
(iii) | Maintenance of Liquidity. Sellers, in the aggregate, shall: |
(A)maintain at all times unencumbered Liquidity in an amount greater than or equal to $15,000,000;
(B)maintain at all times Available Warehouse Facilities from buyers and lenders such that Chase’s Commitment (as defined in the Administration Agreement) constitutes no more than 66.667% of Sellers’ aggregate Available Warehouse Facilities (including the Facility Amount); and
(C)not, any time, add additional mortgage funding facilities (including warehouse lines of credit, purchase facilities, repurchase facilitates or off-balance sheet
funding facilities) without giving at least ten (10) Business Days prior written notice to Administrative Agent.
(iv)Net Income. Seller shall not permit (i) the net income of all Sellers before taxes, for any period of two consecutive fiscal quarters, to be less than $1.00 or (ii) the aggregate net operating loss of all Sellers before taxes, for any fiscal quarter, to exceed
$2,500,000.
(v)Wholesale Originations. Sellers shall, in the aggregate, Originate no more than 20% of their total Mortgage Loan originations in any calendar month through wholesale or broker originations.
(x)Use of Proceeds. Seller (i) will not request any Transaction, and (ii) will not use, and will ensure that its Subsidiaries and its and their respective directors, members, managers, partners, officers, employees and agents do not use, the proceeds of any Transaction, (x) in furtherance of an offer, payment, promise to pay or authorization of the payment or giving of money or anything else of value to any Person in violation of the Anti-corruption Laws, (y) for the
purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person or in any Sanctioned Country or (z) in any manner that would result in the violation of any Sanctions.
(y)Government Regulation. Seller shall not (1) be or become subject at any time to any Requirement of Law (including, without limitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Buyers or Administrative Agent from entering into any Transaction, or otherwise conducting business with Seller, or (2) fail to provide documentary and other evidence of Seller’s identity as may be requested by Administrative Agent at any time to enable Administrative Agent to verify Seller’s identity or to comply with any applicable Requirement of Law, including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.
(z)Anti-corruption Laws and Sanctions. Seller has implemented and maintains in effect, and shall continue to maintain in effect policies and procedures designed to ensure compliance by Seller, its Subsidiaries and their respective directors, members, managers, partners, officers, employees and agents with Anti-corruption Laws and applicable Sanctions, and Seller, its Subsidiaries and their respective managers, officers and employees and to the knowledge of Seller, its directors, members, partners, employees and agents, are in compliance with Anti- corruption Laws and applicable Sanctions in all material respects. None of Seller, nor any of its Subsidiaries is a Sanctioned Person. Neither the execution and delivery of the Transaction Documents by Sellers, nor any Transaction, repurchase of Purchased Mortgage Loans, use of proceeds or other transaction contemplated by this Agreement will violate Anti-corruption Laws or applicable Sanctions. Without limiting the foregoing, no Seller will permit itself nor any of its Subsidiaries to (a) become a Sanctioned Person; or (b) engage in any dealings or transactions or be otherwise associated with any person who is a Sanctioned Person after the Seller acquires knowledge that such person is a Sanctioned Person.
(aa) Contribution Provisions. Seller shall not enter into any additional warehouse lines of credit, purchase facilities, repurchase facilities, off-balance sheet funding facilities (whether committed or uncommitted) or any similar contractual arrangement under which it is jointly and severally liable with any other Person unless such contractual arrangement contains contribution rights to the same extent as exist herein under Section 30(d) and related provisions.
(bb) Mortgage-Backed Securities. Seller shall not create any mortgage-backed securities backed by Purchased Mortgage Loans prior to the repurchase of such Purchased Mortgage Loans by any Seller or purchase of such Purchased Mortgage Loans by an Approved Takeout Investor in accordance with this Agreement.
12. | Events of Default; Remedies |
(a)Each of the following events shall, upon the occurrence and continuance thereof, be an “Event of Default”:
(i)a Seller shall fail to remit any Price Differential or fees due to Administrative Agent pursuant to the terms hereof or any other Transaction Document, and in each case, such failure shall not be remedied within three (3) Business Days of when
such amounts are due and payable or (B) a Seller shall fail to remit any Income, Repurchase Price, escrow payment or any other amount due to Buyers or Administrative Agent pursuant to the terms hereof or any other Transaction Document (other than those amounts specified in part (A) above) or fails to cure any Margin Deficit as provided in Section 4; or
(ii)a Seller shall fail to repurchase any Purchased Mortgage Loan at the time and for the amount required hereunder; or
(iii)any representation or warranty made by any Seller in this Agreement or any other Transaction Document is untrue, inaccurate or incomplete in any material respect (each such representation or warranty, a “Materially False Representation”) on or as of the date made; provided that if any representation or warranty on Exhibit B was when made, or has become, a Materially False Representation, then that Materially False Representation will not constitute a Default or an Event of Default
- although such Materially False Representation will cause each affected Purchased Mortgage Loan to cease to be an Eligible Mortgage Loan and Seller shall be obligated to repurchase it from Administrative Agent (as agent and representative of Buyers) promptly after learning from any source of its ineligibility; or
(B) any information contained in any written statement, report, financial statement or certificate made or delivered by Seller or any Guarantor (either before or after the date hereof) to any Buyer or Administrative Agent pursuant to the terms of this Agreement or any other Transaction Document is untrue or incorrect in any material respect as of the date when made or deemed made; or
(iv)Sellers shall fail to comply with any of the requirements set forth in Sections 11(w), 11(x) or 11(z); or
(v)a Seller shall fail in the observance or performance of any other duty, responsibility or obligation contained in the Transaction Documents (other than the other “Events of Default” identified in this Section 12(a)), and such failure continues unremedied for a period of five (5) Business Days; or
(vi)any Act of Insolvency occurs with respect to a Seller or any of its Subsidiaries; or
(vii)one or more judgments or decrees are entered against a Seller or any of its Subsidiaries involving claims not paid or not fully covered by insurance for payment of money in an amount
greater than $2,000,000 and all such judgments or decrees are not vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from entry thereof; or
(viii)any Agency, or private investor, or any other Person seizes or takes control of the servicing portfolio of a Seller or any of its Subsidiaries or any portion of the servicing portfolio of a Subservicer that includes Purchased Mortgaged Loans serviced by such Subservicer, for breach of any servicing agreement applicable to such servicing portfolio or for any other reason whatsoever and, as to any such event with respect to a Subservicer,
Seller fails to either terminate the applicable Subservicing Agreement and gain full control (as interim servicer, pursuant to this Agreement) of the servicing of all Purchased Mortgaged Loans subject thereto or repurchase the affected Purchased Mortgage Loans within thirty (30) days after such event; or
(ix)any Agency or Governmental Authority revokes or materially restricts the authority of a Seller or any of such Seller’s Subsidiaries to Originate, purchase, sell or service Mortgage Loans or revokes or materially restricts the authority or any Subservicer to service Mortgage Loans, or a Seller, any of such Seller’s Subsidiaries or any Subservicer shall fail to meet all requisite servicer eligibility qualifications promulgated by any Agency and, as to any such event with respect to a Subservicer, Seller fails to either terminate the applicable Subservicing Agreement and gain full control (as interim servicer, pursuant to this Agreement) of the servicing of all Purchased Mortgaged Loans subject thereto or repurchase the affected Purchased Mortgage Loans within thirty (30) days after such event; or
(x)Parent or any Parent Subsidiary shall default in making any payment of any principal of any Indebtedness (including any Contingent Obligations, but excluding Non- Recourse Indebtedness) beyond any applicable period of grace, or default shall be made with respect to the performance of any other obligation incurred in connection with any such Indebtedness or Contingent Obligations beyond any applicable period of grace, and such Indebtedness or Contingent Obligation equals or exceeds $50,000,000, and the effect of any of the foregoing defaults is to accelerate the maturity of such Indebtedness or Contingent Obligations to become due prior to its stated maturity, or any such Indebtedness or Contingent Obligations shall not be paid when due and such default shall not have been timely remedied or cured by Parent or Parent Subsidiary or waived by the holder or obligee thereof;
(xi)a Seller or any of its Subsidiaries fails to pay when due any other Debt in excess of $2,000,000 individually or in the aggregate beyond any period of grace provided, or there occurs any breach or default with respect to any material term of any such Debt, if the effect of such failure, breach or default is to cause, or to permit the holder or holders thereof (or a trustee on behalf of such holder or holders) to cause, such Debt of such Person to become or be declared due prior to its stated maturity (upon the giving or receiving of notice, lapse of time, both, or otherwise); or
(xii) | there is a Material Adverse Effect; or |
(xiii)a Seller or any of its Subsidiaries defaults with respect to any obligation in excess of $2,000,000 individually or in the aggregate under any mortgage loan repurchase arrangement similar to this Agreement, including off balance sheet repurchase agreements, or under any warehouse lending arrangement, including off balance sheet warehouse lending arrangements, which it may have with any other Person, beyond any applicable notice and grace periods; or
(xiv)(A) a Seller shall assert that any Transaction Document is not in full force and effect or shall otherwise seek to terminate or disaffirm its obligations under any such
Transaction Document at any time following the execution thereof or (B) any Transaction Document ceases to be in full force and effect, or any material obligations of a Seller under any Transaction Document shall cease to be in full force and effect, or the enforceability thereof shall be contested by a Seller; or
(xv)any Governmental Authority or any Person acting or purporting to act under Governmental Authority shall have taken any action to condemn, seize or appropriate, or to assume custody or control of, all or any substantial part of the assets of a Seller or any of its Subsidiaries or any Subservicer, or shall have taken any action to displace the management of a Seller or any of its Subsidiaries or to curtail its authority in the conduct of the business of a Seller or any of its Subsidiaries, or to restrict the payment of dividends to a Seller by any Subsidiary of such Seller, and such action shall not have been discontinued or stayed within thirty (30) days or, as to any such event with respect to a Subservicer, Seller fails to either terminate the applicable Subservicing Agreement and gain full control (as interim servicer, pursuant to this Agreement) of the servicing of all Purchased Mortgage Loans subject thereto or repurchase the affected Purchased Mortgage Loans within thirty (30) days after such event; or
(xvi)any Change in Control of a Seller or any of its Subsidiaries shall have occurred without Administrative Agent’s prior written consent; or
(xvii)any failure by a Seller to deliver assignments executed in blank to Administrative Agent or its designee for any Purchased Mortgage Loan within five (5)
Business Days following any termination of a Seller’s MERS membership; or
(xviii)the initiation of any investigation of a Seller by any Governmental Authority which is reasonably likely to have a Material Adverse Effect; or
(xix)the Pension Benefit Guaranty Corp. shall, or shall indicate its intention to, file notice of a Lien pursuant to Section 4068 of ERISA with regard to any of the assets of a Seller or any of its Subsidiaries; or
(xx)a Seller shall become subject to registration as an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended; or
(xxi)Administrative Agent (as agent and representative of Buyers) shall fail to have a valid and perfected first priority security interest in any of the Purchased Mortgage Loans sold by any Seller, including the Servicing Rights thereto, and other Mortgage Assets, in each case free and clear of any other Lien.
Notwithstanding anything to the contrary in this Section 12(a), the instance of a Lien against any Purchased Mortgage Loan or other Mortgage Assets that arises solely as a result of a wrongful or fraudulent filing of a financing statement (and that does not relate to a valid security interest) shall not constitute an Event of Default unless Sellers fail to cause such financing statement to be terminated within thirty (30) days after becoming aware of such filing.
(b)If an Event of Default occurs, Administrative Agent, at its option, may at any time or times thereafter, while such Event of Default is continuing, by written notice to any Seller to do any or all of the following:
(i)accelerate the Repurchase Date of each outstanding Transaction whose Repurchase Date has not already occurred and cancel the Purchase Date for any Transaction whose Purchase Date has not yet occurred;
(ii)terminate and replace all Sellers as interim servicers with respect to any Mortgage Assets at the cost and expense of Sellers;
(iii)direct Sellers to cause all Income to be transferred into the Collection Account within one (1) Business Day after receipt by a Seller or any Subservicer;
(iv)direct or cause Sellers to direct, all Mortgagors to remit all Income directly to an account specified by Administrative Agent; and
(v)terminate any commitment of Buyers and Administrative Agent to purchase Mortgage Loans under this Agreement or otherwise.
(c)If Administrative Agent has exercised the option referred to in Section 12(b)(i), then (i) the applicable Seller’s obligations hereunder to repurchase all Purchased Mortgage Loans in such Transactions on the Repurchase Date determined in accordance with Section 12(b)(i) shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of (1) the Pricing Rate for such Transaction and (2) five percent (5.00%) plus the Prime Rate to (y) the Repurchase Price for such Transaction as of the accelerated Repurchase Date as determined pursuant to Section 12(b) (decreased as of any day by (A) any amounts retained by Administrative Agent with respect to such Repurchase Price pursuant to clause (iii) or clause (iv) of this Section 12(c) and (B) any proceeds from the sale of Purchased Mortgage Loans pursuant to Section 12(e), on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all Income paid after such exercise or deemed exercise shall be payable to and retained by Buyers and shall be applied to the aggregate unpaid Repurchase Prices and all other amounts owed by a Seller to Buyers, Administrative Agent or any other Indemnified Party under the Transaction Documents,
(iv) in accordance with Sections 4 and 5, all amounts on deposit in the Accounts, shall be applied by Administrative Agent and Buyers to the aggregate unpaid Repurchase Prices and all other amounts owed by a Seller to Buyers, Administrative Agent or any other Indemnified Party under the Transaction Documents, (v) Sellers shall, if directed by Administrative Agent in writing to any Seller, immediately deliver to Administrative Agent any documents then in Sellers’ possession relating to any Purchased Mortgage Loans subject to such Transactions, and (vi) Administrative Agent may, by notice to any Seller, declare the Termination Date to have occurred.
(d)Upon the occurrence of any Event of Default, without prior notice to any Seller, Administrative Agent may (A) immediately sell, on a servicing released or servicing retained basis as Administrative Agent deems desirable, in a recognized market at such price or prices as
Administrative Agent may in its sole discretion deem satisfactory, any or all Purchased Mortgage Loans of any or all Sellers subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Sellers to Buyers, Administrative Agent or any other Indemnified Party under the Transaction Documents or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Mortgage Loans, to give each Seller credit for its Purchased Mortgage Loans in an amount equal to the Market Value therefor on such date against the aggregate unpaid Repurchase Prices and any other amounts owing by Sellers to Buyers, Administrative Agent or any other Indemnified
Party under the Transaction Documents.
(e)The proceeds of any disposition described above shall be applied first, to the reasonable costs and expenses incurred by Administrative Agent in connection with or as a result of an Event of Default (including, without limitation, legal fees, consulting fees, accounting fees, file transfer and inventory fees, costs and expenses incurred in respect of a transfer of the servicing of the Purchased Mortgage Loans and costs and expenses incurred in connection with a disposition of the Purchased Mortgage Loans); second, to costs of cover and/or related hedging transactions; third, to the aggregate and accrued Price Differential owed hereunder, fourth, to the remaining aggregate Repurchase Prices owed hereunder; fifth, to any other accrued and unpaid obligations of Sellers hereunder and under the other Transaction Documents, and sixth, any remaining proceeds shall be paid to Sellers or other Person legally entitled thereto.
(f) | The Parties acknowledge and agree that: |
(i)Buyers and Administrative Agent have no desire or intention to hold any of the Purchased Mortgage Loans for investment under any circumstances, and if (x) Sellers fail to repurchase any Purchased Mortgage Loan when required to do so by this Agreement, whether before or after its termination, or (y) any Event of Default has occurred, and (z) Buyers and Administrative Agent have not made an affirmative election under the circumstances then prevailing to retain such Purchased Mortgage Loan pursuant to clause
(B) of Section 12(d), Administrative Agent will sell it (i) if practicable and if the sale can be made without Administrative Agent’s having to undertake representation, warranty or other obligations that Administrative Agent, acting in its sole discretion, considers unacceptable, to the relevant Approved Takeout Investor (if any), or (ii) by private sale to another Person in the secondary mortgage market, undertaking only such representation, warranty and other obligations, if any, to such Person as Administrative Agent, acting in its sole discretion, considers acceptable, at the earliest reasonable opportunity and for such price as Administrative Agent, acting in its sole discretion, determines to be the optimal price available at the time of such sale; provided that if at any time Administrative Agent determines that the secondary market for residential mortgage loans is illiquid, disrupted or dysfunctional, Administrative Agent may elect to postpone sales of Purchased Mortgage Loans for so long as Administrative Agent determines that any such market conditions persist, and no such delay shall be construed to constitute or require a change in the classification of the Purchased Mortgage Loans in Administrative Agent’s or Buyers’ hands from “held for sale” to “held for investment”, and in all cases, to the maximum extent not prohibited by applicable law, their Market Value shall be the only “reasonable determinant of value” of Purchased Mortgage Loans for purposes of Section 562 of the Bankruptcy Code;
(ii)in the absence (whether because of market disruptions or for any other reason whatsoever) of a generally recognized source for secondary mortgage market prices of, or for bid or offer quotations for, any one or more Purchased Mortgage Loans at any time, whether before or after any termination of this Agreement, Administrative Agent may determine the Market Values of such Purchased Mortgage Loans using such means, methods, averaging, weighting, calculations and assumptions as it shall determine in its sole discretion to be appropriate, and Administrative Agent’s determination shall be conclusive and binding, absent manifest error, for all purposes, it being the Parties’ specific intention to include therein the purposes of Sections 559 and 562 of the Bankruptcy Code;
(iii)except to the extent, if any, contrary to market practice, in determining values of Purchased Mortgage Loans, Administrative Agent shall include all related accrued Income available either to be transferred to a secondary market purchaser or to be retained by Buyers to reduce their
Repurchase Prices; and
(iv)in determining the Market Value of any Purchased Mortgage Loans, it is reasonable for Administrative Agent to use and rely on the information provided by any Seller on the daily data tape pursuant to Section 11(g) without being required to check or verify the accuracy or completeness of such information.
(g) | The Parties further recognize that if, under the circumstances described in clause |
(x) or clause (y) of Section 12(f)(i), Administrative Agent has elected to sell Purchased Mortgage Loans, the market for Mortgage Loans may then be insufficiently liquid or dysfunctional in other respects, they agree that Administrative Agent may elect the time and manner of liquidating any Purchased Mortgage Loan, and nothing contained herein shall obligate Administrative Agent (i) to liquidate any Purchased Mortgage Loan immediately after Sellers’ failure to repurchase it when required by this Agreement, the occurrence of an Event of Default or any termination of this Agreement, or (ii) to liquidate all Purchased Mortgage Loans in the same manner or on the same day, and no exercise by Administrative Agent of any right or remedy shall constitute a waiver of any other right or remedy. Sellers shall be jointly and severally liable to Administrative Agent and Buyers for (i) the amount of all reasonable legal or other expenses incurred by Administrative Agent and Buyers in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions reasonably incurred) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default.
(h)To the extent permitted by applicable law, Sellers shall be jointly and severally liable to Buyers and Administrative Agent for interest on any amounts owing by a Seller or Sellers hereunder, from the date such Seller or Sellers become liable for such amounts hereunder until such amounts are (i) paid in full by or on behalf of such Seller or Sellers or (ii) satisfied in full by the exercise of Buyers’ and Administrative Agent’s rights hereunder. Interest on any sum payable by a Seller or Sellers to Buyers or to Administrative Agent under this Section 12(h) shall be at a rate equal to the greater of (x) the Pricing Rate for the relevant Transaction and (y) five percent (5%) plus the Prime Rate.
(i)If an Event of Default occurs, Buyers and Administrative Agent shall have, in addition to their rights hereunder, any rights otherwise available to them under any other agreement entered into in connection with the Transactions contemplated by this Agreement, under applicable law or in equity.
(j)Each Seller hereby acknowledges, admits and agrees that Sellers’ joint and several obligations under this Agreement are recourse obligations of all Sellers.
(k)Any provision hereof to the contrary notwithstanding, a Default or an Event of Default with respect to any Seller shall be deemed to be a Default or an Event of Default with respect to all Sellers.
13. | Servicing Rights Are Owned by Administrative Agent; Interim Servicing of the Purchased Mortgage Loans |
(a)As a condition of purchasing an Eligible Mortgage Loan, Administrative Agent hereby engages Sellers to interim service the related Purchased Mortgage Loans as agent for Administrative Agent and Buyers for a term of thirty (30) days during the Post Origination Period (the “Interim Servicing Term”), which is renewable as provided in clause (vi) below, on the following terms and conditions applicable to each Seller and to all Sellers jointly and severally:
(i)Seller shall interim service and temporarily administer the Purchased Mortgage Loan
on behalf of Administrative Agent and Buyers in accordance with prudent mortgage loan servicing standards and procedures generally accepted in the mortgage banking industry and in accordance with all applicable requirements of the Agencies, Requirements of Law, the provisions of any applicable servicing agreement, and the requirements of any applicable Takeout Agreement and the Approved Takeout Investor, so that the eligibility of the Purchased Mortgage Loan for purchase under such Takeout Agreement is not voided or reduced by such interim servicing and temporary administration;
(ii)If any Eligible Mortgage Loan that is proposed to be sold on a Purchase Date is serviced by a servicer other than Seller or any of its Affiliates (a “Subservicer”), or if the interim servicing of any Purchased Mortgage Loan is to be transferred to a Subservicer, Seller shall provide a copy of the related subservicing agreement and a Subservicer Instruction Letter executed by such Subservicer (collectively, the “Subservicing Agreement”) to Administrative Agent prior to such Purchase Date or interim servicing transfer date, as applicable. Each such Subservicing Agreement shall be in form and substance acceptable to Administrative Agent. In addition, Seller shall have obtained the prior written consent of Administrative Agent for such Subservicer to subservice the Purchased Mortgage Loans, which consent may be withheld in Administrative Agent’s sole discretion. In no event shall Seller’s use of a Subservicer relieve Seller of its obligations hereunder, and Seller shall remain liable under this Agreement as if Seller were interim servicing such Purchased Mortgage Loans directly. Any termination of Seller as interim servicer shall automatically terminate each Subservicer. In the event that any Agency or Governmental Authority revokes or materially restricts any Subservicer’s authority to originate, sell or service Mortgage Loans, or any Subservicer shall fail to meet all requisite
originator, seller and servicer eligibility qualifications promulgated by any Agency, Administrative Agent may direct Seller to immediately terminate such Subservicer as a subservicer of any or all of the Purchased Mortgage Loans and Seller shall promptly cause the termination of such Subservicer as directed by Administrative Agent.
(iii)Seller acknowledges that it has no right, title or interest in the Servicing Rights for any Purchased Mortgage Loan, and agrees that Seller may not transfer or assign any rights to master service, service, interim service, subservice or administer any Purchased Mortgage Loan prior to Seller’s repurchase thereof from Buyers (by payment to Administrative Agent of the Repurchase Price on the applicable Repurchase Date) other than an interim servicing transfer to a Subservicer approved by Administrative Agent pursuant to a Subservicing Agreement approved by Administrative Agent as described above in this Section 13.
(iv)Seller shall deliver all physical and contractual servicing materials, files and records for the servicing of each Purchased Mortgage Loan, together with all of the related Servicing Records that are not already in Administrative Agent’s possession, to Administrative Agent’s designee upon the earliest of (w) the occurrence of a Default or Event of Default hereunder unless Administrative Agent gives written notice to Seller that the Interim Servicing Term is renewed and specifying the renewal term, (x) the termination of Seller as interim servicer by Administrative Agent pursuant to Section 13(a)(v), (y) the expiration (and non-renewal) of the Interim Servicing Term, or (z) the transfer of servicing to any entity approved by Administrative Agent and the assumption thereof by such entity. Seller’s transfer of the Servicing Records and the physical and such contractual servicing materials, files and records under this Section shall be in accordance with customary standards in the industry and such transfer shall include the transfer of the gross amount of all escrows held for the related mortgagors (without reduction for unreimbursed advances or “negative escrows”).
(v)Administrative Agent shall have the right to terminate a Seller as interim servicer of any of the Purchased Mortgage Loans, which right shall be exercisable at any time in Administrative Agent’s sole discretion, upon written notice to any Seller.
(vi)The Interim Servicing Term will be deemed renewed on each Remittance Date succeeding the related Purchase Date unless (i) a Seller has sooner been terminated as interim servicer of all of the Purchased Mortgaged Loans or (ii) an Event of Default has occurred on or before such Remittance Date, in which latter event the Interim Servicing Term for all Sellers will expire on such Remittance Date unless Administrative Agent gives written notice to a Seller that the Interim Servicing Term for such Seller is renewed and specifying the renewal term.
(vii)The Interim Servicing Term will automatically terminate and a Seller shall have no further obligation to interim service such Purchased Mortgage Loan as agent for Administrative Agent and Buyers or to make the delivery of documents required under this Section, upon receipt by Administrative Agent of the Repurchase Price therefor.
(viii)Administrative Agent and Buyers have no obligation to pay any Seller a fee for the interim servicing obligations a Seller agrees to assume hereunder, no fee or other compensation will ever accrue or be or become owing, due or payable for or on account of such interim servicing and such interim servicing rights have no monetary value.
(b)During the period a Seller is interim servicing any Purchased Mortgage Loans as agent for Administrative Agent and Buyers, Sellers agree that Buyers are the owners of the related Servicing Rights, Credit Files and Servicing Records and a Seller acting as interim servicer shall at all times maintain and safeguard, and cause any Subservicer to maintain and safeguard, the Credit File for the Purchased Mortgage Loan (including photocopies or images of the documents delivered to Administrative Agent), and accurate and complete records of its interim servicing of the Purchased Mortgage Loan; a Seller’s possession of the Credit Files and Servicing Records being for the sole purpose of interim servicing such Purchased Mortgage Loans and such retention and possession by such Seller being in a temporary custodial capacity only.
(c) | Each Seller (and all Sellers jointly and severally) further covenants as follows: |
(i)Administrative Agent may, at any time during Seller’s business hours on reasonable notice (provided that upon or during the occurrence of a Default or Event of Default, no such notice shall be required), examine and make copies of all such documents and records relating to interim servicing and administration of the Purchased Mortgage Loans;
(ii)At Administrative Agent’s request, Seller shall promptly deliver to Administrative Agent reports regarding the status of any Purchased Mortgage Loan being interim serviced by Seller, which reports shall include, but shall not be limited to, a description of any event that would cause the Purchased Mortgage Loan to become a Defaulted Loan or a Defective Mortgage Loan or any other circumstances that could cause a material adverse effect on such Purchased Mortgage Loan, Administrative Agent’s title (as agent and representative of Buyers) to such Purchased Mortgage Loan or the collateral securing such Purchased Mortgage Loan; Seller may be required to deliver such reports until the repurchase of the Purchased Mortgage Loan by Seller;
(iii)Seller shall immediately notify Administrative Agent if it becomes aware of any payment default that occurs under any Purchased Mortgage Loan sold hereunder by any Seller or any default under any Subservicing Agreement entered into by any Seller that would materially
and adversely affect any Purchased Mortgage Loan subject thereto; and
(iv)If, during the Post-Origination Period, any Mortgagor contacts Seller requesting a payoff quote on the related Purchased Mortgage Loan, Seller shall ensure that any payoff quote provided requires Mortgagor to wire payoff funds directly to the Funding Account and includes wiring instructions therefor.
(d)Each Seller shall release its custody of the contents of any Credit File and any Loan File only (i) in accordance with the written instructions of Administrative Agent, (ii) upon the consent of Administrative Agent when such release is required as incidental to such Seller’s
servicing of the Purchased Mortgage Loan, or is required to complete the Takeout Funding or comply with the Takeout Guidelines, or (iii) as required by any Requirements of Law.
(e)Administrative Agent reserves the right to appoint a successor interim servicer, or a regular servicer, at any time to service any Purchased Mortgage Loan (each a “Successor Servicer”) in its sole discretion. If Administrative Agent elects to make such an appointment after the occurrence of a Default or an Event of Default, Sellers shall jointly and severally be assessed all costs and expenses incurred by Administrative Agent and Buyers associated with transferring the physical and contractual servicing materials, files and records for the servicing of each Purchased Mortgage Loan, together with all related Servicing Records, to the Successor Servicer. In the event of such an appointment, all Sellers shall perform all acts and take all action so that any part of the Credit File and related Servicing Records held by any Seller, together with any and all mortgagors’ escrow payments held in any account and all other receipts relating to such Purchased Mortgage Loan, are promptly delivered to the Successor Servicer, and shall otherwise fully cooperate with Administrative Agent in effectuating such transfer. No Seller shall have any claim for lost interim servicing income, any termination fee, lost profits or other damages if Administrative Agent appoints a Successor Servicer hereunder. Administrative Agent may, in its sole discretion if an Event of Default shall have occurred and be continuing, without payment of any termination fee or any other amount to any Seller, sell any or all of the Purchased Mortgage Loans on a servicing released basis, at the sole cost and expense of Sellers.
(f)In the event a Seller is terminated as interim servicer of any Purchased Mortgage Loan, Sellers shall all cooperate with Administrative Agent in effecting such termination and transferring all authority to interim service such Purchased Mortgage Loan to the Successor Servicer. Without limiting the generality of the foregoing, each Seller shall, in the manner and at such times as the Successor Servicer or Administrative Agent shall reasonably request (i) promptly transfer all data in its possession relating to the applicable Purchased Mortgage Loans and other Mortgage Assets to the Successor Servicer in such electronic format as the Successor Servicer may reasonably request, (ii) promptly transfer to the Successor Servicer, Administrative Agent or Administrative Agent’s designee all other files, records, correspondence and documents relating to the applicable Purchased Mortgage Loans and other Mortgage Assets and (iii) fully cooperate and coordinate with the Successor Servicer and/or Administrative Agent to comply with any applicable so-called “goodbye” letter requirements, notices or other applicable requirements of the Real Estate Settlement Procedures Act or other applicable Requirements of Law applicable to the transfer of the servicing of the applicable Purchased Mortgage Loans. Each Seller agrees that if any Seller fails to cooperate with Administrative Agent or any Successor Servicer in effecting the termination of a Seller as servicer of any Purchased Mortgage Loan or the transfer of all authority to service such Purchased Mortgage Loan to such Successor Servicer in accordance with the terms hereof, Buyers and Administrative Agent will be irreparably harmed and entitled to injunctive relief and shall not be required to post bond.
(g)Notwithstanding anything to the contrary in any Transaction Document, each Seller, Buyers
and Administrative Agent agree that all Servicing Rights with respect to the Purchased Mortgage Loans are being transferred hereunder to Administrative Agent (as agent and representative of Buyers) on the applicable Purchase Date, the Purchase Price for the Purchased Mortgage Loans includes full and fair consideration for such Servicing Rights and such Servicing Rights shall be, and will be conclusively deemed to be transferred by Administrative Agent (as
agent and representative of Buyers) to a Seller upon Sellers’ payment of the Repurchase Price for such Purchased Mortgage Loans.
14. | Single Agreement |
Buyers, Administrative Agent and Sellers acknowledge that, and have entered into this Agreement and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder, together with the provisions of the Side Letter, constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, Administrative Agent, each Buyer and each Seller agrees (i) to perform all of its obligations in respect of each related Transaction hereunder and its obligations under the Side Letter, and that a default in the performance by any Seller of any such obligations shall constitute a default by all Sellers in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder or any obligations under the Side Letter and (iii) that payments, deliveries and other transfers made by any of them in respect of any Transaction or any agreement under the Side Letter shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder or any agreement under the Side Letter, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted.
15. | Notices and Other Communications |
Except as otherwise expressly provided herein, all such notices, statements, demands or other communications shall be in writing and shall be deemed to have been duly given and received
(i) if sent by facsimile, upon the sender’s receipt of confirmation of transmission of such facsimile from the sending facsimile machine or (ii) if by email, upon confirmation of receipt by the recipient (including by the recipient’s replying to the email or by the sender’s receiving a read receipt when the sender has chosen MS Outlook’s “request a read receipt” option for the email when sent), provided that for both clauses (i) and (ii), if such transmission-confirmed facsimile is sent or such read receipt is received outside of the recipient’s normal business hours, the faxed or emailed communication shall be deemed received at the opening of business on the next Business Day, or
(iii) if hand delivered, when delivery to the address below is made, as evidenced by a confirmation from the applicable courier service of delivery to such address, but without any need of evidence of receipt by the named individual required and (iv) if mailed by overnight courier, on the following Business Day, in each case addressed as follows:
if to UAMC LLC:
Universal American Mortgage Company, LLC 700 N.W. 107th Avenue
3rd Floor
Miami, Florida 33172 Attention: Luis Perez-Soto Telephone: 305-229-6529
Facsimile: 305-229-6657
Email: [email protected]
if to UAMC CA:
Universal American Mortgage Company of California 700 N.W. 107th Avenue
3rd Floor
Miami, Florida 33172 Attention: Luis Perez-Soto Telephone: 305-229-6529
Facsimile: 305-229-6657
Email: [email protected] if to Administrative Agent:
JPMorgan Chase Bank, N.A. 712 Main Street, 9th Floor Houston, Texas 77002 Attention: Daniela Aranguren Phone: (713) 216-0362
Fax: (713) 216-2818
email: [email protected]
with copies to:
Veronica J. Chapple
Chase Mortgage Warehouse Finance 3929 W. John Carpenter Fwy
Irving, Texas 75063
Phone: 214-492-4400
Fax: 972-870-3606
email: [email protected] and [email protected] and
Marjorie A. Hirsch
Vice President and Assistant General Counsel
Legal and Compliance Department
JPMorgan Chase Bank, N.A.
1111 Fannin, 10th Floor (Mail Code TX2-F069)
Houston, TX 77002
Telephone: 713-750-2305
Facsimile: 713-750-2346
Email: [email protected]
If to the other Buyers, at their addresses set forth on their signature pages to this Agreement (or, for Buyers who join after the Effective Date by joinder agreement, on their joinder agreements).
Any Party may revise any information relating to it by notice in writing to the other Parties given, in accordance with the provisions of this Section 15. Any provision hereof to the contrary
notwithstanding, any notice, demand or other communication provided by Administrative Agent to any Seller shall be deemed to be effective notice to all Sellers.
16. | Fees and Expenses; Indemnity |
(a)Sellers jointly and severally agree to promptly pay all out-of-pocket costs and expenses incurred by Administrative Agent, including, without limitation, reasonable attorneys’ fees, in connection with (i) preparation, negotiation, and documentation of this Agreement and the other Transaction Documents, (ii) administration of this Agreement and the other Transaction Documents and any amendment or waiver thereto and purchase and resale of Mortgage Loans by Administrative Agent hereunder, (iii) protection of the Purchased Mortgage Loans (including, without limitation, all costs of filing or recording any assignments, financing statements, amendments and other documents), and (iv) performance of due diligence, collateral audits and servicing appraisals by Administrative Agent or any agent of Administrative Agent conducted prior to and after the date hereof. Sellers will promptly pay all out-of-pocket costs and expenses incurred by Administrative Agent and Buyers, including reasonable attorneys’ fees, in connection with enforcement of Administrative Agent’s and Buyer’s rights hereunder and under any other Transaction Document (including, without limitation, reasonable and documented costs and expenses suffered or incurred by Administrative Agent and any Buyer in connection with any Act of Insolvency related to any Seller, appeals and any post-judgment collection services).
(b)In addition to its other rights hereunder, Sellers shall jointly and severally indemnify Buyers, Administrative Agent, their Affiliates and Subsidiaries and their respective directors, officers, attorneys, agents, advisors and employees (each, an “Indemnified Party” and collectively the “Indemnified Parties”) against, and hold each of them harmless from, any losses, liabilities, damages, claims, costs and expenses (including reasonable attorneys’ fees and disbursements) suffered or incurred by any Indemnified Party (“Losses”) relating to or arising out of this Agreement, any other Transaction Document or any other related document, or any transaction contemplated hereby or thereby or any use or proposed use of proceeds thereof and amendment or waiver thereof, or any breach of any covenant, representation or warranty contained in any of such documents, or arising out of, resulting from, or in any manner connected with, the purchase by Buyers and Administrative Agent of any Mortgage Loan or the servicing of any Purchased Mortgage Loans by any Seller or any Subservicer; provided that Sellers shall not be required to indemnify any Indemnified Party to the extent such Losses result from (i) the gross negligence or willful misconduct of such Indemnified Party, (ii) disputes among Indemnified Parties not arising from or related to a Default or Event of Default by any Seller, or (iii) a claim brought by a Seller against an Indemnified Party for a breach in bad faith by an Indemnified Party of its obligations under this Agreement or any other Transaction Document, provided that the claimant Seller has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction. The provisions of Section 16 shall survive the termination of this Agreement.
17. | Shipment to Approved Takeout Investor; Trust Release Letters |
(a)Shipping Instructions. If a Seller desires that Administrative Agent send a Mortgage Note and the related Mortgage to an Approved Takeout Investor, rather than to a Seller directly, in connection with Sellers’ repurchase of the related Purchased Mortgage Loan, then a
Seller shall prepare and send to Administrative Agent Shipping Instructions to instruct Administrative Agent when and how to send such Mortgage Note and related Mortgage to such Approved Takeout Investor. Administrative Agent shall use its best efforts to send each Mortgage Note and related Mortgage on or before the date specified for shipment in the Shipping Instructions in accordance with the cutoff times specified in the “Chase Mortgage Warehouse Finance Customer Reference Guide” provided by Administrative Agent to such Seller, or otherwise specified by Administrative Agent to any Seller in writing from time to time. If a Seller instructs Administrative Agent to send a Mortgage Note and related Mortgage before the Repurchase Date, Administrative Agent will send the Mortgage Note and related Mortgage under a Bailee Letter. If a Seller does not provide Administrative Agent with Shipping Instructions with
respect to a Mortgage Loan, Administrative Agent shall send the Mortgage Note and related Mortgage to a Seller at such time as Administrative Agent receives the Repurchase Price.
(b)Trust Release Letters. If a Seller believes that a Mortgage Note contains one or more aspects that are correctable and necessary to facilitate the purchase or enforceability of that Mortgage Note, then a Seller may deliver a Trust Release Letter to Administrative Agent to request the release of the Mortgage Note to a Seller for the purpose of making that correction. If Administrative Agent, in its sole discretion, deems the reason stated by a Seller in the Trust Release Letter to be sufficient to cause the Mortgage Note to be returned to a Seller for correction, then Administrative Agent will deliver the Mortgage Note to such Seller at its earliest convenience. The related Seller shall return the corrected Mortgage Note to Administrative Agent no later than the fifth (5th) Business Day after the date of the related Trust Release Letter. At all times any Mortgage Note is in the possession Sellers pursuant to a Trust Release Letter, Sellers shall hold such Mortgage Note in trust for the benefit of Administrative Agent. At no time shall the aggregate original Outstanding Principal Balance of all Mortgage Notes released to all Sellers pursuant to this Section 17(b) exceed $10,000,000.
18. | Further Assurances |
Each Seller shall (i) promptly provide such further assurances or agreements as Administrative Agent may request in good faith in order to effect the purposes of this Agreement and (ii) on or prior to the date hereof, mark its systems and/or other data processing records evidencing the Purchased Mortgage Loans with a legend or other identifier, acceptable to Administrative Agent, evidencing that Administrative Agent has acquired an interest therein as provided in this Agreement.
19. | Administrative Agent as Attorney-in-Fact |
Administrative Agent is hereby appointed the attorney-in-fact of each Seller for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments that Administrative Agent may, in good faith, deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Administrative Agent shall have the right and power to receive, endorse and collect all checks made payable to the order of a Seller representing any Income on any of the Purchased Mortgage Loans and to give full discharge for the same.
20. | Wire Instructions |
(a)Unless otherwise specified in this Agreement, any amounts to be transferred by Administrative Agent to Seller hereunder shall be sent by wire transfer in immediately available funds to an account specified to the Administrative Agent in writing by the Seller.
(b)Unless otherwise specified in this Agreement, any amounts to be transferred by a Seller to Administrative Agent hereunder shall be sent by wire transfer in immediately available funds to the account of Administrative Agent at:
Bank: JPMorgan Chase Bank, N.A. Acct. No.: 771065349
ABA No. 021000021
Reference: Chase Mortgage Warehouse Finance - Clearing Account
(c)Amounts received by Administrative Agent after 4:00 p.m., Houston, Texas time, on any Business Day shall be deemed to have been paid and received on the next succeeding Business Day.
21. | Entire Agreement; Severability |
This Agreement, as supplemented by the Side Letter, supersedes any existing agreements between the Parties containing terms and conditions for repurchase transactions. Each provision and agreement of this Agreement and the other Transaction Documents shall be treated as separate and independent from any other provision or agreement of this Agreement and the other Transaction Documents and shall be enforceable notwithstanding the unenforceability of any of such other provisions or agreements. Without limiting the generality of the foregoing, if any phrase or clause of any Transaction Document would render any provision or agreement of that (or any other) Transaction Document unenforceable, such phrase or clause shall be disregarded and deemed deleted, and such provision or agreement shall be enforced as fully as if the offending phrase or clause had never appeared.
22. | Assignments; Termination |
(a)The rights and obligations of Sellers under this Agreement and under any Transaction shall not be assigned by any Seller without the prior written consent of Administrative Agent and any such assignment without the prior written consent of Administrative Agent shall be null and void.
(b)Each Buyer may assign and participate its rights and obligations hereunder, in accordance with the Administration Agreement. Resales of Purchased Mortgage Loans by Buyers (subject to Sellers’ right to repurchase the Purchased Mortgage Loans before termination of this Agreement or Buyers’ liquidation of the Purchased Mortgage Loans pursuant to Section 12) in accordance with applicable law, shall be permitted without restriction. In addition to, and notwithstanding any provision to the contrary in this Agreement or any other Transaction Document, any Buyer may assign its rights to enforce this Agreement as to any Mortgage Loan following an Event of Default (in addition to the right to receipt of its ratable share of any Repurchase Price prior to an Event of Default) to any Person that subsequently purchases such
Mortgage Loan from such Buyer or provides financing to such Buyer with respect to such Mortgage Loan.
(c)Administrative Agent shall maintain, as agent for Buyers and Sellers, a register (the “Register”) on which it will record each Buyer’s rights hereunder, and each Assignment and Acceptance and participation. The Register shall include the names and addresses of Buyers (including all assignees, successors and participants) and the percentage or portion of such rights and obligations assigned. Failure to make any such recordation, or any error in such recordation shall not affect any Seller’s obligations in respect of such rights. If a Buyer sells a participation in its rights hereunder, it shall provide Administrative Agent the information described in this Section
22 and permit Administrative Agent to review such information as reasonably needed for Administrative Agent (as agent for the other Buyers) to comply with its obligations under this Repurchase Agreement or under any applicable Requirement of Law.
(d)Each Buyer may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 22, disclose to the assignee or participant or proposed assignee or participant, as the case may be, any information relating to any Seller or any of its Subsidiaries or to any aspect of the Transactions that has been furnished to such Buyer or Administrative Agent by or on behalf of any Seller or any of its Subsidiaries, provided that such assignee or participant agrees in writing to hold such information subject to the confidentiality provisions of this Agreement.
(e)In addition to the foregoing, each Buyer may, at any time in its sole discretion, pledge or grant a Lien in all or any portion of its rights under this Agreement (including, without limitation, any
rights to Mortgage Assets and any rights to payment of the Repurchase Price) to secure obligations to a Federal Reserve Bank, without notice to or consent of any Seller or any other Party; provided that no such pledge or grant of a security interest would release such Buyer from any of its obligations under this Agreement, or substitute any such pledgee or grantee for such Buyer as a party to this Agreement.
(f)Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the Parties and their respective successors and assigns.
(g)Notwithstanding any of the foregoing provisions of this Section 22, no Buyer shall be precluded from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Section 12.
(h)This Agreement and all Transactions outstanding hereunder shall terminate automatically without any requirement for notice on the date occurring on or after the Termination Date on which all Repurchase Prices and all other obligations of Sellers under the Transaction Documents have been paid in full. Any provision hereof to the contrary notwithstanding, any notice contemplated in the definition of Termination Date in Section 2 that is provided by a Seller shall be binding on all Sellers.
23. | Counterparts |
This Agreement may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.
24. | GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL |
(a)THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF (EXCEPT FOR SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
(b)EACH SELLER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH SELLER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN THIS SECTION 24 SHALL AFFECT THE RIGHT OF ADMINISTRATIVE AGENT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY SELLER OR ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS. EACH PARTY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO IT AT ITS ADDRESS FOR NOTICES HEREUNDER SPECIFIED IN SECTION 15.
(c)EACH SELLER, BUYER AND ADMINISTRATIVE AGENT (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN ANY OR ALL SELLERS AND ADMINISTRATIVE AGENT OR ANY BUYER ARISING OUT OF
OR IN ANY WAY RELATED TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO BUYERS AND ADMINISTRATIVE AGENT TO PROVIDE THE FACILITY EVIDENCED BY THIS AGREEMENT.
25. | No Waivers, Etc. |
No express or implied waiver of any Event of Default by Administrative Agent or any Buyer shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by Administrative Agent or any Buyer shall constitute a waiver of its right to exercise
any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any Party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by all of the Parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Section 4(a) hereof will not constitute a waiver of any right to do so at a later date.
26. | Use of Employee Plan Assets |
(a)If assets of an employee benefit plan subject to any provision of the ERISA are intended to be used by any Seller in a Transaction, a Seller shall so notify Administrative Agent prior to the Transaction. Such Seller shall represent in writing to Administrative Agent that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and Administrative Agent may proceed in reliance thereon but shall not be required so to proceed.
(b)Subject to the last sentence of Section 26(a) of this Section, any such Transaction shall proceed only if a Seller furnishes or has furnished or caused to be furnished to Administrative Agent and Buyers its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition.
(c)By entering into a Transaction pursuant to this Section 26, each Seller shall be deemed (i) to represent to Buyers and Administrative Agent that since the date of Seller’s latest such financial statements, there has been no material adverse change in Seller’s financial condition which Seller has not disclosed to Administrative Agent, and (ii) to agree to provide Buyers and Administrative Agent with future audited and unaudited statements of its financial condition as they are issued, so long as any such Transaction is outstanding.
27. | Intent |
(a)The Parties intend and acknowledge that each Transaction is a “repurchase agreement” as that term is defined in Section 101 of the Bankruptcy Code, and a “securities contract” as that term is defined in Section 741 of the Bankruptcy Code. Each Seller hereby agrees that it shall not challenge the characterization of this Agreement as a “repurchase agreement” as that term is defined in Section 101 of the Bankruptcy Code, or as a “securities contract” as that term is defined in Section 741 of the Bankruptcy Code in any dispute or proceeding.
(b)It is understood that the right of Buyers and Administrative Agent (as agent and representative of Buyers) to accelerate or terminate this Agreement or to liquidate Mortgage Loans delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Section 12 hereof, is a contractual right to accelerate, terminate or liquidate this Agreement or such Transaction as described in Sections 555 and 559 of the Bankruptcy Code.
(c)The Parties agree and acknowledge that if a Party hereto is an “insured depository institution,” as such term is defined in the FDIA, each Transaction hereunder is a “qualified financial contract,” as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).
(d)It is understood that this Agreement constitutes a “netting contract” as defined in and subject to Title IV of the FDICIA and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a “covered contractual payment entitlement” or “covered contractual payment obligation”, respectively, as defined in and subject to FDICIA (except insofar as any of the Parties is not a “financial institution” as that term is defined in FDICIA).
(e)It is understood and agreed that this Agreement constitutes a “master netting agreement” as that term is defined in Section 101 of the Bankruptcy Code, and that any Party’s right to cause the termination, liquidation, or acceleration of, or to offset net termination values, payment amounts or other transfer obligations arising under or in connection with, this Agreement or any Transaction is a contractual right to cause the termination, liquidation, or acceleration of, or to offset net termination values, payment amounts or other transfer obligations arising under or in connection with, this Agreement or any Transaction as described in Section 561 of the Bankruptcy Code.
28. | Disclosure Relating to Certain Federal Protections |
The Parties acknowledge that they have been advised that:
(a)in the case of Transactions in which one of the Parties is a broker or dealer registered with the Securities and Exchange Commission (“SEC”) under Section 15 of the Securities Exchange Act of 1934 (“1934 Act”), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 (“SIPA”) do not protect the other Parties with respect to any Transaction hereunder;
(b)in the case of Transactions in which one of the Parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other Parties with respect to any Transaction hereunder; and
(c)in the case of Transactions in which one of the Parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.
29. | Confidentiality |
(a)Confidential Terms. The Parties hereby acknowledge and agree that all written or computer-readable information provided by one Party to any other regarding the terms set forth in any of the Transaction Documents or the Transactions contemplated thereby (the “Confidential Terms”) shall be kept confidential and shall not be divulged to any Person (other than Affiliates and Subsidiaries thereof) without the prior written consent of such other Party except to the extent that (i) such Person is an Affiliate, division, or parent holding company of a Party or a director, officer, employee or agent (including an accountant, legal counsel and other advisor) of a Party or such Affiliate, division or parent holding company, (ii) in such Party’s opinion it is necessary to do so in working with legal counsel, auditors, taxing authorities or other governmental agencies or regulatory bodies or in order to comply with any applicable federal or state laws or regulations,
(iii) any of the Confidential Terms are in the public domain other than due to a breach of this covenant, (iv) in the event of a Default or an Event of Default Administrative Agent reasonably determines such information to be necessary or desirable to disclose in connection with the marketing and sales of the Purchased Mortgage Loans or otherwise to enforce or exercise Administrative Agent’s rights hereunder, (v) a Seller is required to disclose certain information pursuant to the terms an existing agreement with another provider of a mortgage loan repurchase facility to such Seller or (vi) to the extent Administrative Agent deems necessary or appropriate, in connection with an assignment or participation under Section 22 of this Agreement or in connection with any hedging transaction related to Purchased Mortgage Loans. Notwithstanding the foregoing or anything to the contrary contained herein or in any other Transaction Document, the Parties may disclose to any and all Persons, without limitation of any kind, the U.S. federal, state and local tax treatment of the Transactions, any fact that may be relevant to understanding the U.S. federal, state and local tax treatment of the Transactions, and all materials of any kind (including opinions or other tax analyses) relating to such U.S. federal, state and local tax treatment and that may be relevant to understanding such tax treatment; provided that no Seller may disclose (except as provided in clauses (i) and (ii) of this Section 29(a)) the name of or identifying information with respect to any Buyer or Administrative Agent, the Side Letter, any terms contained therein (including the Pricing Rate, Facility Fee, Purchase Price Percentage and Purchase Price) or other nonpublic business or financial information (including any sublimits and financial covenants) that is unrelated to the U.S. federal, state and local tax treatment of the Transactions and is not relevant to understanding the U.S. federal, state and local tax treatment of the Transactions, without the prior written consent of Administrative Agent. The provisions set forth in this Section 29 shall survive the termination of this Agreement for a period of one (1) year following such termination.
(b)Privacy of Sellers’ Customer Information. (i) Each Sellers’ Customer Information in the possession of Administrative Agent, other than information independently obtained by Administrative Agent and not derived in any manner from or using information obtained under or in connection with this Agreement, is and shall remain confidential and proprietary information of Sellers. Except in accordance with this Section 29(b), Administrative Agent and Buyers shall not use any Sellers’ Customer Information for any purpose, including the marketing of products or services to, or the solicitation of business from, Customers, or disclose any Sellers’ Customer Information to any Person, including any of Administrative Agent’s or Buyers employees, agents or contractors or any third party not affiliated with Administrative Agent or Buyers. Administrative Agent and Buyers may use or disclose Sellers’ Customer Information only to the extent necessary (i) for examination and audit of Administrative Agent’s or any Buyer’s activities, books and records by Administrative Agent’s or such Buyer’s regulatory authorities, (ii) to protect or exercise Administrative Agent’s rights and privileges or (iii) to carry out Administrative Agent’s or any Buyer’s express obligations under this Agreement and the other Transaction Documents (including providing the related Sellers’ Customer Information to Approved Takeout Investors), and for no other purpose; provided that Administrative Agent and any Buyer may also use and disclose Sellers’ Customer Information as expressly permitted by a Seller in writing, to the extent that such express permission is in accordance with the Privacy Requirements. Each Buyer and Administrative Agent shall take commercially reasonable steps to ensure that each Person to which such Buyer or Administrative Agent intends to disclose Sellers’ Customer Information, before any such disclosure of information, agrees to keep confidential any such Sellers’ Customer Information and to use or disclose such Sellers’ Customer Information only to the extent necessary to protect
or exercise Buyers’ and Administrative Agent’s rights and privileges, or to carry out such Buyer’s or Administrative Agent’s express obligations, under this Agreement and the other Transaction Documents (including providing the related Sellers’ Customer Information to Approved Takeout Investors). Administrative Agent agrees to maintain an information security program and to assess, manage and control
risks relating to the security and confidentiality of Sellers’ Customer Information pursuant to such program in the same manner as Administrative Agent does in respect of its own customers’ information, and shall implement the standards relating to such risks in the manner set forth in the Interagency Guidelines Establishing Standards for Safeguarding Company Customer Information set forth in 12 CFR Parts 30, 208, 211, 225, 263, 308, 364, 568 and 570. Without limiting the scope of the foregoing sentence, Administrative Agent shall use at least the same physical and other security measures to protect all of Sellers’ Customer Information in its possession or control as it uses for its own customers’ confidential and proprietary information.
30. | Multiple Sellers |
(a)Sellers. Each representation and warranty in the Transaction Documents by a Seller shall be deemed to be its separate representation and warranty and the joint and several representation and warranty of all Sellers. Each covenant and agreement by a Seller under the Transaction Documents is the joint and several covenant and agreement of all Sellers. Any notice or other communication provided to a Seller pursuant hereto shall be deemed to have been given each Seller and any failure to receive any notice or communication contemplated hereby shall not relieve a Seller from its joint and several liability for the obligations of each Seller hereunder.
(b)Basis for Structure. UAMC LLC and UAMC CA have each determined that they will specifically and materially benefit from all Transactions hereunder. They intend, and Administrative Agent and Buyers have required, that UAMC LLC and UAMC CA jointly and severally execute and deliver this Agreement and certain other Transaction Documents. Each Seller has requested and bargained for the structure and terms of, and security for, all Transactions.
(c)Joint and Several Obligation. Each Seller hereby irrevocably and unconditionally agrees (i) that it is jointly and severally liable to Administrative Agent and Buyers for full payment and performance of the obligations and liabilities of all Sellers, including all obligations of each of UAMC LLC and UAMC CA under the Transaction Documents and (ii) to fully pay and perform all such obligations and liabilities, including all indemnity obligations under the Transaction Documents. With respect to its obligations to repurchase Purchased Mortgage Loans, transfer cash and/or Additional Purchased Mortgage Loans to Buyers to eliminate any Margin Deficit, maintain the Required Amount in each Cash Pledge Account, maintain the Tax and Insurance Amount in the Collection Account, pay Taxes and Other Taxes, pay Price Differential, indemnify the Indemnified Parties and pay Administrative Agent’s fees, expenses and other obligations and liabilities of another Seller to Administrative Agent (for its account and the account of Buyers), each Seller agrees to the terms set forth in Schedule III. Each Seller further agrees that, notwithstanding any right of Administrative Agent or any Buyer to investigate fully the affairs of a Seller and notwithstanding any knowledge of facts determined or determinable by Administrative Agent and Buyers, Administrative Agent and Buyers have the right to rely fully on the representations, warranties, covenants and agreements of each Seller contained in the Agreement and upon the accuracy of any document, instrument, certificate or exhibit given or delivered hereunder.
(d)Contribution Rights. Each Seller intends that its joint and several obligations under the Transaction Documents, and the security interest granted by it in the Mortgage Assets pursuant to Section 6(a), are not subject to challenge or repudiation on any basis (other than the defense if, and on the basis that, such obligations have been paid to the extent that they have been paid). Therefore, as of the date any transfer - as that term is defined in Bankruptcy Code § 101(54) - is deemed to occur under the Transaction Documents, each Seller’s liabilities under the Transaction Documents and all of such Seller’s other liabilities, calculated in each case to the full extent of that Seller’s probable net exposure when and if those
liabilities become absolute and mature (“Dated Liabilities”), are intended by that Seller to be less than the fair valuation of all of its assets as of that date (“Dated Assets”). To that end, each Seller hereby (i) grants to each other Seller, and recognizes each other Seller as having, ratable rights of subrogation and contribution in the amount, if any, by which the granting Seller’s Dated Assets (but for the total subrogation and contribution in its favor under this paragraph) would exceed the granting Seller’s Dated Liabilities, and (ii) acknowledges receipt of and recognizes its ratable rights to subrogation and contribution from such other Seller in the amount that such other Seller’s Dated Assets (but for the total subrogation and contribution in its favor under this paragraph) would exceed such other Seller’s Dated Liabilities. It is a material objective of this Section 30 that each Seller recognizes rights to subrogation and contribution rather than be deemed not to be solvent by reason of an interpretation of its joint and several obligations under the Transaction Documents.
31. | Contribution with Respect to Seller Obligations |
(a)To the extent that any Seller shall make a payment under this Agreement or any other Transaction Document (a “Seller Payment”) which, taking into account all other Seller Payments then previously or concurrently made by any other Seller, exceeds the amount which otherwise would have been paid by or attributable to such Seller if each Seller had paid the aggregate obligations of Sellers hereunder and under the other Transaction Documents (collectively, the “Seller Obligations”) satisfied by such Seller Payment in the same proportion as such Seller’s “Allocable Amount” (as defined below) (as determined immediately prior to such Seller Payment) bore to the aggregate Allocable Amounts of each of Sellers as determined immediately prior to the making of such Seller Payment, then, following payment in full in cash of Seller Payment and Seller Obligations, such Seller shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Seller for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Seller Payment.
(b)As of any date of determination, the “Allocable Amount” of any Seller shall be equal to the maximum amount of the claim which could then be recovered from such Seller under this Agreement and the other Transaction Documents without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law.
(c)This Section 31 is intended only to define the relative rights of Sellers, and nothing set forth in this Section 31 is intended to or shall impair the obligations of Sellers, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement and the other Transaction Documents. The Parties acknowledge
that the rights of contribution and indemnification hereunder shall constitute assets of Seller or Sellers to which such contribution and indemnification is owing. The rights of the indemnifying Sellers against other Sellers under this Section 31 shall be exercisable upon the full and indefeasible payment of Seller Obligations in cash.
32. | Setoff |
Except to the extent specifically permitted herein, each Seller hereby irrevocably and unconditionally waives all right to setoff that it may have under contract (including this Agreement), applicable law, in equity or otherwise with respect to any funds or monies of Administrative Agent or any Buyer (or any other disclosed principal for which Administrative Agent is acting as agent) at any time held by or in the possession of a Seller.
Each Seller agrees that Administrative Agent and any Buyer may set off any funds or monies of
any Seller at any time held by or in the possession of Administrative Agent or such Buyer, whether in connection with this Agreement, any other Transaction Document or otherwise, against any amounts Sellers owe to Administrative Agent, any such Buyer or any other Indemnified Party, whether pursuant to the terms of this Agreement or any other Transaction Document or otherwise.
33. | WAIVER OF SPECIAL DAMAGES |
EACH SELLER WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT SUCH SELLER MAY HAVE TO CLAIM OR RECOVER FROM BUYERS OR ADMINISTRATIVE AGENT IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.
34. | USA PATRIOT ACT NOTIFICATION |
The following notification is provided to each Seller pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW
ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for each Seller: When Seller opens an account, if Seller is an individual, Administrative Agent will ask for Seller’s name, taxpayer identification number, residential address, date of birth, and other information that will allow Administrative Agent to identify Seller, and if Seller is not an individual, Administrative Agent will ask for Seller’s name, taxpayer identification number, business address, and other information that will allow Administrative Agent to identify Seller. Administrative Agent may also ask, if Seller is an individual, to see Seller’s driver’s license or other identifying documents, and if Seller is not an individual to see Seller’s legal organizational documents or other identifying documents.
35. | Amendment and Restatement of Prior Chase-only MRA |
(a)This Agreement amends and restates in its entirety the Prior Chase-only MRA effective as of the date hereof, subject to the satisfaction of the conditions precedent set forth in Section 7(a). This Agreement shall have the effect of a substitution of terms of the Prior Chase- only MRA, but this Agreement will not have the effect of causing a novation or repayment of the obligations under the Prior Chase-only MRA or a termination or extinguishment of the Liens granted under the Prior Chase-only MRA, but instead such obligations shall remain outstanding and repayable pursuant to the terms of this Agreement and such Liens shall remain attached, enforceable and perfected securing such obligations and all additional payment and performance obligations of Sellers arising under this Agreement and the other Transaction Documents. Upon this Agreement becoming effective, all agreements, documents and instruments executed in connection with the Prior Chase-only MRA shall be terminated; provided that the UCC financing statements filed in respect of the Liens granted to Chase under the Prior Chase-only MRA and any rights of Chase under any provision of any such agreement, document or instrument that by its terms is stated to survive termination shall continue in effect.
(b)The payment by Administrative Agent (with Buyers’ funds) to Chase of the Purchase Price for the initial Transaction under this Agreement shall be applied by Chase to pay
$48,444,591.37, the sum of the outstanding Purchase Prices of the Mortgage Loans purchased by Chase and subject to Transactions under (as those capitalized terms are defined in) the Prior Chase- only MRA
at the time of such payment. When Chase receives such payment from Administrative Agent and payment from Seller of all other amounts then owing to Chase under the Prior Chase- only MRA, the Mortgage Loans then subject to outstanding Transactions under the Prior Chase- only MRA and the Liens securing them shall be conclusively deemed to have been simultaneously transferred and assigned by Chase to Administrative Agent, as agent and representative of Buyers. Sellers’ failure to pay in full to Chase all amounts owing to Chase under the Prior Chase-only MRA, other than the Purchase Prices of such Mortgage Loans, at or before the time of Administrative Agent’s said payment to Chase of the outstanding Purchase Prices of such Mortgage Loans shall be an immediate Event of Default under this Agreement.
(c)Sellers authorize Administrative Agent to amend and continue the UCC financing statements filed in connection with the Prior Chase-only MRA from time to time in any manner deemed desirable or necessary by Administrative Agent, in its sole discretion, to reflect that the Liens described therein are now held by Administrative Agent as agent and representative of the Buyers and to maintain the perfection and priority of such Liens granted under the Prior Chase- only MRA.
36. | Change in Management |
If a Change in Management occurs, then at any time before the thirtieth (30th) day after Administrative Agent receives written notice of such Change in Management from a Seller, Administrative Agent may notify the Sellers in writing that it objects to such Change in Management (an “Objection Notice”). If the Change in Management is not resolved to the reasonable satisfaction of Administrative Agent within ninety (90) days after the date of such Objection Notice, then Administrative Agent shall have the right to terminate this Agreement on or after the ninetieth (90) day following such Objection Notice.
[Remainder of page intentionally blank.]
JPMORGAN CHASE BANK, N.A., as
Administrative Agent and as a Buyer
By: /s/ Carolyn W. Johnson |
Carolyn W. Johnson
Senior Vice President
COMERICA BANK
(a Buyer)
By:/s/ Daniel Voigt |
Daniel Voigt,
Assistant Vice President
Address for Notices:
Comerica Bank Comerica Bank Tower
1717 Main St., Mail Code 6577
Dallas, Texas 75201 Attention: Daniel Voigt phone: (214) 462-4277
fax: (214) 462-4280
email: [email protected]
UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
List of Exhibits and Schedules
Exhibit A Form of Confirmation
Exhibit B Mortgage Loan Representations and Warranties
Exhibit C Form of Compliance Certificate
Exhibit D Form of Shipping Instructions
Exhibit E Conditions Precedent Documents
Exhibit F Required Opinions of Counsel
Exhibit G Subsidiary Information
Exhibit H Form of Subservicer Letter
Exhibit I Fields for Daily Data Tape
Exhibit J Form of Bailee Letter
Exhibit K Seller Names from Tax Returns
Exhibit L Form of Trust Release Letter
Schedule I Approved Takeout Investors
Schedule II Sellers’ Authorized Signers
Schedule III Terms of each Seller’s Obligations to pay transactions by another of them Schedule IV Jumbo Loan Eligibility Criteria
EXHIBIT A
FORM OF CONFIRMATION CONFIRMATION
TO: | [NAME OF SELLER] |
FROM: | JPMorgan Chase Bank, N.A. |
RE: | Confirmation under Master Repurchase Agreement (the “Agreement”) among [Name of Seller], JPMorgan Chase Bank, N.A., as Administrative Agent for the Buyers and the Buyers party thereto |
JPMorgan Chase Bank, N.A. (“Administrative Agent”) is pleased to confirm your sale and its purchase of the Mortgage Loans described below and listed on the attached Loan Purchase Detail pursuant to the Agreement under the following terms and conditions:
ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: | As set forth on attached Loan Purchase Detail |
CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: | As set forth on attached Loan Purchase Detail |
PURCHASE DATE: | The date specified as the Purchase Date in the request related to this Confirmation |
REPURCHASE DATE: | 45 days after the Purchase Date (30 days after the Purchase Date if a Jumbo Loan) or such other date as required by, or otherwise determined in accordance with, the Agreement |
PURCHASE PRICE: | The Purchase Price is specified in the Side Letter for the applicable Mortgage Loan type |
PRICING RATE: | The applicable per annum percentage rate set forth in the Side Letter for the applicable Mortgage Loan type |
PRICE DIFFERENTIAL (TO BE PAID ON EACH APPLICABLE REMITTANCE DATE): | For each month (or portion thereof) during which the Transaction is outstanding, the sum of the following amount for each day during that month |
(or portion thereof): the weighted average of the applicable Pricing Rates for such day multiplied by the Aggregate Purchase Price on such day divided by 360. The Price Differential for the Transaction shall accrue during the period commencing on (and including) the day on which the Purchase Price is transferred into the Funding Account (or otherwise paid to Seller) for the Transaction and ending on (but excluding) the date on which the Repurchase Price is paid.
The Agreement is incorporated by reference into this Confirmation and made a part hereof as if it were fully set forth herein. All capitalized terms used herein but not otherwise defined shall have the
meanings specified in the Agreement.
EXHIBIT B
MORTGAGE LOAN REPRESENTATIONS AND WARRANTIES
With respect to each Mortgage Loan sold under this Agreement, (i) as of the Purchase Date for the purchase of any Purchased Mortgage Loans by Administrative Agent (as agent and representative of Buyers) from any Seller and as of the date of this Agreement and any related Transaction hereunder, and (ii) at all times while the Transaction Documents or any Transaction hereunder is in force and effect, each Seller represents and warrants to Buyers and Administrative Agent that each of the statements set forth in the lettered paragraphs of this Exhibit B is true and correct. For purposes of this Exhibit B and the representations and warranties set forth herein, a breach of a representation or warranty shall be deemed to have been cured with respect to a Mortgage Loan if and when a Seller has taken or caused to be taken action such that the event, circumstance or condition that gave rise to such breach no longer adversely affects such Mortgage Loan. With respect to those representations and warranties which are made to the best of Seller’s knowledge, if it is discovered by Administrative Agent or any Seller that the substance of such representation and warranty is inaccurate, notwithstanding any Seller’s lack of knowledge with respect to the substance of such representation and warranty, such inaccuracy shall be deemed a breach of the applicable representation and warranty.
(a)Mortgage Loans as Described. The information set forth in the related Loan Purchase Detail is complete, true and correct.
a. | Valid First Lien. The Mortgage is properly recorded and is a valid, existing and enforceable first Lien with respect to each Mortgage Loan which is indicated by Seller to be a first Lien on the Mortgaged Property, including all improvements on the Mortgaged Property, free and clear of all adverse claims, and Liens having priority over the Lien of the Mortgage, subject only to (i) the Lien of current real property taxes and assessments not yet due and payable, (ii) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the lender’s title insurance policy delivered to Seller and which do not adversely affect the purchase by, or the purchase price to be paid by, the Approved Takeout Investor, and (iii) other matters to which like properties are commonly subject which do not individually or in the aggregate materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, existing and enforceable first lien and first priority security interest securing the related Mortgage Loan on the property described therein and Seller has full right to sell and assign the related Mortgage Assets to Administrative Agent (as agent and representative of Buyers). | |
b. | Validity of Mortgage Documents. With respect to each Mortgage Loan, Seller or its designee has in its possession all Servicing Files, or any miscellaneous items | |
Exhibit B-1
(except for those Servicing Files disclosed to Administrative Agent by Seller, to the best of Seller’s knowledge, as outstanding). The Mortgage Note and the related Mortgage are
original and genuine and each is the legal, valid and binding obligation of the Mortgagor thereof, enforceable in all respects in accordance with its terms except as enforceability may be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium, reorganization or other similar laws affecting the enforcement of the rights of creditors and (ii) general principles of equity, whether enforcement is sought in a proceeding in equity or at law, and Seller has taken all action necessary to transfer such rights of enforceability to Administrative Agent (as agent and representative of Buyers). Neither the operation of any of the terms of any Mortgage or Mortgage Note, nor the exercise by any holder of any right thereunder, will render the Mortgage or Mortgage Note unenforceable, in whole or in part, or subject to any right of rescission, setoff, counterclaim or defense, and no such right of rescission, setoff, counterclaim or defense has been asserted with respect thereto. To the best of Seller’s knowledge, all parties to the Mortgage Note and the Mortgage had the legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties. All items required to be delivered pursuant to this Agreement shall be delivered to Administrative Agent (as agent and representative of Buyers), within the time frames set forth in this Agreement, and if a document is delivered in imaged format, such images must be of sufficient quality to be readable and able to be copied. There is only one original executed Mortgage Note with respect to such Mortgage Loan.
a. | Customary Provisions. The Mortgage and related Mortgage Note contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including (i) in the case of a Mortgage designated as a deed of trust, by trustee’s sale, and (ii) otherwise by judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee’s sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage Loan will be able to deliver good and merchantable title to the Mortgaged Property. There is no homestead or other exemption or right available to the Mortgagor or any other person which would interfere with the right to sell the Mortgaged Property at a trustee’s sale or the right to foreclose the Mortgage. The Mortgage Note and Mortgage are on forms that are conforming to Agency Guidelines and the Takeout Guidelines, as applicable. |
b. | Original Terms Unmodified. The terms of the Mortgage Note and the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments which (a) have been recorded in the applicable public recording office if required by law or if necessary to maintain the lien priority of the Mortgage, and (b) which have been delivered to Administrative Agent (as agent and representative of Buyers); the substance of any such waiver, alteration or modification has been approved by the insurer under the private mortgage insurance policy, if any, and by the title insurer, to the extent required by the related policy |
provided by Seller and is reflected appropriately on any and all documentation or data and is true and accurate in all respects. No other instrument of waiver, alteration or modification has been executed, and no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the insurer under the private mortgage insurance policy, if any, and by the title insurer, to the extent required by the policy, and which assumption agreement is a part of the loan file. As of the Purchase Date, the full original principal amount of each Mortgage Loan has been fully disbursed as provided for in the Mortgage Loan Documents, and there is no requirement for any future advances.
c. | No Defenses. To the best of Seller’s knowledge, the Mortgage Note and the Mortgage are not subject to any right of rescission, set off, counterclaim or defense, including, without limitation, the defense of usury, nor will the operation of any of the terms of the Mortgage Note and the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set off, counterclaim or defense, including, without limitation, the defense of usury, and no such right of rescission, set off, counterclaim or defense has been asserted with respect thereto; and neither the Mortgagor nor the Mortgaged Property is as of the Purchase Date or was as of the Origination Date, subject to an Act of Insolvency. |
d. | No Outstanding Charges. To the best of Seller’s knowledge, there are no defaults by Seller or any Subservicer in complying with the terms of the Mortgage, and (1) all taxes, ground rents, special assessments, governmental assessments, insurance premiums, leasehold payments, water, sewer and municipal charges which previously became due and owing have been paid, or escrow funds have been established in an amount sufficient to pay for every such escrowed item which remains unpaid and which has been assessed but is not yet due and payable prior to any “economic loss” dates or discount dates (or if payments were made after any “economic loss” date or discount date, then Seller has paid any penalty or reimbursed any discount out of Seller’s funds) and (2) all flood and hazard insurance premiums and private mortgage insurance premiums which are due, have been paid without loss or penalty to the Mortgagor. To the best of Seller’s knowledge, as of the Purchase Date, no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration under a Mortgage Loan has occurred, including but not limited to a violation of applicable law, local ordinances or city codes resulting from a deterioration or defect existing in any Mortgaged Property, and neither Seller nor its predecessors have waived any default, breach, violation or event of acceleration. Seller has received no notice of, and has no knowledge of, any event, including but not limited to the bankruptcy filing or death of a Mortgagor, which may or could give rise to a Mortgagor default under the Mortgage Note or Mortgage. None of Seller or any Subservicer has advanced funds, or induced, solicited or knowingly received any advance from any Person other than the Mortgagor, directly or indirectly, for the payment of any amount due under the Mortgage Loan, unless otherwise permitted in the Takeout Guidelines. |
e. | No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the Lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, cancellation, subordination, rescission or release. Neither Seller nor any Subservicer has waived the performance by the Mortgagor of any action, if the Mortgagor’s failure to perform such action would cause the Mortgage Loan to be in default, and neither Seller nor any Subservicer has waived any default. |
f. | No Default. There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event permitting acceleration, and neither Seller nor any Subservicer has waived any default, breach, violation or event permitting acceleration. With respect to each Mortgage Loan (i) the first Lien securing the Mortgage Loan is in full force and effect, (ii) |
there is no default, breach, violation or event of acceleration existing under such first Lien Mortgage or the related Mortgage Note, and (iii) no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration thereunder.
g. | Full Disbursement of Proceeds. The Mortgage Loan has been closed and the proceeds of the Mortgage Loan have been fully disbursed to or for the account of the Mortgagor and there is no obligation for the mortgagee to advance additional funds thereunder and any and all requirements as to completion of any on site or off site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees, and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage have been paid, and the Mortgagor is not entitled to any refund of any amounts paid or due to the mortgagee pursuant to the Mortgage Note or Mortgage with exception to escrow holdbacks. |
h. | No Mechanics’ Liens. There are no mechanics’ or similar Liens or claims filed for work, labor or material (and no rights are outstanding that under law could give rise to such lien) affecting the related Mortgaged Property which are or may be Liens prior to, or equal or coordinate with, the lien of the related Mortgage. |
i. | No Additional Collateral. The Mortgage Note is not and has not been secured by any collateral except the Lien of the corresponding Mortgage on the Mortgaged Property and the security interest of any applicable security agreement. |
j. | Origination; Payment Terms. The Mortgage Loan was originated by Seller, which is a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or other similar institution which is supervised and examined by a federal or state authority or duly licensed by state licensing authority, if applicable. Seller and all other parties which have had any interest in the Mortgage Loan, whether as |
Exhibit B-4
mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2) organized under the laws of such state, or (3) qualified to do business in such state, or (4) federal savings and loan associations or national banks having principal offices in such state, or (5) not doing business in such state. Other than with respect to interest-only Mortgage Loans, Principal payments on the Mortgage Loan commenced or will commence no more than sixty (60) days after the proceeds of the Mortgage Loan were disbursed. The Mortgage Loan requires interest payable in arrears on the first day of the month. Each Mortgage Note requires a monthly payment which is sufficient (i) during the period prior to the first adjustment to the Mortgage interest rate, to amortize the original principal balance fully over the original term thereof (unless otherwise provided in the Takeout Guidelines) and to pay interest at the related Mortgage interest rate, and
(ii) during the period following each interest rate adjustment date in the case of each adjustable rate Mortgage Loan, to amortize the outstanding principal balance fully as of the first day of such period over the then remaining term of such Mortgage Note and to pay
interest at the related Mortgage interest rate. The Mortgage Note does not permit negative amortization. Interest on the Mortgage Note is calculated on the basis of a 360 day year consisting of twelve 30 day months. The Mortgage Loan is not a simple interest Mortgage Loan (meaning a Mortgage Loan on which interest is calculated daily). The Mortgage Loan does not require a balloon payment upon the maturity thereof. The Mortgage Note does not by its terms provide for the capitalization or forbearance of interest.
k. | Ownership. Immediately before Buyer’s payment of the Purchase Price, Seller was the sole owner and holder of the Mortgage Loan and the indebtedness evidenced by the Mortgage Note. The Mortgage Loan, including the Mortgage Note and the Mortgage, were not assigned or pledged by Seller and Seller had good and marketable title thereto, and Seller had full right to transfer and sell the Mortgage Loan to Buyer free and clear of any Lien, participation interest, equity, pledge or claim and had full right and authority subject to no interest or participation in, or agreement with any other Person to sell or otherwise transfer the Mortgage Loan. Following the sale of the Mortgage Loan, Buyer will own such Mortgage Loan and the other Mortgage Assets free and clear of any Lien and shall have a valid and perfected first priority security interest in such Mortgage Loan and the other Mortgage Assets then existing and thereafter arising in each case free and clear of any Lien. After the related Purchase Date, Seller will not have any right to modify or alter the terms of the sale of the Mortgage Loan and Seller will not have any obligation or right to repurchase the Mortgage Loan, except as provided in this Agreement or as otherwise agreed to by Seller and Buyer. Seller has full right to sell, assign and transfer the Mortgage Loan without the consent of the related Mortgagor or any other Person. |
l. | Transfer of Mortgage Loan. The Mortgage Loan is a MERS Designated Mortgage Loan. The original Mortgage was recorded in the appropriate jurisdictions wherein such recordation is necessary to perfect the Lien thereof as against creditors of |
Exhibit B-5
Seller, or is in the process of being recorded. Seller has designated Administrative Agent (as agent and representative of Buyers) as the “Interim Funder” on the MERS® System with respect to such Mortgage Loan and unless otherwise authorized by Administrative Agent, no Person is listed as interim funder on the MERS® System with respect to such Mortgage Loan.
m. | Hazard Insurance. All buildings or other customarily insured improvements upon the Mortgaged Property are insured by an insurer generally acceptable under the Takeout Guidelines and to prudent mortgage lending institutions against loss by fire, hazards of extended coverage and such other hazards as are required in the Takeout Guidelines pursuant to an insurance policy conforming to the requirements of Takeout Guidelines and providing coverage in an amount equal to the lesser of |
(i)the full insurable value of the Mortgaged Property or (ii) the outstanding principal balance owing on the Mortgage Loan. All such insurance policies are in full force and effect and contain a standard mortgagee clause naming the originator of the Mortgage Loan, its successors and assigns as mortgagee and all premiums thereon have been paid. If the Mortgaged Property is in an area identified on a flood hazard map or flood insurance rate map issued by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available), a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration is in effect which policy conforms to the requirements of the Takeout Guidelines. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance at the Mortgagor’s cost and expense, and on the Mortgagor’s failure to do so, authorizes the holder of the Mortgage to maintain such insurance at the Mortgagor’s cost and expense and to seek reimbursement therefor from the Mortgagor. Where required by state law or regulation, the Mortgagor has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a “master” or “blanket” hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer, is in full force and effect, and will be in full force and effect and inure to the benefit of Administrative Agent (as agent and representative of Buyers) upon the consummation of the transactions contemplated by this Agreement. Seller has not engaged in, and has no knowledge of the Mortgagor, any Subservicer or any prior servicer having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either, including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other person or entity, and no such unlawful items have been received, retained or realized by Seller.
n. | Title Insurance. The Mortgage Loan is covered by an ALTA, CLTA or TLTA lender’s title insurance policy, acceptable to Fannie Mae or Freddie Mac, or state law, issued by a title insurer acceptable to Fannie Mae or Freddie Mac, or state law and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring in (h)(iv)) Seller, its successors and assigns as to the first priority |
Exhibit B-6
lien of the Mortgage in the original principal amount of the Mortgage Loan and, if such Mortgage Loan is an adjustable rate Mortgage Loan, against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage providing for adjustment in the Mortgage interest rate or monthly payment. Where required by state law or regulation, the Mortgagor has been given the opportunity to choose the carrier of the required mortgage title insurance. Additionally, such lender’s title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. The title policy does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading. Seller and its successors and assigns are the sole insureds of such lender’s title insurance policy, and such lender’s title insurance policy is in full force and effect and will be in full force and effect upon the consummation of the transactions contemplated by this Agreement and will inure to the benefit of Administrative Agent (as agent and representative of Buyers) and its assigns without any further act. No claims have been made under such lender’s title insurance policy, and Seller has not done, by act or omission, anything which would impair the coverage of such lender’s title insurance policy.
o. | Closing Protection Letter and Escrow Letter. There is, with respect to such Mortgage Loan, a valid and enforceable Closing Protection Letter and escrow letter duly executed by the Settlement Agent. |
p. | Private Mortgage Insurance Policy. In the event that a private mortgage insurance policy is required by Administrative Agent, the Mortgage Loan has a valid and transferable private mortgage insurance policy. Unless the private mortgage insurance policy for a Mortgage Loan was cancelled at the request of the Mortgagor or automatically terminated, in either case in accordance with applicable law, all premiums have been paid and all provisions of such private mortgage insurance policy have been and are being complied with. With respect to a purchase money Mortgage Loan, both the original appraised value and the purchase price are accurately depicted as such on Seller’s (or, as applicable, Subservicer’s) servicing system. Where a Mortgage Loan was closed as a streamlined refinance and a new appraisal was not required, the prior appraised value that was relied on in making the credit decision for the Mortgage Loan is accurately depicted on Seller’s (or, as applicable, Subservicer’s) servicing system. Seller has not funded the private mortgage insurance policy premium, if any, with respect to such Mortgage Loan. The Mortgage interest rate for the Mortgage Loan is net of any such insurance premium. |
q. | Optional Insurance. No single payment credit life insurance or other optional insurance product that has been considered “predatory” by Fannie Mae or Freddie Mac has been obtained in connection with such Mortgage Loan. If such Mortgage Loan involved any type of optional insurance, such insurance was properly serviced including, without limitation, by use of the proper application and collection of premiums, the maintenance of complete and accurate records, |
processing and payment of claims and the handling of correspondence. The Mortgage Loan does not involve an optional insurance product that was or is being provided free of charge to the Mortgagor.
r. | Insurance. All required insurance policies, of whatever type, remain in full force and effect. Seller has not engaged in, and has no knowledge of the Mortgagors having engaged in, any act or omission which would impair the coverage validity or binding effect of any such policies. No action, inaction, or event has occurred and no state of facts exists or has existed that has resulted or will result in the exclusion from, denial of, or defense to coverage under any applicable special hazard insurance policy, private mortgage insurance policy or bankruptcy bond, irrespective of the cause of such failure of coverage. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by Seller or any Subservicer or any designee of Seller or any Subservicer or any corporation in which Seller, any Subservicer or any officer, director, or employee of Seller or any Subservicer had a financial interest at the time of placement of such insurance. |
s. | Mortgaged Property Undamaged; No Condemnation Proceedings. To the best of Seller’s knowledge, as of the related Purchase Date, there are no uninsured casualty losses or casualty losses where coinsurance has been, or Seller has reason to believe will be, claimed by the insurance company or where the loss, exclusive of contents, is, or will be, greater than the recovery (less actual costs and expenses incurred in connection with such recovery) from the insurance carrier. No casualty insurance proceeds have been used to reduce Mortgage Loan balances or for any other purpose except to make repairs to the Mortgaged Property, except as allowed pursuant to applicable law and the Mortgage Loan documents. All damage with respect to which casualty insurance proceeds have been received by or through Seller has been properly repaired or is in the process of being repaired using such proceeds. To the best of Seller’s knowledge, there is no damage to the Mortgaged Property from waste, |
fire, windstorm, flood, tornado, earthquake or earth movement, hazardous or toxic substances, other casualty, or any other property related circumstances or conditions that would adversely affect the value or marketability of any Mortgage Loan or Mortgaged Property, and adequate insurance is in place to cover all such events. There is no proceeding pending or, to the best of Seller’s knowledge, threatened for the partial or total condemnation of the Mortgaged Property that would adversely affect the Mortgage Loan.
t. | Location of Improvements; No Encroachments. All improvements subject to the Mortgage which were considered in determining the appraised value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property (and wholly within the project with respect to a condominium unit) and no improvements on adjoining properties encroach upon the Mortgaged Property except those which are insured against by the title insurance policy referred to in (p) above and all improvements on the Mortgaged Property comply with all applicable zoning and subdivision laws and ordinances. |
u. | Appraisal. The loan file contains an appraisal or an underwriting property valuation using an automated valuation model of the related Mortgaged Property, or an Appraised Value Alternative, in each case, in a form acceptable to the applicable Agency, Administrative Agent and CL and consistent with the Takeout Guidelines, and in the case of an appraisal, made and signed, prior to the approval of the Mortgage Loan application, by a qualified appraiser, duly appointed by Seller, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, whose compensation is not affected by the approval or disapproval of the Mortgage Loan and who met the minimum qualifications of the applicable Agency. Each appraisal of the Mortgage Loan was made in accordance with the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated thereunder, all as in effect on the Date of Origination of the Mortgage Loan; |
v. | Construction Defects. Any home or other improvement included within the Mortgaged Property was constructed in a workmanlike manner, and was accepted by the original homeowner or Mortgagor in good and habitable condition and working order, and conforms with all warranties, express or implied, representations, legal obligations, and local, state and federal requirements and codes concerning the condition, construction, and placement of the home or improvement. |
w. | Occupancy of the Mortgaged Property. The Mortgaged Property is lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the appropriate authorities and no improvement located on or part of the Mortgaged Property is in violation of any zoning law or regulation. |
x. | Type of Mortgaged Property. The Mortgaged Property is located in the United States and consists of a single parcel of real property with a detached single family residence erected thereon, or a two to four family dwelling, or an individual condominium unit, or an individual unit in a planned unit development, or a Cooperative Unit in a Cooperative Project; provided, however, that any condominium project or planned unit development generally conforms to the Takeout Guidelines regarding such dwellings. As of the date of origination, no portion of the Mortgaged Property was used for commercial purposes, and since the date of origination, no portion of the Mortgaged Property has been used for commercial purposes; |
provided, that Mortgaged Properties which contain a home office shall not be considered as being used for commercial purposes as long as the Mortgaged Property has not been altered for commercial purposes and is not storing any chemicals or raw materials other than those commonly used for homeowner repair, maintenance and/or household purposes. If the Mortgaged Property is a condominium unit or a planned unit development (other than a de minimis planned unit development) such condominium or planned unit development project is acceptable to Administrative Agent. The Mortgaged Property is not a
Manufactured Home or a mobile home unless it secures a Manufactured Home Loan.
aa. Environmental Matters. There is no pending action or proceeding directly involving any Mortgaged Property of which Seller is aware in which compliance with any environmental law, rule or regulation is an issue and nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to use and enjoyment of said property. The Mortgaged Property is free from any and all toxic or hazardous substances and there exists no violation of any local, state or federal environmental law, rule or regulation.
bb. Flood Certification Contract. If the Mortgaged Property relating to such Mortgage Loan is in an area designated as a flood area by the Federal Emergency Management Agency, a flood insurance policy complying with all Requirements of Law is in effect.
cc. Unacceptable Investment. Seller has no knowledge of any circumstances or condition with respect to the Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor’s credit standing that could reasonably be expected to cause investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent or materially adversely affect the value or the marketability of the Mortgage.
dd. Servicemembers Civil Relief Act. The Mortgagor has not notified Seller or any Subservicer, and Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Servicemembers Civil Relief Act of 2003, as amended, or other similar state or federal law.
ee. No Fraud. No fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to the Mortgage Loan has taken place on the part of Seller, any Subservicer or, to the best of Seller’s knowledge, any other Person involved in the origination of the Mortgage Loan or in the application for any insurance in relation to such Mortgage Loan, including without limitation the Mortgagor, any appraiser, any builder or developer. To the best of Seller’s knowledge, the documents, instruments and agreements submitted for loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the information and statements therein not misleading. Seller has reviewed all of the documents constituting the Loan File and has made such inquiries as it deems necessary to make and confirm the accuracy of the representations set forth herein.
ff. Delinquency. All payments required to be made prior to the related Purchase Date for such Mortgage Loan under the terms of the Mortgage Note have been made, the Mortgage Loan has not been dishonored, and the Mortgage Loan is not and has never been a Delinquent Loan or a Defaulted Loan.
gg. Compliance with Applicable Laws. Any and all requirements of any applicable federal, state or local law including, without limitation, usury, truth in lending, real estate settlement
procedures, consumer credit protection, fair credit billing, fair credit reporting, fair debt collection practices, predatory and abusive lending laws, equal credit opportunity, fair housing and disclosure laws or unfair and deceptive practices laws applicable to the origination and servicing of the Mortgage Loan including, without limitation, any provisions relating to prepayment penalties, have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations. Seller maintains, and shall maintain, evidence of such compliance as required by applicable law or regulation and shall make such evidence available for inspection at Seller’s office during normal business hours upon reasonable advance notice. Each Mortgage Loan at the time it was made complied in all material respects with applicable local, state, and federal laws, including, but not limited to, all applicable predatory and abusive lending laws.
hh. Disclosure and Rescission Materials. The Mortgagor has received all disclosure materials required by applicable law with respect to the making of mortgage loans of the same type as the Mortgage Loan and rescission materials required by applicable law and has acknowledged receipt of such materials to the extent required by applicable law and such documents will remain in the loan file.
ii. Texas Refinance Loans. Each Mortgage Loan originated in the State of Texas pursuant to Article XVI, Section 50(a)(6) of the Texas Constitution (a “Texas Refinance Loan”) has been originated in compliance with the provisions of Article XVI, Section 50(a)(6) of the Texas Constitution, Texas Civil Statutes and the Texas Finance Code. With respect to each Texas Refinance Loan that is a cash out refinancing, the related Mortgage Loan Documents state that the Mortgagor may prepay such Texas Refinance Loan in whole or in part without incurring a prepayment penalty. Seller does not collect any such prepayment penalties in connection with any such Texas Refinance Loan.
jj. Anti-Money Laundering Laws. Seller and its agents have at all times complied with all applicable federal, state and local anti-money laundering laws, orders and regulations to the extent applicable to Seller or its agent, including without limitation the USA PATRIOT Act of 2001, the Bank Secrecy Act and the regulations of the Office of Foreign Asset Control (collectively, the “Anti-Money Laundering Laws”), in respect of the origination and servicing of each Mortgage Loan; Seller has established an anti-money laundering compliance program as and to the extent required by the Anti-Money Laundering Laws, has conducted the requisite due diligence in connection with the origination and servicing of each Mortgage Loan for purposes of the Anti-Money Laundering Laws to the extent applicable to Seller, and, to the extent required by applicable law, maintains, and will maintain, either directly or through third parties, sufficient information to identify the applicable Mortgagor for purposes of the Anti-Money Laundering Laws. No Mortgage Loan is subject to nullification pursuant to Executive Order 13224 (the “Executive Order”) or the regulations promulgated by the Office of
Foreign Assets Control of the United States Department of the Treasury (“OFAC Regulations”) or in violation of the Executive Order or the OFAC Regulations, and no Mortgagor is subject to the provisions of such Executive Order or the OFAC Regulations nor listed as a “blocked person” for purposes of the OFAC Regulations.
kk. Predatory Lending Regulations. The Mortgage Loan is not classified as (a) a “high cost” loan under the Home Ownership and Equity Protection Act of 1994 (“HOEPA”) or (b) a “high
cost,” “threshold,” “covered,” or “predatory” loan under any other applicable state, federal or local law. The Mortgage Loan does not have an “annual percentage rate” or total “points and fees” payable by the related Mortgagor (as each such term is calculated under HOEPA) that exceed the thresholds set forth by HOEPA and its implementing regulations, including 12
C.F.R. § 226.32(a)(1)(i). No predatory or deceptive lending practices, including, without limitation, the extension of credit without regard to the ability of the Mortgagor to repay and the extension of credit which has no apparent benefit to the Mortgagor, were employed in the origination of the Mortgage Loan. No term or condition of, and no practice used in connection with the Origination of, such Mortgage Loan has been categorized as an “unfair” or “deceptive” term, condition or practice under any applicable federal, state or local law (or regulation promulgated thereunder) and the Mortgage Loan does not have any terms which expose Administrative Agent or Buyers to regulatory action or enforcement proceedings, penalties or other sanctions.
ll. State Laws. No Mortgage Loan is a “High-Cost Home Loan” as defined in the Arkansas Home Loan Protection Act effective July 16, 2003 (Act 1340 of 2003); no Mortgage Loan is a “High-Cost Home Loan” as defined in the Kentucky high- cost home loan statute effective June 24, 2003 (Ky. Rev. Stat. Section 360.100); no Mortgage Loan is a “High-Cost Home Loan” as defined in the New Jersey Home Ownership Act effective November 27, 2003 (N.J.S.A. 46:10B-22 et seq.); no Mortgage Loan is a “High-Cost Home Loan” as defined in the New Mexico Home Loan Protection Act effective January 1, 2004 (N.M. Stat. Ann. §§ 58-21A-1 et seq.); no Mortgage Loan is a “High-Risk Home Loan” as defined in the Illinois High-Risk Home Loan Act effective January 1, 2004 (815 Ill. Comp. Stat. 137/1 et seq.); no Mortgage Loan is a “High-Cost Home Mortgage Loan” as defined in the Massachusetts Predatory Home Loan Practices Act, effective November 7, 2004 (Mass. Ann. Laws Ch. 183C); no Mortgage Loan is a “High Cost Home Loan” as defined in the Indiana Home Loan Practices Act, effective January 1, 2005 (Ind. Code Ann. Sections 24-9-1 through 24-9-9); no Mortgage Loan that was originated on or after October 1, 2002 and on or prior to March 7, 2003, which is secured by property located in the State of Georgia; no Mortgage Loan that was originated after March 7, 2003, which is a “high cost home loan” as defined under the Georgia Fair Lending Act, as amended (the “Georgia Act”); no Mortgage Loan is a “high cost home loan,” as defined in Section 6 L of the New York State Banking Law; and no Mortgage Loan is a “covered loan” as contemplated in the California Predatory Lending Act set forth in California Finance Code Sections 4970 to 4979.8.
mm. Arbitration. No Mortgagor agreed to submit to arbitration to resolve any dispute arising out of or relating in any way to the mortgage loan transaction; any breach of this representation shall be deemed to materially and adversely affect the value of the Mortgage Loan and shall require a repurchase of the affected Mortgage Loan.
nn. Higher Cost Products. The Mortgagor was not encouraged or required to select a Mortgage Loan product offered by the Mortgage Loan’s originator which is a higher cost product designed for less creditworthy Mortgagors, unless at the time of the Mortgage Loan’s origination, such Mortgagor did not qualify taking into account such facts as, without limitation, the Mortgage Loan’s requirements and the Mortgagor’s credit history, income, assets and liabilities and debt-to-income ratios for a lower-cost credit product then offered by the Mortgage Loan’s originator or any affiliate of the Mortgage Loan’s originator. If, at the time of loan application, the Mortgagor may have qualified for a lower-cost credit product then offered by any mortgage lending affiliate of the Mortgage Loan’s originator, the
Mortgage Loan’s originator referred the Mortgagor’s application to such affiliate for underwriting consideration. For a Mortgagor who seeks financing through a Mortgage Loan originator’s higher-priced nonprime lending channel, the Mortgagor was directed towards or offered the Mortgage Loan originator’s standard mortgage line if the Mortgagor was able to qualify for one of the standard products.
oo. Underwriting Methodology. With respect to delegated underwritten loans, the methodology used in underwriting the extension of credit for each Mortgage Loan does not rely solely on the extent of the Mortgagor’s equity in the collateral as the principal determining factor in approving such extension of credit. The methodology employed objective criteria such as the Mortgagor’s income, assets and liabilities, to the proposed mortgage payment and, based on such methodology, the Mortgage Loan’s originator made a reasonable determination that at the time of origination the Mortgagor had the ability to make timely payments on the Mortgage Loan.
pp. Points and Fees. No Mortgagor was charged “points and fees” (whether or not financed) in an amount greater than (i) $1,000, or (ii) 5% of the principal amount of such Mortgage Loan, whichever is greater. For purposes of this representation, such 5% limitation is calculated in accordance with Fannie Mae’s anti-predatory lending requirements as set forth in the Agency Guidelines and “points and fees”
(x) include origination, underwriting, broker and finder fees and charges that the mortgagee imposed as a condition of making the Mortgage Loan, whether they are paid to the mortgagee or a third party, and (y) exclude bona fide discount points, fees paid for actual services rendered in connection with the origination of the Mortgage Loan (such as attorneys’ fees, notaries fees and fees paid for property appraisals, credit reports, surveys, title examinations and extracts, flood and tax certifications, and home inspections), the cost of mortgage insurance or credit-risk price adjustments, the costs of title, hazard, and flood insurance policies, state and local transfer taxes or fees, escrow deposits for the future payment of taxes and insurance premiums, and other miscellaneous fees and charges which
miscellaneous fees and charges, in total, do not exceed 0.25% of the principal amount of such Mortgage Loan. All fees and charges (including finance charges) and whether or not financed, assessed, collected or to be collected in connection with the origination and servicing of each Mortgage Loan have been disclosed in writing to the Mortgagor in accordance with applicable state and federal law and regulation.
qq. Prepayment Penalties. With respect to any Mortgage Loan that contains a provision permitting imposition of a penalty upon a prepayment prior to maturity: (i) the Mortgage Loan provides some benefit to the Mortgagor (e.g., a rate or fee reduction) in exchange for accepting such prepayment penalty, (ii) the Mortgage Loan’s originator had a written policy of offering the Mortgagor the option of obtaining a mortgage loan that did not require payment of such a penalty, (iii) the prepayment penalty was adequately disclosed to the Mortgagor in the mortgage loan documents pursuant to applicable state, local and federal law, and (v) notwithstanding any state or federal law to the contrary, neither Seller nor any Subservicer shall impose such prepayment premium in any instance when the mortgage debt is accelerated as the result of the Mortgagor’s default in making the loan payments.
rr. Single Premium Credit Insurance Policies. No Mortgagor was required to purchase any single premium credit insurance policy (e.g., life, mortgage, disability, accident, unemployment,
or health insurance product) or debt cancellation agreement as a condition of obtaining the extension of credit. No Mortgagor obtained a prepaid single premium credit insurance policy (e.g., life, mortgage, disability, accident, unemployment, or health insurance product) in connection with the origination of the Mortgage Loan. No proceeds from any Mortgage Loan were used to purchase single premium credit insurance policies or debt cancellation agreements as part of the origination of, or as a condition to closing, such Mortgage Loan; any breach of this representation shall be deemed to materially and adversely affect the value of the Mortgage Loan and shall require a repurchase of the affected Mortgage Loan.
ss. Origination Practices; Servicing. The origination practices used by Seller and the collection and servicing practices used by Seller and any Subservicer with respect to each Mortgage Loan have been in all respects legal and customary in the mortgage origination and servicing industry and the collection and servicing practices used by Seller and any Subservicer have been consistent with customary servicing procedures. The Mortgage Loan satisfies, and has been originated and underwritten in accordance with, all applicable requirements of Seller’s underwriting guidelines. Seller has serviced the Mortgage Loan at all times since its origination.
tt. Escrow Payments. With respect to escrow deposits and payments that Seller is entitled to collect, all such payments are in the possession of, or under the control of Seller, and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All escrow
Exhibit B-14
payments have been collected in full compliance with state and federal law and the provisions of the related Mortgage Note and Mortgage. As to any Mortgage Loan that is the subject of an escrow, escrow of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every escrowed item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or other charges or payments due under the Mortgage Note have been capitalized under any Mortgage or the related Mortgage Note.
uu. Interest on Escrows. As of the related Purchase Date, Seller has credited to the account of the related Mortgagor under the Mortgage Loan all interest required to be paid by applicable law or by the terms of the related Mortgage Note on any escrow account. Evidence of such credit shall be provided to Administrative Agent upon request.
vv. Escrow Analysis. Seller has properly conducted an escrow analysis for each escrowed Mortgage Loan in accordance with applicable law. All books and records with respect to each Mortgage Loan comply with applicable law and regulations, and have been adjusted to reflect the results of the escrow analyses. Except as allowed by applicable law, no inflation factor was used in the escrow analysis. Seller has delivered notification to the Mortgagor(s) under each Mortgage Loan of all adjustments resulting from such escrow analyses.
ww. Escrow Holdbacks. The Mortgage Loan is not subject to outstanding escrow holdbacks except those specifically identified by Seller as defined in the Takeout Guidelines.
xx. Credit Reporting. If applicable, Seller has caused to be fully furnished, in accordance with the Fair Credit Reporting Act and its implementing regulations, accurate and complete
information (i.e., favorable and unfavorable) on its Mortgagor loan files to Equifax, Experian, and Trans Union Credit Information Company (three of the credit repositories), on a monthly basis; any breach of this representation shall be deemed to materially and adversely affect the value of the Mortgage Loan and shall require a repurchase of the affected Mortgage Loan.
yy. Interest Rate Adjustments. If applicable, with respect to each adjustable rate Mortgage Loan, all interest rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited. The Mortgagor has executed a statement to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of adjustable rate mortgage loans.
zz. Regarding the Mortgagor. The Mortgagor is one or more natural persons and/or trustees for an Illinois land trust or a trustee under a “living trust” and such “living trust” is in compliance with Agency Guidelines for such trusts. The Mortgagor is a natural person. The Mortgagor is not an officer (or immediate relative thereof) or agent of Seller or an Affiliate of Seller. The Mortgagor is not a government or
a governmental subdivision or agency. The Mortgagor occupies the Mortgaged Property unless the Mortgaged Property is an Investor Loan.
aaa. Fannie Mae Takeout Guidelines Announcement 95-19. Seller will transmit full file credit reporting data for each Mortgage Loan pursuant to Fannie Mae Announcement 95-19 and that for each Mortgage Loan, Seller agrees it shall report one of the following statuses each month as follows: new origination, current, delinquent (30 or more days), foreclosed, or charged-off.
bbb. Tax Identification/Back Up Withholding. All tax identifications for individual Mortgagors, have been certified as required by law. Seller has complied with all IRS requirements regarding the obtainment and solicitation of taxpayer identification numbers and the taxpayer identification numbers provided to Administrative Agent as reflected on the system are correct. To the extent a Mortgage Loan is on back up withholding, Seller has substantiated both the initial reason for the back up withholding and the amount of such back up withholding and the reason for such back up withholding in the amount currently withheld still exists.
ccc. IRS Forms. All IRS forms, including, but not limited to, Forms 1099, 1098, 1041 and K-1, as appropriate, which are required to be filed with respect to activity occurring on or before the year in which the Purchase Date occurs and have been filed or will be filed in accordance with applicable law.
ddd. Electronic Drafting of Payments. If Seller or a Subservicer drafts monthly payments electronically from the Mortgagor’s bank account, such drafting occurs in compliance with applicable federal, state, and local laws and regulations; and the applicable agreement with the Mortgagor; and such applicable agreement with the Mortgagor both legally and contractually can be fully assigned to Administrative Agent (as agent and representative of Buyers) pursuant to the assignment provisions contained therein, and will be fully assigned to Administrative Agent (as agent and representative of Buyers) pursuant to this Agreement.
eee. Third Party Originators and TPO Loans. The Mortgage Loan is not a TPO Loan, nor was it
originated by a Third Party Originator.
fff. U.S. Loan; Mortgagor. The Mortgage Loan is denominated and payable only in United States dollars within the United States and the related Mortgagor is a United States citizen or resident alien or, only if the Mortgagor is a trustee as described in item (zz) in this Exhibit B that is not a natural person, Mortgagor is a corporation or other legal entity organized under the laws of the United States or any state thereof or the District of Columbia.
ggg. Representations and Warranties to Approved Takeout Investor. Any representations or warranties made by Seller to the Approved Takeout Investor upon final sale of the Mortgage Loan are hereby incorporated into this Agreement, and Seller is deemed to make the same representations and warranties to
Administrative Agent and Buyers, as if such representations and warranties were fully set forth herein.
hhh. [Reserved.]
iii. Takeout Commitment/Hedging Arrangement. The Mortgage Loan is subject to (a) a legally valid and binding Takeout Commitment and satisfies all of the requirements related to such Takeout Commitment; or (b) a legally valid and binding Hedging Arrangement and satisfies all the requirements related to such Hedging Arrangement.
jjj. Agency Guidelines. The Mortgage Loan satisfies, and has been originated in accordance with, all applicable requirements of the applicable Agency Guidelines;
kkk. MERS. The Mortgage Loan is a MERS Designated Mortgage Loan.
lll. Whole Loan. The Mortgage Loan is a whole loan and not a participation interest.
mmm. UCC Characterization. The Mortgage Loan is an “account”, “chattel paper”, “promissory note” or “payment intangible” within the meaning of Article 9 of the UCC of all applicable jurisdictions;
nnn. Bankruptcy Code Characterization. The Mortgage Loan is a “mortgage loan” within the meaning of the Bankruptcy Code.
ooo. No Previous Financing. The Mortgage Loan has not been previously financed by any other Person.
ppp. Ineligible Loan Types. The Mortgage Loan is not (i) a negative amortization loan,
(ii) a second lien loan, (iii) a home equity line of credit or similar loan, (iv) secured by Mortgaged Property which is not occupied by the Mortgagor unless the Mortgage Loan is an Investor Loan, (v) secured by Mortgaged Property which is a vacation home or second home of Mortgagor unless the Mortgage Loan is a Second Home Loan, (vi) a reverse mortgage, (vii) a subprime Mortgage Loan or alt-A Mortgage Loan, or (viii) considered an “Expanded Approval” loan or a similar loan such as is described in the applicable Agency’s eligibility certification.
qqq. No Equity Participation. No document relating to the Mortgage Loan provides for any
contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage Note is not convertible to an ownership interest in the Mortgaged Property or the Mortgagor and Seller has not financed nor does it own directly or indirectly, any equity of any form in the Mortgaged Property or the Mortgagor.
rrr. Condominiums/ Planned Unit Developments. If the Mortgage Loan is a condominium loan, the related residential dwelling is a condominium unit or a unit in a planned unit development (other than a de minimis planned unit development)
and such condominium or planned unit development project meets the eligibility requirements of Fannie Mae and Freddie Mac including Fannie Mae eligibility requirements for sale to Fannie Mae or is located in a condominium or planned unit development project which has received Fannie Mae project approval and the representations and warranties required by Fannie Mae with respect to such condominium or planned unit development have been made and remain true and correct in all respects.
sss. Downpayment. The source of the down payment with respect to such Mortgage Loan has been fully verified by Seller.
ttt. Due on Sale. The related Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder.
uuu. Flood Certification Contract. Seller has obtained a life of loan, transferable flood certification contract for such Mortgage Loan and such contract is assignable without penalty, premium or cost to Administrative Agent (as agent and representative of Buyers).
vvv. No Construction Loans. The Mortgage Loan was not made in connection with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property.
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE COMPLIANCE CERTIFICATE
SELLER: [NAME OF APPLICABLE SELLER]
ADMINISTRATIVE AGENT: JPMORGAN CHASE BANK, N.A.
a national banking association
TODAY’S DATE:
/ /
REPORTING PERIOD ENDED: month(s) ended _ / /
This certificate is delivered to Administrative Agent under the Master Repurchase Agreement dated effective as of November , 2013, between Sellers and Administrative Agent (the “Agreement”), all the defined terms of which have the same meanings when used herein.
I hereby certify that with respect to Seller indicated above: (a) I am, and at all times mentioned herein have been, the duly elected, qualified, and acting Chief Financial Officer of Seller; (b) to the best of my knowledge, the Financial Statements of Seller from the period shown above (the “Reporting Period”) and which accompany this certificate were prepared in accordance with GAAP and present fairly the financial condition of Seller as of the end of the Reporting Period and the results of its operations for Reporting Period; (c) a review of the Agreement and of the activities of Seller during the Reporting Period has been made under my supervision with a view to determining Seller’s compliance with the covenants, requirements, terms, and conditions of the Agreement, and such review has not disclosed the existence during or at the end of the Reporting Period (and I have no knowledge of the existence as of the date hereof) of any Default or Event of Default with respect to any Seller, except as disclosed herein (which specifies the nature and period of existence of each Default or Event of Default, if any, and what action Seller has taken, is taking, and proposes to take with respect to each); (d) the calculations described on the pages attached hereto evidence that Seller is in compliance with the requirements of the Agreement at the end of the Reporting Period (or if Seller is not in compliance, showing the extent of non-compliance and specifying the period of non-compliance and what actions Seller proposes to take with respect thereto); (e) Seller was, as of the end of the Reporting Period, in compliance and good standing with applicable CL, Fannie Mae, Ginnie Mae, Freddie Mac, and HUD net worth requirements; (f) this certificate is being delivered by me in my capacity as the Chief Financial Officer of Seller and not in my personal capacity.
By: | Name: |
Title: Chief Financial Officer
SELLER:
REPORTING PERIOD ENDED: / /
All financial calculations set forth herein are as of the end of the Reporting Period.1
I. | TANGIBLE NET WORTH |
The Tangible Net Worth is: | |
Shareholder’s equity: | $ |
Minus: intangible assets - goodwill, intellectual property | $ |
Minus: capitalized servicing rights | $ |
Minus: Employee Loans (unless they are advances against commissions) | $ |
Minus: Assets pledged to secure liabilities not included in Debt: | $ |
Minus: Any assets unacceptable to Administrative Agent or Agencies | $ |
TANGIBLE NET WORTH: | $ |
II. | ADJUSTED TANGIBLE NET WORTH |
Adjusted Tangible Net Worth is: | |
Tangible Net Worth (from above): | $ |
Plus: Qualified Subordinated Debt: | $ |
Plus: Lesser of (i) 1.00% times unpaid principal balance of Seller’s Mortgage Loans with Servicing Rights and (ii) capitalized value of Seller’s Servicing Rights | $ |
Plus: Lesser of (A) 50% of net book value of Mortgage Loans held for investment and (B) $20,000,000 | |
Minus: 100% of net book value of Mortgage Loans held for investment | $ |
Minus: 50% of net book value of REO Property | $ |
Minus: 50% of net book value of other illiquid investments | $ |
Minus: Advances of loans to Affiliates: | |
Minus: Investments in Affiliates, pledged assts, etc. (per definition): | |
ADJUSTED TANGIBLE NET WORTH: | $ |
1 Calculation chart to be matched to financial covenants.
REQUIRED MINIMUM (through Termination Date) | $50,000,000 |
In compliance? | YesNo |
III. | DEBT OF SELLER |
Total Liabilities | $ |
Plus: off balance sheet debt: | $ |
Minus: loan loss reserves (if included in liabilities): | $ |
Minus: deferred taxes arising from capitalized excess servicing fees: | $ |
Minus: operating leases | $ |
Minus: Qualified Subordinated Debt | $ |
DEBT: | $ |
IV. | LEVERAGE RATIO: DEBT TO ADJUSTED TANGIBLE NET WORTH |
Debt (from above): | $ |
Adjusted Tangible Net Worth: | $ |
RATIO OF DEBT/ADJUSTED TANGIBLE NET WORTH: | :1 |
Maximum permitted | 10:1 |
In compliance? | YesNo |
V. | LIQUIDITY |
Cash (including Cash Pledge Account balance but excluding other pledged cash and restricted cash) | $ |
Cash Equivalents | $ |
Total Required Liquidity: | $15,000,000 |
Total Liquidity: | $ |
In compliance? | YesNo |
VI. | NET INCOME (tested each fiscal quarter for most recently ended period of two consecutive fiscal quarters)/NET LOSS (tested each fiscal quarter) |
Net Income for period of last two consecutive fiscal quarters: | $ |
Minimum required: | $1.00 |
In compliance? | YesNo |
Net Operating Loss for fiscal quarter | $ |
Maximum permitted: | $2,500,000 |
In compliance? | YesNo |
VII. | PRODUCTION |
Volume | Current Month | Year-to-Date |
Residential Mortgage Loans Funded | $ | $ |
Commercial Loans Funded * | $ | $ |
TOTAL VOLUME | $ | $ |
* Commercial loans include 5 or more unit multi-family properties and mixed use properties.
Volume | Current Month | Year-to-Date |
Banked Loan Production | $ | $ |
Brokered Loan Production | $ | $ |
TOTAL VOLUME | $ | $ |
By Channel/Source | Current Month | Year-to-Date |
Retail as % of Total | % | % |
TPO Loans as a % of Total | % | % |
Correspondent as a % of Total** | % | % |
TOTAL (Must = 100%) | % | % |
*Correspondent loans are defined as those that are purchased as closed loans from third parties.
By Category | Current Month | Year-to-Date |
Government as % of Total | % | % |
Conventional as % of Total | % | % |
Jumbo as % of Total | % | % |
Alt A as % of Total | % | % |
Subprime as % of Total | % | % |
Second Mortgages as % | % | % |
Other (Describe) | % | % |
Total (Must = 100%) | % | % |
By Finance Type | Current Month | Year-to-Date |
Purchase as % of Total | % | % |
Refinance as a % of Total | % | % |
TOTAL (Must = 100%) | % | % |
Others | Current Month | Year-to-Date |
Average FICO | % | % |
Average LTV | % | % |
Average CLTV | ||
VIII. | FACILITIES (Please list all Available Warehouse Capacity including off balance sheet facilities) |
Institution | Total (committed or uncommitted, please indicate “C” or “U”) | Outstanding |
$$ | ||
$$ | ||
SUB TOTALS | $$ | |
JPM syndicate | ||
Chase Commitment | $$ | |
Other participants’ commitment | $$ | |
TOTAL JPM Facility Amount | $$ | |
X. Chase Commitment | $ | |
Y. Sum of Available Warehouse Facilities (including Facility$ Amount) | ||
Ratio X/Y (stated as a percentage) | % | |
Maximum ratio of Chase Commitment to Available Warehouse66-2 Facilities (including JPM Facility Amount) | /3% | |
In compliance? | YesNo | |
IX. | REPURCHASES / INDEMNIFICATIONS (R&I) |
Repurchases | UPB | # of Loans | Actual or Estimated Loss | How were they recorded on the financials? |
Beginning Open R&I’s | ||||
$ | $ | |||
New R&I’s received this month | ||||
$ | $ | |||
R&I’s rescinded this month | $ | $ | n/a | |
R&I’s settled this month | $ | $ | ||
Ending Open R&I’s | $ | $ | ||
* If you have a detailed schedule of loans subject to repurchases that includes the investor requesting, reason for repurchases, origination date, loan characteristics such as LTV, lien position, occupancy etc., and valuation method if you have estimated your loss exposure, please attach it with this table.
X. | FORECLOSURES |
Current Month | Year-to-Date | |
Foreclosure loan units | $ | $ |
Foreclosure loan volumes | $ | $ |
Expected loss on Foreclosures | $ | $ |
TOTALS | $ | $ |
XI. | LOAN LOSS RESERVE |
Current Month | Year-to-Date | |
Beginning loan loss reserve | $ | $ |
Additional loss provision | $ | $ |
Actual charge off | $ | $ |
Ending Loan Loss Reserve | $ | $ |
XII. | LOAN SERVICING |
Total Servicing portfolio at end of period | ||
Number of Mortgage Loans serviced: | ||
Aggregate principal balance of Mortgage Loans serviced: | $ | |
Current Month | Year-to-Date | |
60 days delinquency (Unit) | ||
60 days delinquency volumes | $ | $ |
Loan servicing report attached | ||
XIII. | LITIGATION |
Current Month | Year-to-Date | |
Pending litigation (Unit) | ||
Expected losses on litigation | $ | $ |
XIV. | THIRD PARTY REPORTS |
All reports received from third parties (such as the SEC, Fannie Mae, Ginnie Mae, Freddie Mac) subsequent to the last reporting period are attached hereto. These reports include the following (if none, write “None”):
XV. | DEFAULTS OR EVENTS OF DEFAULT |
Disclose nature and period of existence and action being taken in connection therewith; if none, write “None”:
XVI. | OTHER REPORTS REQUIRED (Please attach if applicable) |
a. | Buyer Warehouse Loans T& I Escrow reconciliation |
b. | Indemnification & Repurchase Report for the prior year and current YTD. |
c. | Hedge Reports (including: position summary report, MBS & whole loan trade detail, loan level detail report with weighted average take out price) |
EXHIBIT D
FORM OF SHIPPING INSTRUCTIONS
Shipping Instructions
These loans being shipped to a custodian? Or to an Investor?
Please ship the following notes to: Investor name
Street address City, State, Zip Attn:
Endorse the note as follows: Endorsement Instructions
Loan Number | Borrower Name | Loan Amount |
Attach additional pages as required | ||
Special Instructions: For any questions, please contact: Name: Phone:
Fax Number: Signature:
EXHIBIT E
CONDITIONS PRECEDENT DOCUMENTS
1. | Master Repurchase Agreement |
2. | Side Letter |
3. | Administration Agreement |
4. | Electronic Tracking Agreement |
5. | Certified organizational documents of Seller |
6. | UCC, tax lien and judgment searches, state of Seller’s organization and county where Seller’s chief executive office is located |
7. | UCC-1 Financing Statements |
8. | Opinions of Counsel |
9. | Errors and omissions insurance policy or mortgage impairment insurance policy or evidence of insurance in lieu of policy |
10. | Blanket bond coverage policy or evidence of insurance in lieu of policy endorsed to (i) provide that for any loss affecting Buyer’s interest, Buyer will be named on the loss payable draft as its interest may appear and (ii) provide Buyer access to coverage under the theft of secondary market institution’s money or collateral clause of such insurance policy |
11. | Subservicer Instruction Letter between the Seller and any Subservicer |
EXHIBIT F
REQUIRED OPINIONS OF COUNSEL WITH RESPECT TO EACH SELLER
1.Seller has been legally incorporated or otherwise created under the laws of the State of [ ] and is validly existing and in good standing under the laws of that State, and has the requisite entity power and authority to execute and deliver each Transaction Document to which it is a party and to perform its obligations thereunder.
2.Each of the execution, delivery and performance by Seller of the Transaction Documents to which it is a party has been duly authorized by all requisite [corporate][limited liability] action on the part of Seller.
3.Each Transaction Document to which Seller is a party has been duly executed and delivered by a duly authorized officer of Seller.
4.Each Transaction Document to which Seller is a party constitutes the valid and binding obligation of Seller under the laws of the State of New York, enforceable against Seller in accordance with its respective terms.2
5.The execution, delivery and performance by Seller of its obligations under each of the Transaction Documents to which it is a party and the consummation of the transactions contemplated thereby will not result in (i) any breach or violation of its organizational documents,
(ii) any breach, violation or acceleration of or default under any indenture, loan or credit agreement, lease, mortgage, security agreement or other material agreement or instrument to which it is a party or by which it is bound,3 (iii) any breach or violation of any order, writ, judgment, injunction or decree of any court, agency or other governmental body, or (iv) any breach or violation of any United States federal, State of New York [or State of [ ]] statute or regulation that is normally applicable to transactions of the type contemplated by the Transaction Documents.
6.There is no legal action, suit, proceeding or investigation before any court, agency or other governmental body pending or, to my knowledge, threatened against Seller which, either in one instance or in the aggregate, (a) could reasonably be expected to have a material adverse effect on its business, operations, properties or condition (financial or otherwise) or (b) draws into question the validity of, seeks to prevent the consummation of any of the transactions contemplated by or would impair materially its ability to perform its obligations under any of the Transaction Documents to which it is a party.
7.The execution, delivery and performance of Seller’s obligations under each of the Transaction Documents to which it is a party and the consummation of the transactions contemplated thereby do not require any consent, approval, authorization or order of, filing with or notice to any United States federal[, State of [ _]] or State of New York court, agency or other governmental body under any United States federal[, State of [ ]] or State of New York statute
2 To be given by outside counsel licensed to practice in the State of New York.
3 To be given by outside counsel. An officer of Seller is to certify to outside counsel and JPM that the attached list of agreements are all of the indentures, leases, credit agreements, repos and other material agreements to which Seller or its parent is subject or a party.
or regulation that is normally applicable to transactions of the type contemplated by the Transaction Documents, except such as may be required under the securities laws of any State of the United States or such as have been obtained, effected or given.
8.Seller is not required to register as an “investment company” under the Investment Company Act of 1940, as amended.
9. | [reserved] |
10.The Repurchase Agreement creates, for the benefit of Administrative Agent, a valid security interest which will attach in all right, title and interest of Seller in and to the Mortgage Assets, and the proceeds thereof,4 (i) which security interest in each Mortgage Note, upon the delivery thereof to Administrative Agent in the State of [Texas] pursuant to and in accordance with the Transaction Documents, and the proceeds thereof, will be perfected, and (ii) which security interest in the Mortgage Assets (in which a security interest can be perfected by filing), and the proceeds thereof, will be perfected upon the filing of the applicable financing statement in the filing office located in the State of [ ], which is the proper place to file against Seller.5
4 Creation opinion to be given by outside counsel licensed to practice in the State of New York.
5 Perfection and priority opinions to be given by outside counsel.
EXHIBIT G SUBSIDIARY INFORMATION
Universal American Mortgage Company, LLC
Address: | 700 N.W. 107 Avenue, 3rd Floor Miami, FL 33172 |
Home Jurisdiction: FL
Universal American Mortgage Company of California, Inc. Address: 700 N.W. 107 Avenue, 3rd Floor
Miami, FL 33172 Home Jurisdiction: CA
Eagle Home Mortgage, LLC
Address: 301 116th Ave SE Suite 400
Bellevue, WA 98004 Home Jurisdiction: DE
Eagle Home Mortgage of California, Inc.
Address: 301 116th Ave SE Suite 400
Bellevue, WA 98004 Home Jurisdiction: CA
Eagle Home Mortgage Holdings, LLC
Address: 301 116th Ave SE Suite 400
Bellevue, WA 98004 Home Jurisdiction: DE
Edgewater Reinsurance, Ltd.
Address: 15550 Lightwave Drive, Suite 200
Clearwater, FL 33760
Home Jurisdiction: Turk & Caicos (Overseas)
Colony Escrow, Inc
Address: 301 116th Ave SE Suite 400
Bellevue, WA 98004 Home Jurisdiction: WA
EXHIBIT H
FORM OF SUBSERVICER INSTRUCTION LETTER SUBSERVICER INSTRUCTION LETTER
, 2013
, as Subservicer
Attention:
Re: Master Repurchase Agreement, dated as of November
, 2013 (“Repurchase
Agreement”), by and among [Name of Seller] (“Seller”), JPMorgan Chase Bank, N.A., as a Buyer and as Administrative Agent for the Buyers (“Administrative Agent”), and the other Buyers party thereto
Ladies and Gentlemen:
As Subservicer (referenced herein as “You”) of those mortgage loans described on Schedule 1 hereto, which may be amended or updated from time to time (the “Mortgage Loans”) pursuant to that Subservicing Agreement, between You and the undersigned Seller, as amended or modified, attached hereto as Exhibit A (the “Subservicing Agreement”), you are hereby notified that the undersigned Seller has sold to Administrative Agent (as agent and representative of the Buyers under the Repurchase Agreement) such Mortgage Loans pursuant to the above-referenced Repurchase Agreement.
You agree to service the Mortgage Loans in accordance with the terms of the Subservicing Agreement for the benefit of Administrative Agent and Buyers and, except as otherwise provided herein, Administrative Agent shall have all of the rights, but none of the duties or obligations of any Seller under the Subservicing Agreement including, without limitation, payment of any indemnification or reimbursement or payment of any servicing fees or any other fees. No subservicing relationship shall be hereby created between You and Administrative Agent or Buyers.
Upon your receipt of written notification by Administrative Agent that a Default has occurred under the Agreement (the “Default Notice”), you, as Subservicer, hereby agree to remit all payments or distributions made with respect to such Mortgage Loans, net of the servicing fees payable to you with respect thereto, immediately in accordance with Administrative Agent’s wiring instructions provided
below, or in accordance with other instructions that may be delivered to you by Administrative Agent:
[wire instructions]
You agree that, following your receipt of such Default Notice, under no circumstances will you remit any such payments or distributions in accordance with any instructions delivered to you by the undersigned Seller, except if Administrative Agent instructs you in writing otherwise.
You further agree that, upon receipt written notification by Administrative Agent that an Event of Default has occurred under the Agreement (“Event of Default Notice”), Administrative Agent shall assume all of the rights and obligations of any Seller under the Subservicing Agreement, except as otherwise provided herein. Subject to the terms of the Subservicing Agreement, You shall (x) follow the instructions of Administrative Agent with respect to the Mortgage Loans and deliver to a Administrative Agent any information with respect to the Mortgage Loans reasonably requested by such Administrative Agent, and (y) treat this letter agreement as a separate and distinct servicing agreement between You and Administrative Agent (incorporating the terms of the Subservicing Agreement by reference), subject to no setoff or counterclaims arising in Your favor (or the favor of any third party claiming through You) under any other agreement or arrangement between You and any Seller or otherwise. Notwithstanding anything to the contrary herein or in the Subservicing Agreement, in no event shall Administrative Agent be liable for any fees, indemnities, costs, reimbursements or expenses incurred by You prior to receipt of such Event of Default Notice or otherwise owed to You in respect of the period of time prior to receipt of such Event of Default Notice.
[NO FURTHER TEXT ON THIS PAGE]
Please acknowledge receipt of this instruction letter by signing in the signature block below and forwarding an executed copy to Administrative Agent promptly upon receipt. Any notices to Administrative Agent should be delivered to the following address: [ ], Attention: [ ], Telephone: [ ], Facsimile: [ ].
Very truly yours,
[NAME OF APPLICABLE SELLER]
By:_ Name:
Title: Acknowledged and Agreed as of this day of , 20 :
[SUBSERVICER]
By:_ Name:
Title:
EXHIBIT I
FIELDS FOR DAILY DATA TAPE
The daily data tape shall include the following fields, accurately completed for each Purchased Mortgage Loan:
Seller’s Loan number Mortgagor’s name
City, state and zip code of the Mortgaged Property Outstanding Principal Balance as of such date Approved Takeout Investor
Takeout Value
Market Value (based on Administrative Agent’s determination) Combined Loan-to-Value Ratio
Interest rate
Original principal balance
Current scheduled monthly payment of principal and interest, Origination date
First Purchase Date on which Mortgage Loan will be or was purchased under the Agreement Such other fields as Administrative Agent requires from time to time in its sole discretion with notice to Seller
EXHIBIT J
FORM OF BAILEE LETTER
[date]
[Investor name and address]
Ladies and Gentlemen:
JPMorgan Chase Bank, N.A. (“JPM Chase”) hereby delivers with this letter to you, as bailee, limited and conditional possession of the promissory notes (“Notes”) and the other loan
documents (collectively, the “Loan Papers”) relating to the mortgage loans (the “Loans”) described on the attached Exhibit A. JPM Chase is the successor in ownership interest to Universal American Mortgage Company, LLC and Universal American Mortgage Company of California (whichever of them is named as payee or last endorsee on each Note delivered to you herewith, the “Mortgage Company”) in and to the Loans pursuant to that certain Master Repurchase Agreement between those affiliated companies, as Sellers, and JPM Chase, as Administrative Agent, as supplemented, amended or restated from time to time (the “Repurchase Agreement”). The Loan Papers are delivered to you at the request of the Mortgage Company for your inspection and determination of whether to purchase the Loans under your agreement with the relevant Mortgage Company (the “Purchase Agreement”), and for no other use or purpose. Detailed terms of this bailment are stated in Section 6 below. The Loan Papers are also delivered conditionally: if you are unwilling to accept the terms and conditions of this bailment, as specified below, you must immediately return all Loan Papers to JPM Chase. If you do not return them within two business days after receipt, you will have accepted the bailment terms and conditions.
Please examine the Loan Papers and decide whether you will purchase any or all of the Loans. To purchase one or more Loans, send, or cause Mortgage Company to send, a list to JPM
Chase indicating which Loans you are buying and remit the Pay-off Price (defined in Section 3
below) for each Loan to JPM Chase in immediately available federal funds wired to :
JPMorgan Chase Bank, N.A. ABA No. 021000021
712 Main Street
Houston, Texas 77002
For Credit Account No. 79975873
Attention: Chase Mortgage Warehouse Finance Phone: 214-492-4351
Further Credit - Universal American Mortgage Co. and affiliates
Please return the Loan Papers for all Loans that you decide not to purchase to JPM Chase addressed to:
JPMorgan Chase Bank, N.A.
Chase Mortgage Warehouse Finance 3929 W. John Carpenter Freeway Mail Stop 1731
Irving, Texas 75063 Attn: Anthony Lassiter Phone: (214) 492-4393
The “Pay-off Price” for each Loan is the greater of:
(x) the minimum payment required for the Mortgage Company’s repurchase of such Loan so that the Mortgage Company can sell it to you (the “Release Price”), as set forth in the “Release Price” column of Exhibit A; and
(y) the purchase price that you and the Mortgage Company have agreed you will pay for such Loan (the “Agreed Purchase Price”).
If you pay JPM Chase only the Agreed Purchase Price for a Loan whose Release Price exceeds the Agreed Purchase Price, you will thereupon become the owner of that Loan, provided that JPM Chase retains a security interest in that Loan and the related Loan Papers to secure payment to JPM Chase of the amount by which the Release Price exceeds the Agreed Purchase Price (the “Required Deficiency Payment”), which security interest will not be released unless and until either you or the Mortgage Company pays JPM Chase the Required Deficiency Payment and concurrently gives JPM Chase a written notice that both (i) identifies the Loan with the payment and (ii) indicates that the amount so paid equals at least the amount of the Required Deficiency Payment of that Loan.
Pursuant to the Repurchase Agreement, the Mortgage Company has sold the Loans to JPM Chase, and JPM Chase owns and holds the Loan Papers, the Loans they evidence and all related security, collateral support and
other rights. Payment of the Pay-off Price to JPM Chase will effect the relevant Mortgage Company’s repurchase of the Loans from JPM Chase under the Repurchase Agreement and their transfer by that Mortgage Company to you under the Purchase Agreement.
Although the parties intend that all transactions under the Master Repurchase Agreement be sales and purchases and not loans, if any one or more Transactions are recharacterized as
loans by a court of competent jurisdiction, the parties have agreed that the Mortgage Company has pledged the Loans to JPM Chase as security for such recharacterized transactions. To invoke UCC
§ 9-313(h) to maintain the perfection by possession of the Loan Papers of the security interest in the Loans held by JPM Chase as secured party, we instruct you hereby, concurrently with this delivery of the Loan Papers, (1) to hold possession of the Loan Papers for the benefit of JPM Chase as secured party, or (2) to redeliver the Loan Papers to JPM Chase.
We are delivering bare possession of the Loan Papers to you as bailee for your inspection and decision whether you will (i) pay JPM Chase (for the relevant Mortgage Company’s repurchase credit) for, and buy (from the Mortgage Company), the related Loans or (ii) return to
JPM Chase the Loan Papers for the Loans that you do not purchase and pay for. JPM Chase retains and reserves all of its ownership rights in the Loans and the Loan Papers until you actually pay JPM Chase for the Loans and thereby purchase them from the Mortgage Company in accordance with this bailee letter. You acquire no ownership or security interest in them by our delivery of them to you. No sale on credit is being made, and no credit is being extended to you. This bailee letter and our delivery of the Loan Papers to you creates a “true bailment” under applicable law, and your interest in the Loan Papers and their related
Loans is and will be limited to that of a bailee under such law, with no ability to pass a greater interest to another, unless and until you purchase and wire payment of the Pay-off Price (defined below) for the Loans you decide to purchase (if any) to JPM Chase in strict accordance with Section 2 and the other provisions of this bailee letter.
No Release of Interest in Mortgages, Warehouse Lender Release of Security Interest or other release that JPM Chase has executed
or executes will be effective to release JPM Chase’s interest in the proceeds of any Loan unless and until the full Release Price for that Loan has actually been received by JPM Chase.
With respect to the Loans, only JPM Chase has authority (A) to request or direct you (i) where to make payment, (ii) where to return the Loan Papers for Loans you decide not to purchase or
(iii) to take any other action, or (B) to make any agreement with you. Unless JPM Chase hereafter gives you different written instructions or advice, this bailee letter provides all instructions and advice for the Loans and the Loan Papers. You may not honor any notice, direction or other communication from the Mortgage Company (or anyone else) concerning the Loans or the Loan Papers unless it is specifically confirmed in writing by JPM Chase.
You may not make payment for the Loans to anyone but JPM Chase unless you are otherwise specifically instructed in writing by JPM Chase. Until JPM Chase has received payment of the full Pay-off Price for a Loan, you may not deliver any of its Loan
Papers to anyone other than JPM Chase without written authorization from JPM Chase. DO NOT SEND ANY PAYMENTS OR ANY LOAN PAPERS TO THE MORTGAGE COMPANY.
If (but only if) you have already paid the Pay-off Price for a Loan to JPM Chase, then the enclosed Loan Papers for, and ownership of, that Loan are being delivered to you free of
such security interest or any trust, bailment or any other claim by JPM Chase.
It is very important that you promptly return the Loan Papers to us for each Loan that you do not
intend to purchase so that we will know at all times which specific Loans will remain subject to
the Repurchase Agreement and which will not. Accordingly, you will have 30 days after the date of this letter to either (i) return the enclosed Loan Papers for any Loan you elect not to purchase, or (ii) to purchase all of the Loans that you do not return.
Notwithstanding any other provision of this bailee letter, the enclosed Loan Papers are delivered to you on the express and controlling condition that, unless JPM Chase has already received the Pay-Off Price for each of the Loans, you will return any or all of them to JPM Chase promptly upon your receipt of
JPM Chase’s written direction to do so, regardless of whether or not you have decided to purchase such Loans, excluding only those Loans (if any) for which you have already paid us the Pay-Off Price.
You are directed to keep all of the enclosed Loan Papers in a fire- resistant vault and safe from loss, theft and other casualty and you will bear any losses, costs or expenses the Mortgage Company and
JPM Chase may incur as a result of any such event.
If any other written instruction or advice you receive from us, the Mortgage Company or anyone else in respect of the Loans is inconsistent with this bailee letter, then this bailee letter shall control unless JPM Chase confirms
in writing that the other instruction or advice controls.
Please immediately indicate your receipt of this bailee letter and the enclosed Loan Papers, and your acceptance of and agreement to the bailment and the other terms and conditions stated above, by dating and
signing the enclosed copy of this bailee letter and returning it to us (although your doing so will not be necessary to the effectiveness of any of this bailee letter’s terms, provisions or conditions).
Very truly yours,
JPMORGAN CHASE BANK, N.A.
Attached:
Exhibit A - schedule of Loans shipped
RECEIPT ACKNOWLEDGED AND BAILMENT, TERMS AND CONDITIONS ACCEPTED AND AGREED TO ON , 201
[INVESTOR’S NAME]
By: Name: Title:
EXHIBIT K
SELLER NAMES FROM TAX RETURNS
UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC - consolidated tax return filed by parent company, Lennar Corporation.
UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA - consolidated tax
return filed by parent company, Lennar Corporation.
EXHIBIT L
FORM OF TRUST RELEASE LETTER TRUST RELEASE LETTER
TO: JPMORGAN CHASE BANK, N.A.
RE: [Seller] DATE: [ ]
Reference is made to the Master Repurchase Agreement dated as of November , 2013 (as amended, restated, supplemented or otherwise modified from time to time, the “Agreement”), among: (a) JPMorgan Chase Bank, N.A. as a Buyer and as Administrative Agent for the Buyers (“Administrative Agent”), and the other Buyers party thereto and (b) Universal American Mortgage Company, LLC and Universal American Mortgage Company of California (each a “Seller” and collectively, the “Sellers”). Capitalized terms used herein and not otherwise defined have the meanings given to those terms in the Agreement.
Seller hereby requests that the following Mortgage Note be returned to Seller at [address] for the reason(s) set forth below:
Loan ID number | Mortgagor last names (1 name sufficient if same name) | Mortgage loan amount | Allonge, Rider, or CEMA docs to be returned also? | Reason(s) |
Seller agrees that Administrative Agent (as agent and representative of the Buyers) continues to have the sole ownership interest in the listed Mortgage Note and all other Mortgage Assets related to the Mortgage Note.
Seller shall return the corrected Mortgage Note to Administrative Agent no later than the fifth (5th) Business Day after the date of this Trust Release Letter. At all times the Mortgage Note listed above is in the possession of Seller pursuant to this Trust Release Letter, Seller shall hold such Mortgage Note in trust for the benefit of Administrative Agent. Seller hereby certifies that after Administrative Agent delivers the Mortgage Note described above to Seller, the aggregate
original Outstanding Principal Balance of all Mortgage Notes released to Seller pursuant to Trust Release Letters as of the date of this Trust Release Letter does not exceed $10,000,000.
Seller has caused the information set forth in the table below to be accurately completed.
This Trust Receipt prepared by (first & last name) | First & last name of contact person for questions (if different from name to the left) | Contact person’s phone number | Contact person’s fax number | Contact person’s e- mail address |
Sincerely, [SELLER]
By:_ Name:
Title:
SCHEDULE I
APPROVED TAKEOUT INVESTORS
Arizona Housing and Finance Corp. Bank of America
Bank of America, N.A. BB&T Corporation
California Housing Finance Agency CitiFinancial
CitiMortgage
Colorado Housing and Finance Authority Credit Suisse
Deutsche Bank National Trust Co.
Federal Home Loan Mortgage Corporation Federal National Mortgage Association Florida Housing Finance Corporation Freedom Mortgage Corporation
Ginnie Mae GMAC/Ally Bank
Housing Opportunities Commission Montgomery County, MD Idaho Housing and Finance Association
JPMorgan Chase Bank, N.A. Nevada Housing Division
New Penn Financial c/o Wells Fargo Bank North Carolina Housing Finance Agency Oregon Housing and Community Service Dept. Pennsylvania Housing Finance Agency Platinum Home Mortgage Corp.
Redwood Trust
South Carolina State Housing Finance and Development Authority State Home Mortgage/Georgia Department of Community Affairs SunTrust Bank
The Oregon Housing and Community Srv Dept
A. | Bank N.A. |
Utah Housing Corporation
Washington State Housing Finance Commission Wells Fargo Bank, N.A.
Wyoming Community Development Authority
SCHEDULE II
SELLERS’ AUTHORIZED SIGNERS
Robert S. Greaton (Vice President/Senior Vice President) James T. Timmons (President)
Luis Perez-Soto (Senior Manager, Treasury)
SCHEDULE III
TERMS OF EACH SELLER’S OBLIGATIONS TO PAY TRANSACTIONS BY ANOTHER OF THEM
Each Seller hereby agrees to the following terms with respect to Transactions and with respect to the obligations and liabilities of each other Seller:
1.Each Seller hereby (a) agrees to any modifications of any terms or conditions of each other Seller’s obligations and liabilities to Administrative Agent and Buyers (“Obligations”) and/or to any extensions or renewals of time of payment or performance by any other Seller; (b) agrees that it shall not be necessary for Administrative Agent or any Buyer to resort to legal remedies against any other Seller, nor to take any action against any other Person obligated (an “Obligor”) or on or against any Mortgage Assets or any other security for payment or performance of any other Seller’s Obligations before proceeding against such Seller; (c) agrees that no release of any other Seller or any guarantor or other Obligor, or of any Mortgage Assets or other security for any other Seller’s obligations and liabilities, whether by operation of law or by any act of Administrative Agent or any Buyer, with or without notice to such Seller, shall release such Seller and (d) waives notice of demand, dishonor, notice of dishonor, protest, and notice of protest and waives, to the extent permitted by law, all benefit of valuation, appraisement and exemptions under the laws of the United States, or any of the States of New York, Texas or any other state or territory of the United States.
2.The obligations of each Seller for every other Seller’s Obligations shall be primary, absolute and unconditional, and shall remain in full force and effect without regard to, and shall not be impaired or affected by: (a) the genuineness, validity, regularity or enforceability of, or any amendment or change in, this Agreement or any other Transaction Document, or any change in or extension of the manner, place or terms of payment of all or any portion of such other Seller’s Obligations; (b) the taking or failure to take any action to enforce this Agreement or any other Transaction Document, or the exercise or failure to exercise any remedy, power or privilege contained therein or available at law or otherwise, or the waiver by Administrative Agent or any Buyer of any provisions of this Agreement or any other Transaction Document; (c) any impairment, modification, change, release or limitation in any manner of the liability of the other Seller or its estate in bankruptcy, or of any remedy for the enforcement of such other Seller’s liability, resulting from the operation of any present or future provision of the bankruptcy laws (if applicable) or any other statute or regulation, or the dissolution, bankruptcy, insolvency, or reorganization of such other Seller; (d) the merger or consolidation of such other Seller or any sale or transfer by such other Seller of all or part of its assets or property; (e) any claim such Seller may have against such other Seller or any other Obligor, including any claim of contribution; (f) the release, in whole or in part, of any guarantor, such other Seller or any other Obligor; (g) the occurrence of any event or circumstances which might otherwise constitute a surety or similar defense available to, or a discharge of, any Seller, including failure of consideration, fraud by or affecting any Person, usury, forgery, breach of warranty, failure to satisfy any requirement of the statute of frauds, running of any statute or limitation, accord and satisfaction and any defense based on remedies of any type or (h) any other action or circumstance which (with or without notice to or knowledge of such Seller) might in any manner or to any extent vary the risks of such Seller or otherwise constitute a legal or equitable discharge or defense, it being understood and agreed by
each Seller that its obligations for every other Seller’s Obligation shall not be discharged except by the full payment and performance of such other Seller’s Obligation.
3.Each Seller hereby waives every right to which it may be entitled by virtue of any suretyship law.
4.Administrative Agent (as agent and representative of Buyers) shall have the right to determine how, when and what application of payments and credits, if any, whether derived from any Seller or from any other source, shall be made on the Obligations and any other obligations and liabilities owed by any Seller and/or any other Obligor to Administrative Agent or any Buyer.
5.The obligations of each Seller hereunder shall continue to be effective, or be automatically reinstated, as the case may be, if at any time the performance or the payment, as the case may be, in whole or in part, of any Seller’s Obligations is rescinded or must otherwise be restored or returned by Administrative Agent or any Buyer or any other Person (as a preference, fraudulent conveyance or otherwise) upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Seller or any other Person or upon or as a result of the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to any Seller or any other Person, or any substantial part of its property, or otherwise, all as though such payments had not been made. If an Event of Default shall at any time have occurred and be continuing or shall exist and declaration of default or acceleration under or with respect to any Seller’s Obligations shall at such time be prevented by reason of the pendency against any Seller or any other Person of a case or proceeding under any applicable bankruptcy or insolvency law, each Seller agrees that its obligations for any Seller’s Obligations shall be deemed to have been declared in default or accelerated with the same effect as if such Obligations had been declared in default and accelerated in accordance with their respective terms and each Seller shall forthwith perform or pay, as the case may be, as required hereunder in accordance with the terms hereunder without further notice or demand.
6.No postponement or delay on the part of Administrative Agent or any Buyer in the enforcement of any right with respect to the Obligations of any Seller, including any other Seller’s Obligations, shall constitute a waiver of such right and all rights of Administrative Agent or Buyers hereunder shall be cumulative and not alternative and shall be in addition to any other rights granted to Administrative Agent and Buyers in any other agreement or by law.
SCHEDULE IV
Primary Residence (Fixed & ARM Loans) - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $650k | > $650k - $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM | |||||
Purchase | 1 Unit, | 80% 720 | 80% | 720 | 75% | 720 | 70% | 720 | 70% | 720 | |
and NCO | Attached/ | 65% 700 | 60% | 700 | 55% | 680 | 55% | 700 | 55% | 700 | |
Refinance | Detached | 55% 680 | 55% | 680 | |||||||
Cash Out | PUD, | 65% 780 | 65% | 780 | 60% | 780 | 55% | 780 | 55% | 780 | |
Attached/De | |||||||||||
Refinance | tached | 60% 740 | 60% | 740 | 55% | 740 | 50% | 740 | |||
Condo, | 55% 720 | 55% | 720 | ||||||||
Attached/ | |||||||||||
Detached | |||||||||||
Co-op | |||||||||||
Primary Residence (Interest Only Loans) - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $650k | > $650k - $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM |
Purchase and NCO Refinance | 1 Unit, Attached/ Detached PUD, Attached/Det ached Condo, Attached/ Detached Co- op | 70%740 60%720 55%700 | 70%740 60%720 55%700 | 70%800 65%740 55%720 | 65%780 60%740 55%720 | 65% 780 60% 740 55% 720 |
Second Home - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM |
Purchase and NCO Refinance | 1 Unit, Attached/ Detached PUD, Condo, Co-op | 60%740 | 55%740 | 50%740 | 50%740 |
Notes:
• | Maximum DTI 45% |
• | Evidence of underwriting approval required on Jumbo Loans sold to Approved Investors with non- delegated authority |
• | Evidence of Seller’s internal underwriting approval and Approved Investors acceptance of appraisal valuation required on Jumbo Loans sold to Approved Investors with delegated authority |
FIRST AMENDMENT TO MASTER REPURCHASE AGREEMENT
Dated as of December 20, 2014
Between:
UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC, as Seller jointly and severally with the other Sellers
and
UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA, as Seller jointly
and severally with the other Sellers
and
JPMORGAN CHASE BANK, N.A., as Administrative Agent
1. | THIS AMENDMENT |
The Parties hereby agree to amend (for the first time) the Master Repurchase Agreement dated November 21, 2013, between them (the “Original MRA”, and as further supplemented, amended or restated from time to time, the “MRA”) to extend the latest Termination Date, and they hereby amend the MRA as follows (paragraphs below are numbered to correspond to the numbering of the paragraphs of the MRA amended hereby and consequently are sometimes nonsequential):
All capitalized terms used in the MRA and used, but not defined differently, in this amendment (this “Amendment”) have the same meanings here as there.
2. | DEFINITIONS; INTERPRETATION |
A.The definition of “Termination Date” in Section 2(a) of the MRA is hereby amended to read as follows:
“Termination Date” means the earliest of (i) that Business Day which Administrative Agent (solely in accordance with Section 36) designates as the Termination Date, (ii) that Business Day which any Seller designates as the Termination Date by written notice to Administrative Agent at least fifteen (15) days prior to such date, (iii) the date of declaration of the Termination Date pursuant to Section 12(b), and (iv) December 19, 2015.
Schedule IV
A new Schedule IV in the form attached hereto as Schedule IV is hereby made part of the MRA in place of the Schedule IV currently attached to the MRA.
(The remainder of this page is intentionally blank)
1
As amended hereby, the MRA remains in full force and effect, and the Parties hereby ratify and confirm it.
JPMORGAN CHASE BANK, N.A., as
Administrative Agent
By:/s/ Carolyn Johnson
Name: Carolyn Johnson
Title: Underwriter and Senior Vice President
UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
Counterpart signature page to First Amendment to Master Repurchase Agreement
SCHEDULE IV
Primary Residence (Fixed & ARM Loans) - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $650k | > $650k - $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM* | |||
Purchase | 1 Unit, | 85% 740 | 85% | 740 | 75% 700 | 70% | 720 | 70% | 720 |
and NCO | Attached/ | 80% 700 | 80% | 700 | 65% 680 | 60% | 680 | 60% | 680 |
Refinance | Detached | 70% 680 | 70% | 680 | |||||
PUD, | |||||||||
Cash Out | 70% 760 | 70% | 760 | 60% 740 | 55% | 740 | 55% | 760 | |
Attached/D | |||||||||
Refinance | 65% 740 | 65% | 740 | 55% 720 | 50% | 720 | |||
etached | |||||||||
60% 720 | 60% | 720 | |||||||
Condo, | |||||||||
Attached/ | |||||||||
Detached | |||||||||
Co-op | |||||||||
*A Jumbo Loan having a stated principal amount in excess of $2,000,000 cannot be an Eligible Mortgage Loan unless Chase is the Approved Takeout Investor.
Primary Residence (Interest Only Loans) - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $650k | > $650k - $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM* |
Purchase and NCO Refinance | 1 Unit, Attached/ Detached PUD, Attached/De tached Condo, Attached/ Detached Co-op | 70%740 60%720 55%700 | 70%740 60%720 55%700 | 70%800 65%740 55%720 | 65%780 60%740 55%720 | 65% 780 60% 740 55% 720 |
* | A Jumbo Loan having a stated principal amount in excess of $2,000,000 cannot be an Eligible Mortgage Loan unless Chase is the Approved |
Takeout Investor.
Second Home - Combination of Maximum CLTV and Minimum FICO:
Purpose | Property Type | > Conf < $1.0MM | > $1.0MM - $1.5MM | > $1.5MM - $2.0MM | $2.0MM - $3.0MM* |
Purchase and NCO Refinance | 1 Unit, Attached/ Detached PUD, Condo, Co- op | 60%740 | 55%740 | 50%740 | 50%740 |
* A Jumbo Loan having a stated principal amount in excess of $2,000,000 cannot be an Eligible Mortgage Loan unless Chase is the Approved
Takeout Investor.
Notes:
• | Maximum DTI 43% |
• | Evidence of underwriting approval required on Jumbo Loans sold to Approved Investors with non- delegated authority |
• | Evidence of Seller’s internal underwriting approval and Approved Investors acceptance of appraisal valuation required on Jumbo Loans sold to Approved Investors with delegated authority |
Exhibit 10.15
AMENDED AND RESTATED ADMINISTRATION AGREEMENT
This Amended and Restated Administration Agreement (this “Agreement”) dated as of December 20, 2014 (the “Effective Date”), is made by and among JPMORGAN CHASE BANK,
A.(“Chase”), a national banking association, as a Buyer and as administrative agent for the Buyers (in that capacity, Chase is herein referred to as the “Administrative Agent”) and the other Buyers party hereto from time to time (collectively with Chase, “Buyers” and each a “Buyer”) and UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC and UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA (collectively, “Sellers”, and each a “Seller”). Administrative Agent, Buyers and Sellers are sometimes also referred to herein individually as a “Party” and collectively as the “Parties”. Administrative Agent, Chase, Comerica Bank, and Sellers entered into an Administration Agreement dated as of November 21, 2013 (the “Original Administration Agreement”). Effective as of the Effective Date, this Agreement amends and restates the Original Administration Agreement in its entirety. This Agreement shall henceforth be the Administration Agreement referred to in the Repurchase Agreement (defined below).
Recitals
Sellers, Chase, as a Buyer and as Administrative Agent for the Buyers, and such other Buyers have entered into a Master Repurchase Agreement dated as of November 21, 2013 (as amended by the First Amendment to Master Repurchase Agreement dated December 20, 2014, and as it may be further supplemented, amended or restated from time to time, the “Repurchase Agreement”)
Pursuant to the Repurchase Agreement, Chase, as Administrative Agent for the Buyers, has agreed to enter into Transactions for the purchase from Sellers of mortgage loans (the “Purchased Mortgage Loans”), subject to the Sellers’ joint and several obligation to repurchase such Purchased Mortgage Loans at the Repurchase Price on before the Repurchase Date.
The Buyers desire that such Transactions be allocated to them by the Administrative Agent.
The Administrative Agent desires to allocate to Buyers, and each Buyer has agreed to purchase, Purchased Mortgage Loans and the rights related thereto up to such Buyer’s Commitment (as defined below).
Administrative Agent desires to administer the Repurchase Agreement and the allocation of the Purchased Mortgage Loans as agent and representative of the Buyers.
Agreements
In consideration of the mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, hereto agree as follows:
Article 1
DEFINED TERMS
Section 1.1 Defined Terms.
(a)All capitalized terms defined in the Repurchase Agreement and used, but not defined differently, in this Agreement have the same meanings here as there.
(b)As used herein, the following terms have the following meanings: “Administrative Questionnaire” means a form sent by the Administrative Agent to an
assignee in accordance with clause (iv) of Section 8.5(b).
“Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Buyer, (b) an Affiliate of a Buyer or (c) an entity or an Affiliate of an entity that administers or manages a Buyer.
“Available Commitment” means, with respect to any Buyer, the excess (if any) of (x) such Buyer’s Commitment over (y) the sum of the amounts funded by such Buyer and outstanding in respect of Transactions.
“Buyer’s Swing Line Purchase Price” means the relevant Buyer’s Purchase Price Share of a Transaction initially funded as a Swing Line Transaction.
“Commitment” means, for any day, the maximum amount for which a Buyer is committed on that day to enter into Transactions with the Sellers pursuant to the Repurchase Agreement, on its terms and subject to its conditions. The Commitments for the Buyers are as set forth on Schedule 1, as it may be updated, amended and restated by Administrative Agent from time to time.
“Custodial Assets Schedule” means a schedule of Purchased Mortgage Loans held by the Administrative Agent.
“Declining Buyer” is defined in Section 2.1(b).
“Exception Mortgage Loan” is defined in Section 6.2(h).
“Increase Date” shall have the meaning given to such term in that certain First Amendment to Side Letter dated December 20, 2014 by and between Sellers and Administrative Agent.
“Maximum Swing Line Purchase Price” means the lesser of (x) $195,000,000 prior to the Increase Date, and from and after the Increase Date, $270,000,000 and (y) the Facility Amount minus the Aggregate Purchase Price then outstanding other than the aggregate outstanding Purchase Prices with respect to the Swing Line Transactions.
“New Buyer” means a bank or other lending institution that becomes a Buyer as a result of the events described in Section 2.3 or Section 5.3(c).
“Participant” is defined in Section 8.5(a).
“Pro Rata” means in accordance with the Buyers’ respective ownership interests in the Transactions: the ratio of that Buyer’s aggregate outstanding Purchase Price to the aggregate
Purchase Price outstanding for all Buyers. On any day, the Buyers will each own an undivided interest in the Purchased Mortgage Loans, both principal and accrued interest, and a corresponding undivided interest in all Mortgage Assets and all rights to the Mortgage Assets equal to that Buyer’s undivided ownership interest in the Purchased Mortgage Loans, that bears the same ratio to all Purchased Mortgage Loans then held by Administrative Agent (as agent and representative of Buyers) as that Buyer’s Commitment bears to the aggregate Commitments for all Buyers, subject to the following adjustment: if at any time or times,
any Buyer fails to fund any of its Purchase Price Share of any Transaction or fails to fund the re-funding of any Swing Line Transaction and one or more of the other Buyers at its option funds it, then:
(a)the respective ownership interests in the Transactions of both (1) the Declining Buyer and (2) the Buyer (or Buyers) that paid the corresponding amount for such Purchase Price Share(s), shall be proportionately decreased and increased, respectively, to the same extent as if their respective Commitments were changed in direct proportion to the unreimbursed balance outstanding from time to time thereafter of the amount so funded;
(b)the Declining Buyer’s share of all future distributions of any payments and prepayments on the Transactions and any fees paid by Sellers pursuant to this Agreement or the other Transaction Documents shall be paid Pro Rata among such other Buyers in accordance with their respective unrecovered amount paid on account of such Declining Buyer’s Purchase Price Share to the Buyer(s) that so funded such Declining Buyer’s Purchase Price Share until all such funding Buyers have been fully repaid the amount so funded; and
(c)such adjustment shall remain in effect until such time as the Buyer(s) that funded such Purchase Price Share have been so fully repaid.
If no other Buyer funds the Declining Buyer’s Purchase Price Share, then the Pro Rata ownership interest in the Transactions of the Buyers shall be changed, in that case so that each Buyer’s Pro Rata ownership interest in the Transactions is equal to the ratio of that Buyer’s aggregate outstanding Purchase Price to the Aggregate Purchase Price (for all Buyers). Notwithstanding the change in the Buyers’ Pro Rata ownership interests in the Transactions due to any Buyer’s failure to fund its Purchase Price Share of any Transaction(s), such failure to fund shall not diminish any Buyer’s funding obligation for its Purchase Price Shares of any subsequent Transactions.
“Purchase Price Share” means the ratio of (a) a Buyer’s Commitment to (b) the aggregate of the Commitments of all Buyers.
“Replacement Buyer” means the Buyer who has been approved by Administrative Agent in writing and is replacing the Retiring Buyer.
“Required Buyers” means, for any day, the Buyers with aggregate Commitments evidencing fifty-one percent (51%) or more of (a) the aggregate Commitments if on that day the Buyers are committed to enter into Transactions under the Repurchase Agreement or (b) the Aggregate Purchase Price if on or after that day the Buyers’ Commitments have expired or have been terminated and have not been reinstated; provided, that (i) the Commitment of any Declining Buyer shall not be included in determining the consent of Required Buyers hereunder, and (ii)
“Required Buyers” shall include at least two (2) Buyers unless all Buyers other than the consenting Buyer are Declining Buyers.
“Retiring Buyer” is defined in Section 5.3(c).
“Settlement Account” means the account described in Section 3.3(a).
“Swing Line Commitment” means Chase’s commitment to enter into Swing Line Transactions pursuant to Article 3.
“Swing Line Repurchase Date” means, with respect to a Swing Line Transaction, the Business Day next following the day that the Swing Line Transaction was entered into but in no event later than the Termination Date.
“Swing Line Transaction” means Transactions that the Sellers will enter into with Chase to initially fund the Sellers’ daily Purchase Price requirements for Transactions under the Repurchase Agreement.
Article 2
COMMITMENTS TO ENTER INTO TRANSACTIONS
Section 2.1 Commitment to Enter into Transactions.
(a)Subject to the terms and conditions of this Agreement and the Repurchase Agreement and provided that no Default or Event of Default has occurred under the Repurchase Agreement, the Administrative Agent, as agent and representative of Buyers, agrees to enter into Transactions with Sellers up to the Facility Amount. The Buyers’ respective Commitments are set forth on Schedule 1. Each Buyer shall be obligated to fund only that Buyer’s own Purchase Price Share of any Transaction requested, and no Buyer shall be obligated to the Sellers, the Administrative Agent or any other Buyer to fund a (i) greater share of any Transaction or (ii) a share in excess of such Buyer’s Available Commitment, notwithstanding any contrary inference of the provisions of the penultimate grammatical paragraph of Section 1 of the Side Letter.
(b)No Buyer shall be excused from funding its applicable Purchase Price Share of any Transaction merely because any other Buyer has failed or refused to fund its Purchase Price Share of that or any other Transaction. If any Buyer fails to fund its Purchase Price Share of any Transaction or of the re-funding of any Swing Line Transaction (a “Declining Buyer”), (i) the Administrative Agent as a Buyer (in its sole and absolute discretion) may choose to fund the Purchase Price Share of the Declining Buyer, or (ii) the Administrative Agent as a Buyer and the other Buyers who are willing to do so shall have the right (but no obligation, except as provided in Section 3.3(c) below with respect to a failure to refund a Swing Line Transaction) to fund the Declining Buyer’s Purchase Price Share in the proportion that the Commitment of each bears to the sum of the Commitments of all Buyers that have funded (or are funding) their own Purchase Price Shares of that Transaction.
(c)Regardless of whether the other Buyers fund the Purchase Price Share of the Declining Buyer, the respective ownership interests of the Buyers in the Transaction shall be adjusted Pro Rata as described in the definition thereof.
(d)Should the Administrative Agent fund the Declining Buyer’s Purchase Price Share of any Transaction, then the Declining Buyer shall have the obligation to the Administrative Agent, the Sellers and the other Buyers to deliver such amount to the Administrative Agent in collected funds on the next Business Day.
(e)Notwithstanding that multiple Buyers are purchasing Purchase Price Shares of the Transactions entered into under the Repurchase Agreement, all Transactions shall be deemed a single Transaction and all of the Mortgage Assets shall be security for all of the Obligations thereunder.
Section 2.2 Expiration or Termination of the Commitments. Unless extended in writing or terminated earlier in accordance with this Agreement and the Repurchase Agreement, the Buyers’ Commitments to enter into Transactions under this Agreement and the other Transaction Documents (including Chase’s Swing Line Commitment) shall automatically expire at the close of business on the Termination Date, without any requirement for notice or any other action by the Administrative Agent,
any of the Buyers or any other Person.
Section 2.3 Request for Increase in the Facility Amount.
(a)If the Sellers shall request an increase in the Facility Amount in accordance with Section 1 of the Side Letter, the Administrative Agent shall use commercially reasonable efforts to obtain increased Commitments from existing Buyers, new Commitments from prospective new Buyers or such combination thereof as the Administrative Agent shall elect, to achieve such requested increase; each Buyer’s decision whether to increase its Commitment shall be in such Buyer’s sole and absolute discretion.
(b)The Administrative Agent shall (i) first offer the opportunity to each then- existing Buyer to proportionately increase its Commitment before offering prospective new Buyers the opportunity to join as Buyers, and (ii) will next offer the opportunity to the then-existing Buyers who have agreed to increase their Commitments to further proportionately increase them to include any Commitment increase offered to but not accepted by any of the other then-existing Buyers.
(c)If the increase in the Facility Amount is achieved in whole or in part (whether by some or all of the existing Buyers’ increasing their Commitments, written joinder in the Repurchase Agreement by a New Buyer or New Buyers, or both), then (i) the Pro Rata ownership interest in the Transactions of each Buyer (if any) that does not proportionately increase its Commitment shall automatically be reduced and adjusted proportionately and (ii) Schedule 1 shall be updated and the updates executed and delivered by the Administrative Agent to the Sellers and each of the Buyers and shall automatically supersede and replace the then-existing corresponding schedule for all purposes. The amount and Buyers offering any Facility Amount increase shall be subject to the prior written consent of the Sellers, which consent shall not be unreasonably withheld, conditioned or delayed.
Article 3
SWING LINE COMMITMENT
Section 3.1 Swing Line Commitment. In addition to its Commitment under Section 2.1, Chase agrees to enter into Swing Line Transactions with the Sellers in amounts that do not on any
day exceed the Maximum Swing Line Purchase Price for purposes of initially entering into Transactions under the Repurchase Agreement (excluding the initial Transaction for the repurchase from Chase of purchased mortgage loans then held by Chase under the Prior Chase- only MRA and their purchase by Administrative Agent as agent and representative of Buyers, as described in Section 33(b) of the Repurchase Agreement, which shall be funded by all Buyers). The rights and obligations of Chase set forth in this Section 3.1 shall not modify the rights and obligations of Chase in its capacity as a Buyer.
Section 3.2 Swing Line Transactions. Each requested Transaction (other than said initial Transaction) shall be initially funded by Chase as a Swing Line Transaction, provided that:
(a)no Default or Event of Default has occurred and is continuing or would exist after funding of such Swing Line Transaction;
Commitment;
(b) | after such funding, Chase’s aggregate Purchase Price would not exceed its |
(c) | the Maximum Swing Line Purchase Price would not be exceeded; and |
(d)neither the Sellers nor Chase is aware of any reason why the requested Swing Line Transaction cannot or will not be fully funded by the Buyers according to their respective Purchase Price Shares on the Swing Line Repurchase Date.
Section 3.3 Re-funding of Swing Line Transactions.
(a)By 10:00 AM, Houston time, on the Swing Line Repurchase Date, Administrative Agent will deliver written notice to each Buyer stating the amount of such Buyer’s Swing Line Purchase Price for the Swing Line Transaction funded on the immediately preceding Business Day and the amount due from each Buyer to Administrative Agent to pay such Buyer’s Swing Line Purchase Price to Chase (such amount due being such Buyer’s Swing Line Purchase Price net of the sum of such Buyer’s Pro Rata share of any Repurchase Price, Price Differential Payments and other payments theretofore received by Administrative Agent from Sellers, or from Takeout Investors or others for Sellers’s account, and not previously paid or credited by Administrative Agent to such Buyer), and each Buyer will wire such amount by 1:00 PM, Houston time, on such Swing Line Repurchase Date to the Administrative Agent by federal funds wire transfer to such account as Administrative Agent shall specify (the “Settlement Account”).
(b)Each Swing Line Transaction shall be re-funded on its Swing Line Repurchase Date by the Administrative Agent’s paying over to Chase out of the Settlement Account and/or the Funding Account, and Chase’s applying against such Swing Line Transaction, an amount equal to the aggregate Purchase Price funded by Chase in such Swing Line Transaction less Chase’s own Purchase Price Share of such Transaction.
(c)The other Buyers shall be unconditionally and irrevocably obligated subject to the provisions of this Agreement and the other Transaction Documents to timely purchase their respective Purchase Price Shares of each Swing Line Transaction and when they have done so each Swing Line Transaction will be converted to an ordinary Transaction by the Administrative Agent; provided that no Buyer shall be required to purchase its Purchase Price Share of any Swing
Line Transaction to the extent that such purchase would result in such Buyer having an outstanding Purchase Price in excess of its Commitment. In addition to the foregoing, if at the time such Swing Line Transaction was funded, Chase reasonably believed that no Default or Event of Default had occurred and was then continuing, the other Buyers shall remain unconditionally and irrevocably obligated (subject to the provisions of this Agreement and the other Transaction Documents) to timely fund their respective Purchase Price Shares of the Swing Line Transaction, irrespective of whether in the meantime any Default or Event of Default has occurred or been discovered, and irrespective of whether in the meantime some or all of the Buyers’ Commitments have lapsed, expired or been canceled, rescinded or terminated with or without cause, or have been waived, released or excused for any reason whatsoever. If any Buyer nonetheless fails to fund its Purchase Price Share of the Swing Line Transaction, upon Chase’s request, each other Buyer shall fund, in addition to its own Purchase Price Share thereof, that fraction of the Declining Buyer’s Purchase Price Share whose numerator is such Buyer’s Commitment and whose denominator is the sum of the Commitments of all Buyers other than such Declining Buyer; provided that no Buyer shall be required to fund any portion of a Declining Buyer's Purchase Price Share that would results in such Buyer having an aggregate outstanding Purchase Price in excess of it's Commitment.
(d)All accrued Price Differential on Swing Line Transactions shall be due and payable by the Sellers to the Administrative Agent (for distribution to Chase) on the later of (x) the fifteenth (15th) day of the next month (with the first Price Differential payment due January 15, 2015) or (y) two (2) Business Days after the Administrative Agent bills the Sellers for such accrued Price Differential.
Article 4
DISTRIBUTION OF PAYMENTS
Section 4.1 Pro Rata Distributions. All payments received by the Administrative Agent from the Sellers pursuant to the Repurchase Agreement and the Side Letter (including, without limitation, Non-Usage Fee, Price Differential and the Repurchase Price, but excluding fees provided for in the Fee Letter, which shall belong solely to Chase shall be distributed by the Administrative Agent to the Buyers Pro Rata in accordance with their respective ownership interests in the Transactions or as otherwise may be expressly provided in the Repurchase Agreement or Side Letter. By 10:00 AM, Houston time on the Business Day next following a Business Day when the Administrative Agent receives any such payments, their amounts and each Buyer’s Pro Rata share of them shall be described in a report delivered by the Administrative Agent to the Buyers, and the Buyers’ Pro Rata shares of such payments shall be distributed by the Administrative Agent to the Buyers by wire transfers initiated by the Administrative Agent before 1:00 PM (Houston time) on that same day, either directly to the Buyers or to such account at another financial institution as is designated from time to time by a Buyer in writing.
Article 5
THE BUYERS
Section 5.1 Buyers’ Cooperation. The Buyers agree to cooperate among themselves and with the Administrative Agent and from time to time upon the Administrative Agent’s request, to execute and deliver such papers as may be reasonably necessary to enable the Administrative Agent, in its capacity as lead buyer and servicer, to effectively administer and service the Purchased Mortgage Loans and Transactions in the manner contemplated by this Agreement and the Repurchase Agreement.
Section 5.2 Buyers’ Sharing Arrangement. Each of the Buyers agrees that if it should receive any amount (whether by voluntary payment, realization upon security, the exercise of the right of set-off or otherwise) which is applicable to the payment of the Repurchase Price of or Price Differential on the Purchased Mortgage Loans and related Transactions, or of any fees or expenses owing by Sellers to Buyers under the Repurchase Agreement or any other Transaction Document, of an amount that with respect to the related sum or sums received (or receivable) by the other Buyers is in greater proportion than that Buyer’s Pro Rata ownership of the Purchased Mortgage Loans and related Transactions, then such Buyer receiving such excess amount shall purchase from the other Buyers an interest in the Obligations of the Sellers under this Agreement or any of the Transaction Documents in such amount as shall result in a proportional participation by all of the Buyers in such excess amount; provided that if all or any portion of such excess amount is thereafter recovered from such Buyer, such purchase shall be rescinded and the purchase price of such participation interest restored to the extent of such recovery; and provided further that the provisions of this Section 5.2 shall not apply to any of Chase’s fees under the Fee Letter.
Section 5.3 Buyers’ Acknowledgment.
(a)Each Buyer other than Chase hereby acknowledges that Chase has made no representations or warranties with respect to the Purchased Mortgage Loans other than as expressly set forth in this Agreement and the Transaction Documents and that Chase shall have no responsibility (in its capacity as a Buyer, the Administrative Agent or in any other capacity or role) for:
(i)the collectability of the Purchased Mortgage Loans; or
(ii)the value, validity, effectiveness, genuineness, enforceability, or sufficiency of any Purchased Mortgage Loans or other Mortgage Assets or any property at any time subject to
Transactions or otherwise covered by the Transaction Documents; or
(iii)any recital, statement, representation or warranty of the Sellers or any of its Subsidiaries or Affiliates in the Repurchase Agreement or any other Transaction Document, or in any other writing at any time furnished by or on behalf of any Seller or any of its Subsidiaries or Affiliates in connection therewith; or
(iv)the legality, validity, enforceability, or any legal effect of any of the Transaction Documents, or any insurance, bond or similar device purportedly protecting any obligation to the Buyers or any Purchased Mortgage Loans or other Mortgage Assets; or
(v)the financial condition of any Seller or any of its Subsidiaries or Affiliates, the status, health or viability of any industry in which any of them is involved, the prospects for repayment of the Transactions or the effectiveness of any of the provisions of the Transaction Documents (including the financial covenants, tests and hedging requirements) or any aspect of their implementation or administration at any time to reduce or control risks of any type, to produce returns, profits, yields or spreads or to reduce or control losses; or
(vi)the truthfulness, accuracy or completeness of any information at any time supplied or to be supplied in connection with any Seller or any of its Subsidiaries or Affiliates, or otherwise with respect to the Purchased Mortgage Loans, any other Mortgage Assets, or any
source of equity or other financing for any of such companies, or whether any such information is current or meets the requirements of the Transaction Documents; or
(vii)any failure of any Seller or any other obligor under the Repurchase Agreement, any of the other Transaction Documents to perform any of its obligations thereunder.
(b)Each Buyer acknowledges and agrees that, independently and without reliance on the Administrative Agent or any other Buyer, and based on the financial statements and other information furnished by any Seller, its Subsidiaries and Affiliates, and such other documents and information as such Buyer deems necessary or appropriate (all of which such Buyer has obtained and reviewed to enable it to make the decision described in Section 5.3(b)(i)), such Buyer:
(i)has made its own complete analysis of the credit quality of each Seller and its Subsidiaries and the Underwriting and Acquisition Guidelines, and its own decision to make its Commitment and enter into the Repurchase Agreement, this Agreement and the other Transaction Documents;
(ii)will continue, until the Transactions are repurchased and such Buyer’s Commitment has terminated, to make its own credit analysis and its own decision to take or not to take any action in connection with the Transactions, this Agreement and the other Transaction Documents; and
(iii)will, until all Purchased Mortgage Loans in all Transactions are repurchased and such Buyer’s Commitment has terminated, maintain current and complete credit information on the Sellers and update, revise and review for itself the credit quality of each Seller and its Subsidiaries and the Transactions and their documentation.
(c)Compensation Claim; Replacement of a Buyer or Termination of Repurchase Agreement. If any Buyer (or one of its Participants) becomes entitled to claim any additional amounts pursuant to Section 8 of the Repurchase Agreement, the Buyer shall promptly notify the Administrative
Agent of the event by reason of which it has become so entitled. Provided that no Default or Event of Default has occurred, in the event any Buyer becomes a Declining Buyer or any Buyer (or one of its Participants) becomes entitled to claim any additional amounts pursuant to Section 8 of the Repurchase Agreement (in either case, herein referenced to as a “Retiring Buyer”) (i) the Sellers may seek to replace such Retiring Buyer or (ii) the Sellers may elect to terminate the Repurchase Agreement by giving an irrevocable written notice to the Administrative Agent specifying as the termination date a date no earlier than sixty (60) days, and no later than ninety (90) days after the date of the notice, and on the termination date so specified, provided that the Obligations (including the Non-Usage Fee accrued through such termination date) are then fully paid and satisfied. The replacement of a Retiring Buyer pursuant to this Section
1.shall be effective on the tenth (10th) Business Day following the date of a notice to the Retiring Buyer and each other Buyer through the Administrative Agent, subject to satisfaction of the following conditions:
(i)The Replacement Buyer(s) shall pay to the Retiring Buyer an amount equal in the aggregate to the sum of (x) the aggregate outstanding Purchase Price of the
Retiring Buyer, together with all accrued and unpaid Price Differential thereon, and (y) the Retiring Buyer’s Pro Rata share of any accrued and unpaid fees and other Obligations owing under the Repurchase Agreement.
(ii)The Sellers shall have paid to the Administrative Agent for the account of the Retiring Buyer an amount equal to all obligations owing to the Retiring Buyer by the Sellers (other than those obligations of the Sellers owing but not yet due that are referred to in this Section 5.3(c)).
(iii)The Retiring Buyer shall assign all of its rights, obligations and liabilities under the Transaction Documents to a Replacement Buyer approved by the Sellers and the Administrative Agent (such approvals not to be unreasonably withheld, conditioned or delayed); provided that the consent of the Sellers shall not be required if (A) the Replacement Buyer is a Buyer (including permitted assignees thereof); (B) the assignee is an Affiliate of a Buyer; (C) the assignee is an Approved Fund or (D) an Event of Default has occurred and is continuing and provided further that the consent of the Administrative Agent shall not be required if the assignee is (A) a Buyer (including assignees thereof); (B) an Affiliate of a Buyer or (C) an Approved Fund; provided further that (1) no such assignment shall result in a Buyer having an aggregate Commitment of less than Five Million Dollars ($5,000,000); and (2) the Administrative Agent shall have no obligation to consent to there being more than a total of ten (10) Buyers (a participant is not a Buyer).
(iv)The Retiring Buyer and the Replacement Buyer shall execute and deliver to the Administrative Agent an Assignment Agreement substantially in the form of Exhibit A hereof and the Replacement Buyer, if it is not a current Buyer, shall deliver to the Administrative Agent an Administrative Questionnaire in form and substance acceptable to the Administrative Agent.
Upon such assignment, the Retiring Buyer shall have no further right or obligation with respect to the rights and obligations assigned to and assumed by the Replacement Buyer, the Replacement Buyer shall be a Buyer for all purposes under this Agreement and the other Transaction Documents and the Commitments shall be adjusted appropriately. Each Replacement Buyer that is a New Buyer shall become a Buyer and the Retiring Buyer shall cease to be a Buyer; provided that this Agreement and the Repurchase Agreement shall continue to govern the rights and obligations of a Retiring Buyer with respect to any Transactions or other actions taken by such Retiring Buyer while it was a Buyer and the obligations of the Sellers under Section 16 of the Repurchase Agreement shall survive with respect to such Retiring Buyer.
The Sellers agree to execute such papers and agreements as are reasonably necessary to substitute the Replacement Buyer for the Retiring Buyer, including documents necessary to protect all liens and security interests of the Replacement Buyer.
Article 6
ACTIONS REQUIRING CONSENT
Section 6.1 Actions Requiring All Buyers’ Consent. Notwithstanding any provision of the Repurchase Agreement or the Side Letter that it is within the sole discretion of the Administrative Agent to do so (the Parties intend and agree that Sellers have no right to inquire
into Administrative Agent’s authority to act as agent and representative of Buyers), without the written consent or ratification of all Buyers the Administrative Agent shall not:
(a)increase the Facility Amount;
(b)agree to reduction of the Non-Usage Fee or any Pricing Rates specified in the Side Letter or in any Price Differential or Repurchase Price;
(c)release any material Lien held under the Transaction Documents other than in accordance with the Transaction Documents;
(d)enter into any Transaction for the purchase of any ineligible Mortgage Loans (other than pursuant to the Administrative Agent’s discretionary authority under Section 6.2(h));
(e)change any Buyer’s Purchase Price Share or Pro Rata share of a Transaction other than in accordance with the express provisions of the Transaction Documents;
(f)increase the concentration limits set forth in the definition in the Repurchase Agreement of Eligible Mortgage Loan (or otherwise modify such definition), or consent to any increases in the Purchase Prices specified in the Side Letter;
(g)agree to any change in the nature of the Buyers’ respective Commitments from several to joint, in whole or in part;
(h) | agree to any change to the definition of “Required Buyers”; |
(i) | extend the Termination Date; |
Documents;
(j) | release any Seller from any of its material obligations under the Transaction |
(k) | release any guaranty (if any); |
(l)change any provision of any Transaction Document that provides for the pro rata nature of disbursements by or payments to the Buyers;
(m)extend the due date for payment of the Upfront Fee or any Non-Usage Fee, or any Remittance Date, other than in accordance with the express provisions of the Transaction Documents; or
(n) | agree to any change in this Section 6.1 or in Section 6.2 below. |
Section 6.2 Actions Requiring Required Buyers’ Consent. Notwithstanding any provision of the Repurchase Agreement or the Side Letter that it is within the sole discretion of the Administrative Agent to do so, without the written consent or ratification of the Required Buyers, the Administrative Agent shall not:
(a)notify the Sellers that the Buyers do not intend to enter into Transactions as a result of the failure of the conditions precedent (specified in Section 7 of the Repurchase Agreement) to be satisfied;
(b)agree to any material change to, or waive in writing, any of the material conditions precedent to Transactions specified in Section 7 of the Repurchase Agreement;
(c)agree to any material change to, or waive in writing, any of the material representations and warranties of Sellers specified in Section 10 of the Repurchase Agreement;
(d)exercise any of the remedies for default described in Section 12 of the Repurchase Agreement;
(e) | waive any Event of Default under the Transaction Documents; |
(f)unless directed by the Required Buyers not to make a Margin Call, fail to make a Margin Call when the related Margin Deficit exceeds Two Million Five Hundred Thousand Dollars ($2,500,000);
(g)except as otherwise expressly provided for in this Section 6.2, cause or permit any material change in the terms of any affirmative or negative covenants in the Repurchase Agreement or other Transaction Documents; or
(h)cause or permit any material change in the eligibility standards for Mortgage Loans under the Repurchase Agreement or materially change the definition of Eligible Mortgage Loan, provided that the Administrative Agent may in its discretion approve or continue to treat a Mortgage Loan as an Eligible Mortgage Loan (including for purposes of Section 4(d) of the Repurchase Agreement) that otherwise would be ineligible due to concentration limitations or aging limits or breaches of representations and warranties (such Mortgage Loans “Exception Mortgage Loans”) but only to the extent that the sum of the Purchase Prices of such Exception Mortgage Loans do not exceed five percent (5.0%) of the Facility Amount at the time of approval.
Section 6.3 Action Requiring Consent of Affected Buyer. Without the written consent or ratification of each Buyer affected thereby, the Administrative Agent shall not increase any Buyer’s Commitment.
Section 6.4 Administrative Agent’s Discretionary Actions. Except as provided in Section 6.1 and Section 6.2, in its capacity as Administrative Agent and without seeking or obtaining the consent, agreement or approval of any of the other Buyers (although Administrative Agent may elect to obtain any such consent, agreement or approval before acting if in its sole discretion it deems that desirable), the Administrative Agent may:
(a)agree or consent to any change in the handling of the Purchased Mortgage Loans or other Mortgage Assets which in the Administrative Agent’s reasonable judgment is unlikely to have a Material Adverse Effect;
(b)release, reconvey or change, in whole or in part, any Mortgage Asset which is required to be released or reconveyed in accordance with the Transaction Documents;
(c)approve any new investor proposed by the Sellers (and the Administrative Agent will promptly provide to any Buyer that requests it a current list of Approved Takeout Investors);
(d) | approve any Seller’s declaration or payment of any dividend; |
(e) | determine the Market Value of Purchased Mortgage Loans; and |
(f)do or perform any act or thing that, in the Administrative Agent’s reasonable judgment, is necessary or appropriate to enable the Administrative Agent to properly discharge and perform its duties under this Agreement, the Repurchase Agreement, the Side Letter or any other Transaction Document, or which in its reasonable judgment is necessary or appropriate to preserve or protect the validity, integrity or enforceability of the Transaction Documents, the Purchased Mortgage Loans or other Mortgage Assets or the financial condition, operations or prospects in respect of Sellers or to preserve and protect the interest of the Buyers in any of the foregoing.
Section 6.5 Buyers’ Consent to Amendments to Transaction Documents. Each undersigned Buyer, by its execution of this Agreement, authorizes Administrative Agent to enter into the First Amendment to Master Repurchase Agreement and the First Amendment to Side Letter, each dated December 20, 2014, with Sellers, and consents to the amendments to the Transaction Documents set forth therein.
Article 7
JPMORGAN AS AGENT
Section 7.1 Administrative Agent’s Duties. In its capacity as Administrative Agent and until all Transactions are fully paid and satisfied, the Administrative Agent shall:
(a)hold the Transaction Documents, the Purchased Mortgage Loans and the other Mortgage Assets as agent for itself and each other Buyer, and each Buyer (including Chase) shall be deemed to have an interest in the Transaction Documents, the Purchased Mortgage Loans and the other Mortgage Assets on any day in proportion to its Pro Rata interest in the outstanding Transactions on that day;
(b)send, in accordance with the Repurchase Agreement, bills to the Sellers for accrued Price Differential, the Non-Usage Fee and other sums due and receive all payments of Repurchase Price, Price Differential, Non-Usage Fee and other sums on account of the Transactions or with respect to them;
(c)use reasonable diligence to obtain from the Sellers and promptly remit to each Buyer such Buyer’s Pro Rata shares of Repurchase Price, Price Differential, Non-Usage Fee and other sums received by the Administrative Agent on account of the Transactions or with respect to them, in accordance with this Agreement;
(d)use reasonable diligence to recover from the Sellers all expenses incurred that are reimbursable by the Sellers, and promptly remit to each Buyer its Pro Rata share (if any) thereof;
(e)enforce the terms of this Agreement and the Repurchase Agreement, including, with the approval or at the direction of the Required Buyers, the remedies afforded the Buyers pursuant to Section 12 of the Repurchase Agreement;
(f)hold all security interests ratably for itself as a Buyer and as agent and bailee for and on behalf of the other Buyer(s);
(g)request from the Sellers, and promptly forward to the other Buyers, such information as the other Buyers may reasonably request the Administrative Agent to obtain from the Sellers, consistent with the terms of this Agreement and the Repurchase Agreement;
(h)deliver to the Buyers within a reasonable period of time any notices Administrative Agent receives under Section 11(d) of the Repurchase Agreement;
(i)without limiting the Administrative Agent’s rights set forth in Section 5 of the Repurchase Agreement, give notice to the Buyers of any Margin Deficit in excess of Two Million Five Hundred Thousand Dollars ($2,500,000); and
(j)upon request of a Buyer (such request not to be made more than once per week), the Administrative Agent shall deliver a copy of the Custodial Assets Schedule to such Buyer.
Section 7.2 Administrative Agent’s Representations to Buyers. The Administrative Agent hereby represents and warrants to the Buyers (other than itself) that:
(a)the Administrative Agent has delivered to each Buyer true copies of the originals of those Transaction Documents that have been specifically requested by that Buyer; and
(b)the Administrative Agent has no current actual knowledge that any Event of Default has occurred and is continuing on the date of this Agreement.
Section 7.3 Administrative Agent’s Duty of Care, Express Negligence Waiver and Release. AT ALL TIMES UNTIL THE TRANSACTIONS HAVE BEEN PAID IN FULL, THE ADMINISTRATIVE AGENT SHALL EXERCISE THE SAME DEGREE OF CARE IN ADMINISTERING THE TRANSACTIONS, THE PURCHASED MORTGAGE LOANS AND THE OTHER MORTGAGE ASSETS AS CHASE EXERCISES WITH RESPECT TO TRANSACTIONS AND PURCHASED MORTGAGE LOANS THAT ARE HELD SOLELY BY CHASE FOR ITS OWN ACCOUNT, AND THE ADMINISTRATIVE AGENT, IN ITS CAPACITY AS ADMINISTRATIVE AGENT SHALL HAVE NO RESPONSIBILITY TO THE BUYERS OTHER THAN TO EXERCISE SUCH STANDARD OF CARE AND, IN ANY EVENT, CHASE SHALL HAVE NO LIABILITY WITH RESPECT TO ANY OTHER BUYER’S PRO RATA INTEREST IN THE TRANSACTIONS EXCEPT FOR CHASE’S OWN FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. EXCEPT IN THE CASE OF ITS OWN FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, NEITHER THE ADMINISTRATIVE AGENT, ANY BUYER, NOR ANY OF THEIR OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS OR AGENTS SHALL BE LIABLE FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEM UNDER THIS AGREEMENT, THE REPURCHASE AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS REASONABLY BELIEVED BY IT
OR THEM TO BE WITHIN THE DISCRETION OR POWER CONFERRED UPON IT OR THEM BY THE
TRANSACTION DOCUMENTS OR BE RESPONSIBLE FOR CONSEQUENCES OF ANY ERROR OF
JUDGMENT, THE BUYERS EXPRESSLY INTENDING TO HEREBY WAIVE AND RELEASE ALL PRESENT AND FUTURE CLAIMS AND RIGHTS AGAINST THE ADMINISTRATIVE AGENT (I) OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR (II) FOR DAMAGES OR INJURIES CAUSED OR CONTRIBUTED TO BY ANY INDEMNIFIED PARTY’S SOLE OR CONCURRENT ORDINARY NEGLIGENCE THAT DOES NOT AMOUNT TO GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. Except as otherwise specifically and expressly set forth in this Agreement, the Administrative Agent shall not be responsible in any manner to anyone for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement, any supplement, amendment or restatement of it or of any other Transaction Documents or for any representation, warranty, document, certificate, report or statement made or furnished in, under or in connection with this Agreement or any of the other Transaction Documents or be under any obligation to anyone to ascertain or to inquire as to the performance or observation of any
of the terms, covenants or conditions of this Agreement or of the other Transaction Documents or any Guaranty on the part of the Sellers, any Guarantor or anyone else. Without limiting the generality of the foregoing provisions of this Section 7.3, the Administrative Agent may seek and rely upon the advice of legal counsel in taking or refraining to take any action under any of the Transaction Documents or otherwise in respect of the Transactions, the Mortgage Assets and its parties, and shall be fully protected in good faith relying upon such advice.
Section 7.4 Resignation of the Administrative Agent. The Administrative Agent, or any agent or agents hereafter appointed, at any time may resign by giving written notice of resignation to the Sellers and the Buyers and complying with the applicable provisions of this Section 7.4. Upon receiving such notice of resignation or removal, with the Sellers’ consent, which consent shall not unreasonably be conditioned, delayed or withheld (and shall not be required if any Default or Event of Default has occurred that the Administrative Agent has not declared in writing to have been cured or waived), a successor Administrative Agent shall be promptly appointed by all of the Buyers by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Administrative Agent and one copy to the successor Administrative Agent.
Section 7.5 Successor Administrative Agent. Any successor Administrative Agent appointed as provided in Section 7.4 shall execute and deliver to the Sellers, the Buyers and to its predecessor Administrative Agent an instrument accepting such appointment, and thereupon the resignation or removal of the predecessor Administrative Agent shall become effective and such successor Administrative Agent, without any further act, deed or conveyance, shall become vested with all the rights and obligations of its predecessor, with like effect as if originally named as the Administrative Agent; provided that upon the written request of the Sellers, Required Buyers or the successor Administrative Agent, the Administrative Agent ceasing to act shall execute and deliver (a) an instrument transferring to such successor Administrative Agent all of the rights of the Administrative Agent so ceasing to act and (b) to such successor Administrative Agent such instruments as are necessary to transfer the Mortgage Assets to such successor Administrative Agent (including assignments of all Mortgage Assets or Transaction Documents). Upon the request of any such successor Administrative Agent made from time to time, the Sellers shall execute any and all papers which the successor Administrative Agent shall request or require to more fully and certainly vest in and confirm to such successor Administrative Agent all such rights.
Section 7.6 Merger of the Administrative Agent. Any Person into which the Administrative Agent may be merged or converted or with which it may be consolidated, or any
Person surviving or resulting from any merger, conversion or consolidation to which the Administrative Agent shall be a party or any Person succeeding to the commercial banking business of the Administrative Agent, shall be the successor Administrative Agent without the execution or filing of any paper or any further act on the part of any of the parties.
Article 8 GENERAL
Section 8.1 Amendments. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the Administrative Agent, the Buyers (as and to the extent required by Section 6.1, Section 6.2 or Section 6.3, as the case may be) and the Sellers.
Section 8.2 Termination. This Agreement shall terminate upon the repayment of all
Obligations of Sellers under the Repurchase Agreement and termination thereof.
Section 8.3 Headings. The headings in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof.
Section 8.4 Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which together shall constitute but one instrument.
Section 8.5 Assignment; Successors and Assigns.
(a)Participations. (i) Any Buyer may, without the consent of the Sellers or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Buyer’s Pro Rata Shares of Transactions, or their Commitment; provided that (A) such Buyer’s obligations under this Agreement and the Repurchase Agreement shall remain unchanged, (B) such Buyer shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Sellers, the Administrative Agent and the other Buyers shall continue to deal solely and directly with such Buyer in connection with such Buyer’s rights and obligations under this Agreement and the Repurchase Agreement. Any agreement or instrument pursuant to which a Buyer sells such a participation shall provide that such Buyer shall retain the sole right to enforce this Agreement and the Repurchase Agreement and to approve any amendment, modification or waiver of any provision of this Agreement and the Repurchase Agreement; provided that such agreement or instrument may provide that such Buyer will not, without the consent of the Participant, agree to any amendment, modification or waiver described in Section 6.1 hereof that affects such Participant. In those cases (if any) where a Buyer grants rights to any of its Participants to approve amendments, modifications or waivers of any Transaction Documents pursuant to the immediately preceding sentence, such Buyer shall use commercially reasonable efforts to include a voting mechanism as to all such approval rights in the relevant participation agreement(s); provided, that if no such voting mechanism is provided for or is fully and immediately effective, then the vote of such Buyer itself shall be the vote for all of such Buyer’s Pro Rata portions of the Transactions. Subject to Section 8.5(a)(ii) hereof, the Sellers agrees that each Participant shall be entitled to the benefits of Sections 7 and 8 of the Repurchase Agreement to the same extent as if it were a Buyer and had acquired its interest by assignment pursuant to Section 8.5(b) hereof. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 8 of the Repurchase Agreement as though it were a Buyer, provided such Participant agrees to be subject to Article 5 hereof as though it were a Buyer. Notwithstanding any other provision of this Section 8.5(a), neither Sellers, any other Buyer nor Administrative Agent shall have any responsibility or obligation to collect any payments from or remit any payments to any Buyer’s Participant, provide any information, reports or statements to any Buyer’s Participant, obtain any approval, agreement or consent of any Buyer’s Participant or poll any Buyer’s Participants’ votes.
(ii) A Participant shall not be entitled to receive any greater payment under the Repurchase Agreement than the applicable Buyer would have been entitled to receive with respect to the participation sold to such Participant.
(b) | Assignments. |
(i)Neither Seller may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Buyer (and any attempted assignment or transfer by any Seller without such consent shall be null and void).
(ii)Any Buyer may assign to one or more assignees all or a portion of its rights
and obligations under this Agreement (including all or a portion of its Commitment and the Pro Rata Share of the Transactions at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld, conditioned or delayed) of the Sellers and the Administrative Agent; provided that the consent of the Sellers shall not be required if (A) the assignee is a Buyer (including permitted assignees thereof); (B) the assignee is an Affiliate of a Buyer; (C) the assignee is an Approved Fund or (D) if a Default or an Event of Default has occurred and is continuing and provided further that the consent of the Administrative Agent shall not be required if the assignee is (A) a Buyer (including permitted assignees thereof); (B) an Affiliate of a Buyer or (C) an Approved Fund; provided further that (1) no such assignment shall result in a Buyer having an aggregate Commitment of less than Five Million Dollars ($5,000,000); (2) the Administrative Agent shall have no obligation to consent to there being more than a total of ten
(10) Buyers (a participant is not a Buyer) and (3) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment Agreement substantially in the form of Exhibit A hereof and the assignee, if the assignee is not a current Buyer, shall deliver to the Administrative Agent an Administrative Questionnaire in form and substance acceptable to the Administrative Agent.
(iii)Upon such assignment, the assignee shall be a Buyer for all purposes under this Agreement and the other Transaction Documents, if the assignment is an assignment of all of the assignor’s interest in the Pro Rata Share of the Transactions or Commitments and its security to an assignor, the assignor shall be automatically released from all of its obligations and liabilities hereunder and under the Transaction Documents, and, whether it is such a complete assignment or only a partial assignment, the Pro Rata Share of the Transactions or Commitments shall be adjusted appropriately, and the parties agree to approve in writing a revised and updated version of Schedule 1.
Section 8.6 Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if given in accordance with Section 15 of the Repurchase Agreement.
Section 8.7 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF (EXCEPT FOR SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
Section 8.8 Consent to Jurisdiction. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN THE CITY OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN THIS Section 8.8 SHALL AFFECT THE RIGHT OF ADMINISTRATIVE AGENT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY SELLER OR ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS. EACH PARTY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO IT AT ITS ADDRESS FOR NOTICES HEREUNDER SPECIFIED IN THE REPURCHASE AGREEMENT OR IN ANY RELATED JOINDER AGREEMENT.
Section 8.9 Jury Trial Waiver. EACH OF SELLERS, BUYERS AND ADMINISTRATIVE AGENT (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN ANY SELLER AND ADMINISTRATIVE AGENT OR ANY BUYER ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. THIS PROVISION IS A MATERIAL INDUCEMENT TO BUYERS AND ADMINISTRATIVE AGENT TO PROVIDE THE FACILITY EVIDENCED BY THIS AGREEMENT.
Section 8.10 Entirety. This Agreement and the Transaction Documents represent the entire agreement between the Parties with respect to the subject matter. This Agreement supersedes all prior agreements and understandings, oral or written, with respect to the subject matter. In the event of a conflict between this Agreement and the Repurchase Agreement with respect to the Sellers’ rights or obligations, the Repurchase Agreement shall prevail.
Section 8.11 Intent. This Agreement is intended to constitute a security agreement or arrangement or other credit enhancement related to the “Repurchase Agreement” and transactions thereunder as defined under Section 101(47)(v) of the Bankruptcy Code.
Section 8.12 No Third Party Beneficiaries. Except as expressly set forth herein, there are no intended third party beneficiaries to this Agreement.
Section 8.13 General Interpretive Principles. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:
(a)the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender;
(b)accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles;
(c)references herein to Articles, Sections and other subdivisions without specification of a document are to designated Articles, Sections and other subdivisions of this Agreement;
(d)a reference to a paragraph or clause without reference to a specific Section is a reference to the paragraph or clause contained in the same Section in which the reference appears;
(e)the words “herein”, “hereof”, “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular provision;
enumeration;
(f) | the term “include” or “including” means without limitation by reason of |
(g)all times specified herein (unless expressly specified otherwise) are Central times unless otherwise stated.
Section 8.14 Multiple Sellers. Sellers acknowledge and agree that the representations, warranties, covenants and agreements set forth in Section 30 of the Repurchase Agreement are incorporated herein by
reference.
Section 8.15 Execution of Transaction Documents. Each Party represents to the other Parties that this Agreement, the Repurchase Agreement and the Side Letter were executed (to the extent executed by such Party) by such Party outside the State of Florida.
(The remainder of this page is intentionally blank; counterpart signature pages follow.)
EXECUTED as of the Effective Date.
JPMORGAN CHASE BANK, N.A., as
Administrative Agent and as a Buyer
By:/s/ Carolyn W. Johnson | Carolyn W. Johnson |
Senior Vice President and Underwriter
COMERICA BANK
(a Buyer)
By:/s/ Daniel Voigt | Daniel Voigt, Assistant Vice President |
Address for Notices:
Comerica Bank Comerica Bank Tower
1717 Main St., Mail Code 6577
Dallas, Texas 75201 Attention: Daniel Voigt phone: (214) 462-4277
fax: (214) 462-4280
email: [email protected]
BRANCH BANKING AND TRUST COMPANY
(a Buyer)
By:/s/ Stephen Kleindienst Name: Stephen Kleindienst
Title: Senior Vice President
Address for Notices:
Branch Banking and Trust Company
Attention:
phone: fax: email:
UNIVERSAL AMERICAN MORTGAGE COMPANY, LLC,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA,
jointly and severally with the other Sellers
By: /s/ Robert S. Greaton
Name: Robert S. Greaton
Title: Vice President
Schedule 1
Buyers’ Commitments
BUYERS | COMMITMENTS PRIOR TO INCREASE DATE | COMMITMENTS FROM AND AFTER INCREASE DATE |
JPMorgan Chase Bank, N.A. | $250,000,000 | $305,000,000 |
Comerica Bank | $75,000,000 | $90,000,000 |
Branch Banking and Trust Company | $25,000,000 | $55,000,000 |
Facility Amount | $350,000,000 | $450,000,000 |
Exhibit A
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (the “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “Assignor”) and [Insert name of Assignee] (the “Assignee”). Capitalized terms used but not defined herein shall have the meanings given to them in the Administration Agreement identified below (as amended, the “Administration Agreement”) and the Repurchase Agreement, as defined in the Administration Agreement. Assignee hereby acknowledges receipt of a copy of the Repurchase Agreement and the Administration Agreement. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Administration Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below
(i) all of the Assignor’s rights and obligations in its capacity as a Buyer under the Repurchase Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including any letters of credit, guarantees, and Swing Line Transactions included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Buyer) against any Person, whether known or unknown, arising under or in connection with the Administration Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as the “Assigned Interest”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. | Assignor: |
2. | Assignee: |
[and is a Buyer Affiliate of [identify Buyer]]
3. | Sellers: |
4. | Administrative Agent: |
, as the agent and representative of the Buyers under the Administration Agreement
5. | Administration Agreement: The [amount] Administration Agreement dated as of |
among [name of Sellers], the Buyers parties thereto and [name of Administrative Agent], as Administrative Agent
6. | Assigned Interest: |
Aggregate Amount of Commitment/Commitments for all Buyers | Amount of Commitment/Transactions Assigned | Percentage Assigned of Commitment/Transactions |
$ | $ | % |
Effective Date: , 20 [TO BE INSERTED BY THE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]
The terms set forth in this Assignment and Assumption are hereby agreed to:
ASSIGNOR
[NAME OF ASSIGNOR]
By:_ | Title: |
ASSIGNEE
[NAME OF ASSIGNEE]
By:_ | Title: |
[Consented to and] Accepted:
[NAME OF AGENT], as
Administrative Agent
By | Title: |
[Consented to:]
[NAME OF RELEVANT PARTY]
By | Title: |
ANNEX 1
STANDARD TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION
1.Representations and Warranties.
1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Administration Agreement or any other Transaction Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Transaction Documents or any collateral thereunder, (iii) the financial condition of the Sellers, any of its (their) Subsidiaries or Affiliates or any other Person obligated in respect of any Transaction Documents or (iv) the performance or observance by the Sellers, any of its (their) Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Transaction Document.
1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Buyer under the Administration Agreement, (ii) it satisfies the requirements, if any, specified in the Administration Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Buyer, (iii) from and after the Effective Date, it shall be bound by the provisions of the Administration Agreement as a Buyer thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Buyer thereunder, (iv) it has received a copy of the Administration Agreement, together with copies of the most recent financial statements delivered pursuant to the Administration Agreement, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Buyer, and (v) if it is a Person that is organized under the legal requirements of any jurisdiction other than the United States of America or any State thereof, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Administration Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Buyer, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Transaction Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Transaction Documents are required to be performed by it as a Buyer.
2.Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3.General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.
Exhibit 10.18
LENNAR CORPORATION
2015 TARGET BONUS OPPORTUNITY
CHIEF EXECUTIVE OFFICER
NAME | TARGET AWARD OPPORTUNITY [1] |
Stuart Miller | 1.25% of Lennar Corporation Pretax Income [2] |
[1] The 2015 Target Bonus Opportunity program, under the 2012 Incentive Compensation Plan, is intended to encourage superior performance and achievement of the Company’s strategic business objectives. The bonus (if any) awarded under this plan may be adjusted downward at the sole discretion of the Compensation Committee of the Board of Directors, based on its assessment of the quantitative and qualitative performance of the CEO. Factors that may cause an adjustment include, but are not limited to, a comparison of the Company’s actual results (sales, closings, starts, etc) to budget, inventory management, corporate governance, customer satisfaction, and peer/competitor comparisons.
[2] Per our 2012 Incentive Compensation Plan (the “Plan”), Pretax income shall take into account and adjust for goodwill charges, losses or expenses on early retirement of debt, and impairment charges, in accordance with the Plan. Pretax Income is calculated as Net Earnings attributable to Lennar plus/minus income tax expense/benefit.
PAYMENTS
• | The payment of any bonus shall be made no later than April 15th of the year following the fiscal year to which the bonus calculation applies, or if such day is not a business day, the next business day. |
• | 100% of the bonus payment is contingent on the recipient being employed with the Company on the applicable payment date. No bonus will be earned or paid unless the participant remains employed in good standing through such date. |
Your participation in this 2015 Target Bonus Opportunity program shall not constitute a contract of employment or for wages between you and the Company or otherwise entitle you to remain in the employ of the Company. The Target Bonus Opportunity will be adjusted annually to be in alignment with Company goals.
I also understand and agree that for twelve (12) months following termination of my employment with Lennar, I will not, directly or indirectly, employ or offer employment to any Lennar Associate or solicit, recruit, influence or encourage any Lennar Associate to terminate his or her employment with Lennar. Lennar Associate shall mean any person who is, or who during the three (3) month period prior to such time had been, an employee of Lennar.
The Company and associate acknowledge and agree that bonuses are not automatic, but are awarded for excellent individual performance, not just excellent market conditions. Therefore, the Compensation Committee of the Board of Directors may reduce any bonus amount at its sole discretion under any circumstance, and all such decisions will be final and binding.
/S/ STUART A. MILLER | /S/ STEVEN L. GERARD | |
1/14/2015 | 1/14/2015 | |
Stuart Miller Chief Executive Officer Lennar Corporation | Steven Gerard Chairman, Compensation Committee Lennar Corporation | |
LENNAR CORPORATION
2015 TARGET BONUS OPPORTUNITY
PRESIDENT
NAME | TARGET AWARD OPPORTUNITY [1] |
Rick Beckwitt | 1.15% of Lennar Corporation Pretax Income [2] |
[1] The 2015 Target Bonus Opportunity program, under the 2012 Incentive Compensation Plan, is intended to encourage superior performance and achievement of the Company’s strategic business objectives. The bonus (if any) awarded under this plan may be adjusted downward at the sole discretion of the Compensation Committee of the Board of Directors, based on its assessment of the quantitative and qualitative performance of the Associate. Factors that may cause an adjustment include, but are not limited to, a comparison of the Company’s actual results (sales, closings, starts, etc) to budget, inventory management, corporate governance, customer satisfaction, and peer/competitor comparisons.
[2] Per our 2012 Incentive Compensation Plan (the “Plan”), Pretax income shall take into account and adjust for goodwill charges, losses or expenses on early retirement of debt, and impairment charges, in accordance with the Plan. Pretax Income is calculated as Net Earnings attributable to Lennar plus/minus income tax expense/benefit.
PAYMENTS
• | The payment of any bonus shall be made no later than April 15th of the year following the fiscal year to which the bonus calculation applies, or if such day is not a business day, the next business day. |
• | 100% of the bonus payment is contingent on the recipient being employed with the Company on the applicable payment date. No bonus will be earned or paid unless the participant remains employed in good standing through such date. |
Your participation in this 2015 Target Bonus Opportunity program shall not constitute a contract of employment or for wages between you and the Company or otherwise entitle you to remain in the employ of the Company. The Target Bonus Opportunity will be adjusted annually to be in alignment with Company goals.
I also understand and agree that for twelve (12) months following termination of my employment with Lennar, I will not, directly or indirectly, employ or offer employment to any Lennar Associate or solicit, recruit, influence or encourage any Lennar Associate to terminate his or her employment with Lennar. Lennar Associate shall mean any person who is, or who during the three (3) month period prior to such time had been, an employee of Lennar.
The Company and associate acknowledge and agree that bonuses are not automatic, but are awarded for excellent individual performance, not just excellent market conditions. Therefore, the Compensation Committee of the Board of Directors may reduce any bonus amount at its sole discretion under any circumstance, and all such decisions will be final and binding.
/S/ RICK BECKWITT | /S/ STUART A. MILLER | |
1/14/2015 | ||
Rick Beckwitt President Lennar Corporation | Stuart Miller Chief Executive Officer Lennar Corporation | |
LENNAR CORPORATION
2015 TARGET BONUS OPPORTUNITY
CHIEF OPERATING OFFICER
NAME | TARGET AWARD OPPORTUNITY [1] |
Jon Jaffe | 1.15% of Lennar Corporation Pretax Income [2] |
[1] The 2015 Target Bonus Opportunity program, under the 2012 Incentive Compensation Plan, is intended to encourage superior performance and achievement of the Company’s strategic business objectives. The bonus (if any) awarded under this plan may be adjusted downward at the sole discretion of the Compensation Committee of the Board of Directors, based on its assessment of the quantitative and qualitative performance of the Associate. Factors that may cause an adjustment include, but are not limited to, a comparison of the Company’s actual results (sales, closings, starts, etc) to budget, inventory management, corporate governance, customer satisfaction, and peer/competitor comparisons.
[2] Per our 2012 Incentive Compensation Plan (the “Plan”), Pretax income shall take into account and adjust for goodwill charges, losses or expenses on early retirement of debt, and impairment charges, in accordance with the Plan. Pretax Income is calculated as Net Earnings attributable to Lennar plus/minus income tax expense/benefit.
PAYMENTS
• | The payment of any bonus shall be made no later than April 15th of the year following the fiscal year to which the bonus calculation applies, or if such day is not a business day, the next business day. |
• | 100% of the bonus payment is contingent on the recipient being employed with the Company on the applicable payment date. No bonus will be earned or paid unless the participant remains employed in good standing through such date. |
Your participation in this 2015 Target Bonus Opportunity program shall not constitute a contract of employment or for wages between you and the Company or otherwise entitle you to remain in the employ of the Company. The Target Bonus Opportunity will be adjusted annually to be in alignment with Company goals.
I also understand and agree that for twelve (12) months following termination of my employment with Lennar, I will not, directly or indirectly, employ or offer employment to any Lennar Associate or solicit, recruit, influence or encourage any Lennar Associate to terminate his or her employment with Lennar. Lennar Associate shall mean any person who is, or who during the three (3) month period prior to such time had been, an employee of Lennar.
The Company and associate acknowledge and agree that bonuses are not automatic, but are awarded for excellent individual performance, not just excellent market conditions. Therefore, the Compensation Committee of the Board of Directors may reduce any bonus amount at its sole discretion under any circumstance, and all such decisions will be final and binding.
/S/ JON JAFFE | /S/ STUART A. MILLER | |
1/14/2015 | ||
Jon Jaffe Chief Operating Officer Lennar Corporation | Stuart Miller Chief Executive Officer Lennar Corporation | |
LENNAR CORPORATION
2015 TARGET BONUS OPPORTUNITY
SR. CORPORATE MANAGEMENTASSOCIATES
NAME | DEPARTMENT | TARGET AWARD OPPORTUNITY [1] |
Bruce Gross | Executive | 100% of base salary + 1.00% of LFS Pretax Income |
The following are measured to determine % of target paid out:
PERFORMANCE CRITERIA (see definitions section for more detail) | PERCENT OF TARGET AWARD | PERFORMANCE LEVELS/ TARGET BONUS OPPORTUNITY | |
THRESHOLD | % OF TARGET | ||
Individual Performance — Based on annual Performance Appraisal review determined at the end of the fiscal year by current supervisor. | 60% | Good Very Good Excellent | 20% 40% 60% |
Corporate Governance, Company Policy and Procedure Adherence, and Internal Audit Evaluation — As determined by the Corporate Governance Committee | 40% | Good Very Good Excellent | 10% 25% 40% |
TOTAL [1] | 100% | ||
ADDITIONAL BONUS POTENTIAL: | |||
LFS Pretax Income | 1.00% | 1.00% of LFS Pretax Income | |
Pretax Achievement vs. Plan Upside Potential [2] | Up to +50% | % of upside target earned will be adjusted pro-rata between 0% and 50% of Associate’s Target based on Pretax achievement of 100% to 115% of Business Plan. Consideration will also be given for Associates’ contribution towards significant value creation transaction(s) for the Company. | |
[1] The 2015 Target Bonus Opportunity is intended to encourage superior performance and achievement of the Company’s strategic business objectives. The bonus (if any) awarded under this plan may be adjusted downward at the sole discretion of the Compensation Committee of the Board of Directors, based on its assessment of the quantitative and qualitative performance of the associate. Factors that may cause an adjustment include, but are not limited to, a comparison of the associate’s performance to others in the program, economic or market considerations, etc.
[2] Upside Potential: % of Target earned will be adjusted pro-rata between 0% and 50% of Target based on Pretax achievement of 100% to 115% of Business Plan (i.e. 107.5% of Business Plan Achievement would result in an additional 25% of Target Earned, and 115% of Business Plan Achievement would result in an additional 50% of Target Earned). Consideration will also be given for Associates’ contribution towards significant value creation transaction(s) for the Company. Per our 2012 Incentive Compensation Plan (the “Plan”), Pretax income shall take into account and adjust for goodwill charges, losses or expenses on early retirement of debt, and impairment charges, in accordance with the Plan. Pretax Income is calculated as Net Earnings attributable to Lennar plus/minus income tax expense/benefit.
PAYMENTS
• | The payment of any bonus shall be made no later than April 15th of the year following the fiscal year to which the bonus calculation applies, or if such day is not a business day, the next business day. |
• | 100% of the bonus payment is contingent on the recipient being employed with the Company on the applicable payment date. No bonus will be earned or paid unless the participant remains employed in good standing through such date. |
Your participation in this 2015 Target Bonus Opportunity shall not constitute a contract of employment or for wages between you and the Company or otherwise entitle you to remain in the employ of the Company. The Target Bonus Opportunity will be adjusted annually to be in alignment with Company goals.
I also understand and agree that for twelve (12) months following termination of my employment with Lennar, I will not, directly or indirectly, employ or offer employment to any Lennar Associate or solicit, recruit, influence or encourage any Lennar Associate to terminate his or her employment with Lennar. Lennar Associate shall mean any person who is, or who during the three (3) month period prior to such time had been, an employee of Lennar.
The Company and associate acknowledge and agree that bonuses are not automatic, but are awarded for excellent individual performance, not just excellent market conditions. Therefore, the Compensation Committee of the Board of Directors may reduce any bonus amount at its sole discretion under any circumstance, and all such decisions will be final and binding.
/S/ BRUCE GROSS | /S/ STUART A. MILLER | |
1/21/2015 | ||
Bruce Gross Chief Financial Officer Lennar Corporation | Stuart Miller Chief Executive Officer Lennar Corporation | |
LENNAR CORPORATION
2015 TARGET BONUS OPPORTUNITY
SR. CORPORATE MANAGEMENTASSOCIATES
NAME | DEPARTMENT | TARGET AWARD OPPORTUNITY [1] |
Mark Sustana | Legal | 100% of base salary |
The following are measured to determine % of target paid out:
PERFORMANCE CRITERIA (see definitions section for more detail) | PERCENT OF TARGET AWARD | PERFORMANCE LEVELS/ TARGET BONUS OPPORTUNITY | |
THRESHOLD | % OF TARGET | ||
Individual Performance — Based on annual Performance Appraisal review determined at the end of the fiscal year by current supervisor. | 60% | Good Very Good Excellent | 20% 40% 60% |
Corporate Governance, Company Policy and Procedure Adherence, and Internal Audit Evaluation — As determined by the Corporate Governance Committee | 40% | Good Very Good Excellent | 10% 25% 40% |
TOTAL [1] | 100% | ||
UPSIDE POTENTIAL [2] | |||
Pretax achievement vs. Plan | Up to +50% | % of upside target earned will be adjusted pro-rata between 0% and 50% of Associate’s target based on Pretax achievement of 100% to 115% of Business Plan. Consideration will also be given for Associates’ contribution towards significant value creation transaction(s) for the Company. | |
[1] The 2015 Target Bonus Opportunity is intended to encourage superior performance and achievement of the Company’s strategic business objectives. The bonus (if any) awarded under this plan may be adjusted downward at the sole discretion of the Compensation Committee of the Board of Directors, based on its assessment of the quantitative and qualitative performance of the associate. Factors that may cause an adjustment include, but are not limited to, a comparison of the associate’s performance to others in the program, economic or market considerations, etc.
[2] Upside Potential: % of Target earned will be adjusted pro-rata between 0% and 50% of Target based on Pretax achievement of 100% to 115% of Business Plan (i.e. 107.5% of Business Plan Achievement would result in an additional 25% of Target Earned, and 115% of Business Plan Achievement would result in an additional 50% of Target Earned). Consideration will also be given for Associates’ contribution towards significant value creation transaction(s) for the Company. Per our 2012 Incentive Compensation Plan (the “Plan”), Pretax income shall take into account and adjust for goodwill charges, losses or expenses on early retirement of debt, and impairment charges, in accordance with the Plan. Pretax Income is calculated as Net Earnings attributable to Lennar plus/minus income tax expense/benefit.
PAYMENTS
• | The payment of any bonus shall be made no later than April 15th of the year following the fiscal year to which the bonus calculation applies, or if such day is not a business day, the next business day. |
• | 100% of the bonus payment is contingent on the recipient being employed with the Company on the applicable payment date. No bonus will be earned or paid unless the participant remains employed in good standing through such date. |
Your participation in this 2015 Target Bonus Opportunity shall not constitute a contract of employment or for wages between you and the Company or otherwise entitle you to remain in the employ of the Company. The Target Bonus Opportunity will be adjusted annually to be in alignment with Company goals.
I also understand and agree that for twelve (12) months following termination of my employment with Lennar, I will not, directly or indirectly, employ or offer employment to any Lennar Associate or solicit, recruit, influence or encourage any Lennar Associate to terminate his or her employment with Lennar. Lennar Associate shall mean any person who is, or who during the three (3) month period prior to such time had been, an employee of Lennar.
The Company and associate acknowledge and agree that bonuses are not automatic, but are awarded for excellent individual performance, not just excellent market conditions. Therefore, the Compensation Committee of the Board of Directors may reduce any bonus amount at its sole discretion under any circumstance, and all such decisions will be final and binding.
/S/ MARK SUSTANA | /S/ STUART A. MILLER | /S/ BRUCE GROSS | ||
1/14/2015 | ||||
Mark Sustana General Counsel Lennar Corporation | Stuart Miller Chief Executive Officer Lennar Corporation | Bruce Gross Vice President & Chief Financial Officer Lennar Corporation | ||
Exhibit 21
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
308 Furman, Ltd. | TX | |||
360 Developers, LLC | FL | |||
Ann Arundel Farms, Ltd. | TX | |||
Aquaterra Utilities, Inc. | FL | |||
Asbury Woods L.L.C. | IL | |||
Astoria Options, LLC | DE | |||
Autumn Creek Development, Ltd. | TX | |||
Aylon, LLC | DE | |||
Bainebridge 249, LLC | FL | |||
Bay Colony Expansion 369, Ltd. | TX | |||
Bay River Colony Development, Ltd. | TX | |||
BB Investment Holdings, LLC | NV | |||
BCI Properties, LLC | NV | |||
Bellagio Lennar, LLC | FL | |||
Belle Meade LEN Holdings, LLC | FL | |||
Belle Meade Partners, LLC | FL | |||
Bonterra Lennar, LLC | FL | |||
BPH I, LLC | NV | |||
Bramalea California, Inc. | CA | |||
Bressi Gardenlane, LLC | DE | |||
Builders LP, Inc. | DE | |||
Cambria L.L.C. | IL | |||
Cary Woods, LLC | IL | |||
Casa Marina Development, LLC | FL | |||
Caswell Acquisition Group, LLC | DE | |||
Cedar Lakes II, LLC | NC | |||
Cherrytree II LLC | MD | |||
CL Ventures, LLC | FL | |||
Club Bonterra Lennar, LLC | FL | |||
Coco Palm 82, LLC | FL | |||
Colonial Heritage LLC | VA | |||
Concord Station, LLP | FL | Club Concord Station | ||
Coto De Caza, Ltd., Limited Partnership | CA | |||
Coventry L.L.C. | IL | |||
CP Development Co., LP | DE | |||
CP Red Oak Management, LLC | TX | |||
CP Red Oak Partners, Ltd. | TX | |||
CP/HPS Development Co. GP, LLC | DE | |||
CP/HPS Development Co.-C, LLC | DE | |||
CPFE, LLC | MD | |||
Creekside Crossing, L.L.C. | IL | |||
Crest at Fondren Holdings, LLC. | DE | |||
1
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
Crest at Fondren Investor, LLC. | DE | |||
CV Parcel, LLC | FL | |||
Danville Tassajara Partners, LLC | DE | |||
Darcy-Joliet L.L.C. | IL | |||
DBJ Holdings, LLC | NV | |||
DCA Financial, LLC | FL | |||
DTC Holdings of Florida, LLC | FL | |||
Durrell 33, LLC | NJ | |||
Eagle Bend Commercial, LLC | CO | |||
Eagle Home Mortgage of California, Inc. | CA | |||
Eagle Mortgage Holdings, LLC | DE | |||
Edgefield Holdings, LLC | DE | |||
Edgewater Reinsurance, Ltd. | Turks and Caicos | |||
Estates Seven, LLC | DE | |||
EV, LLC | MD | |||
Evergreen Village LLC | DE | |||
F&R Florida Homes, LLC | FL | |||
F&R QVI Home Investments USA, LLC | DE | |||
Fidelity Guaranty and Acceptance Corp. | DE | First Texas Fidelity Company | ||
Five Point Communities Management, Inc. | DE | |||
Five Point Communities, LP | DE | |||
FLORDADE LLC | FL | |||
Fox-Maple Associates, LLC | NJ | Maple Ridge Asociates, LLC | ||
Friendswood Development Company, LLC | TX | |||
Garco Investments, LLC | FL | |||
Greystone Construction, Inc. | AZ | |||
Greystone Homes of Nevada, Inc. | DE | |||
Greystone Homes, Inc. | DE | |||
Greystone Nevada, LLC | DE | Lennar Homes | ||
Greywall Club L.L.C. | IL | |||
Hammocks Lennar LLC | FL | |||
Harveston, LLC | DE | |||
Haverton L.L.C. | IL | |||
HCC Investors, LLC | DE | |||
Heathcote Commons LLC | VA | |||
Heritage of Auburn Hills, L.L.C. | MI | |||
Hewitts Landing Trustee, LLC | MA | |||
Home Buyer's Advantage Realty, Inc. | TX | |||
Homecraft Corporation | TX | |||
HPS Development Co., LP | DE | |||
HPS Vertical Development Co., LLC | DE | |||
HPS Vertical Development Co.-B, LP | DE | |||
2
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
HPS Vertical Development Co.-D/E, LLC | DE | |||
HPS1 Block 1, LLC | DE | |||
HPS1 Block 48-1A, LLC | DE | |||
HPS1 Block 48-1B, LLC | DE | |||
HPS1 Block 48-2A, LLC | DE | |||
HPS1 Block 48-2B, LLC | DE | |||
HPS1 Block 48-3A, LLC | DE | |||
HPS1 Block 48-3B, LLC | DE | |||
HPS1 Block 50, LLC | DE | |||
HPS1 Block 51, LLC | DE | |||
HPS1 Block 52, LLC | DE | |||
HPS1 Block 53, LLC | DE | |||
HPS1 Block 54, LLC | DE | |||
HPS1 Block 55, LLC | DE | |||
HPS1 Block 56/57, LLC | DE | |||
HTC Golf Club, LLC | CO | |||
Inactive Companies, LLC | FL | |||
Independence L.L.C. | VA | |||
Isles at Bayshore Club, LLC | FL | |||
Kendall Hammocks Commercial, LLC | FL | |||
LAC MOUNTAIN VIEW INVESTOR, LLC | DE | |||
Lakelands at Easton, L.L.C. | MD | |||
Lakeside Farm, LLC | MD | |||
LCD Asante, LLC | DE | |||
LCI Downtown Doral Investor, LLC | DE | |||
LCI North DeKalb Investor GP, LLC | DE | |||
LCI North DeKalb Investor LP, LLC | DE | |||
LCI Property Managers, LLC | DE | |||
Legends Club, LLC | FL | |||
Legends Golf Club, LLC | FL | |||
LEN - Belle Meade, LLC | FL | |||
LEN - OBS Windemere, LLC | DE | |||
LEN - Palm Vista, LLC | FL | |||
LEN OT Holdings, LLC | FL | |||
LEN Paradise Cable, LLC | FL | |||
LEN Paradise Operating, LLC | FL | |||
Len Paradise, LLC | FL | |||
LEN-CG South, LLC | FL | |||
Lencraft, LLC | MD | |||
LENH I, LLC | FL | |||
Len-Hawks Point, LLC | FL | |||
Lennar - BVHP, LLC | CA | |||
Lennar Aircraft I, LLC | DE | |||
3
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
Lennar Arizona Construction, Inc. | AZ | |||
Lennar Arizona, Inc. | AZ | |||
Lennar Associates Management Holding Company | FL | |||
Lennar Associates Management, LLC | DE | |||
Lennar Avenue One, LLC | DE | |||
Lennar Berkeley, LLC | NJ | |||
Lennar Bridges, LLC | CA | |||
Lennar Buffington Colorado Crossing, L.P. | TX | |||
Lennar Buffington Zachary Scott, L.P. | TX | |||
Lennar Carolinas, LLC | DE | |||
Lennar Central Park, LLC | DE | |||
Lennar Central Region Sweep, Inc. | NV | |||
Lennar Central Texas, L.P. | TX | |||
Lennar Chicago, Inc. | IL | Lennar | ||
Lennar Cobra, LLC | DE | |||
Lennar Colorado Minerals LLC | CO | |||
Lennar Colorado, LLC | CO | Blackstone Country Club | ||
Lennar Commercial Investors, LLC | FL | |||
Lennar Commercial Management, Inc. | CA | |||
Lennar Communities Development, Inc. | DE | |||
Lennar Communities Nevada, LLC | NV | |||
Lennar Communities of Chicago L.L.C. | IL | |||
Lennar Communities, Inc. | CA | |||
Lennar Concord, LLC | DE | |||
Lennar Construction, Inc. | AZ | |||
Lennar Coto Holdings, L.L.C. | CA | |||
Lennar Courts, LLC | FL | |||
Lennar Developers, Inc. | FL | |||
Lennar Ewing, LLC | NJ | |||
Lennar Family of Builders GP, Inc. | DE | |||
Lennar Family of Builders Limited Partnership | DE | |||
Lennar Financial Services, LLC | FL | |||
Lennar Flamingo, LLC | FL | |||
Lennar Fresno, Inc. | CA | |||
Lennar Gardens, LLC | FL | |||
Lennar Georgia, Inc. | GA | |||
Lennar Greer Ranch Venture, LLC | CA | |||
Lennar Heritage Fields, LLC | CA | |||
Lennar Hingham Holdings, LLC | DE | |||
Lennar Hingham JV, LLC | DE | |||
Lennar Homes Holding, LLC | DE | |||
Lennar Homes NJ, LLC | DE | |||
Lennar Homes of Arizona, Inc. | AZ | |||
4
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
Lennar Homes of California, Inc. | CA | |||
LENNAR HOMES OF TENNESSEE, LLC | DE | |||
Lennar Homes of Texas Land and Construction, Ltd. | TX | Friendswood Development Company | ||
TX | Village Builders Land Company | |||
Lennar Homes of Texas Sales and Marketing, Ltd. | TX | Kingswood Sales Associates | ||
TX | Houston Village Builders, Inc. | |||
TX | Friendswood Land Development Company | |||
TX | Bay Oaks Sales Associates | |||
TX | Lennar Homes of Texas, Inc. | |||
TX | U.S. Home | |||
TX | U.S. Home of Texas | |||
TX | U.S. Home of Texas, Inc. | |||
TX | NuHome Designs, Inc. | |||
TX | Village Builders, Inc. | |||
TX | NuHome of Texas, Inc. | |||
TX | NuHome Designs | |||
TX | NuHome of Texas | |||
TX | Lennar Homes of Texas, Inc. | |||
TX | Lennar Homes | |||
TX | Village Builders | |||
TX | Friendswood Development Company | |||
Lennar Homes, LLC | FL | Baywinds Land Trust D/B/A Club Vineyards | ||
FL | Doral Park | |||
FL | Doral Park Joint Venture | |||
FL | The Breakers at Lennar's Pembroke Isles | |||
FL | Doral Park Country Club | |||
FL | Coco Pointe | |||
FL | The Point at Lennar's Pembroke Isles | |||
FL | The Royal Club | |||
FL | The Palace | |||
FL | Club Pembroke Isles | |||
FL | Walnut Creek | |||
FL | Lennars The Palms @ Pembroke Isles | |||
FL | Walnut Creek Club | |||
FL | Lennar Century 8th Street Developers | |||
FL | Your Hometown Builder | |||
FL | Lennar Communities | |||
FL | Verona Trace Club, Inc. | |||
FL | Lake Osborne Trailer Ranch | |||
FL | Tripson Estates Club, Inc. | |||
FL | Club Carriage Pointe | |||
FL | Club Tuscany Village | |||
FL | Club Silver Palms | |||
5
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
FL | Bent Creek Club, Inc. | |||
FL | U.S. Home | |||
FL | Verona Trace Club, Inc. | |||
FL | Club Malibu Bay | |||
FL | Copper Creek Club, Inc. | |||
FL | Isles of Bayshore Club | |||
Lennar HW Scala SF GP, LLC | DE | |||
Lennar Illinois Trading Company, LLC | IL | |||
Lennar Imperial Holdings Limited Partnership | DE | |||
Lennar Insurance Services, Inc. | FL | |||
Lennar International Holding, LLC | DE | |||
Lennar International, LLC | DE | |||
Lennar Lakeside Investor, LLC | DE | |||
Lennar Land Partners Sub II, Inc. | NV | |||
Lennar Land Partners Sub, Inc. | DE | |||
Lennar Layton, LLC | DE | |||
Lennar Long Beach Promenade Partners, LLC | DE | |||
Lennar Lytle, LLC | DE | |||
Lennar Mare Island, LLC | CA | |||
Lennar Marina A Funding, LLC | DE | |||
Lennar Massachusetts Properties, Inc. | DE | |||
Lennar MF Holdings, LLC | DE | |||
Lennar Middletown, LLC | NJ | |||
Lennar Multifamily Communities, LLC | DE | |||
Lennar Multifamily Management, LLC | DE | |||
Lennar New Jersey Properties, Inc. | DE | |||
Lennar New York, LLC | NY | |||
Lennar Northeast Properties LLC | NJ | |||
Lennar Northeast Properties, Inc. | NV | |||
Lennar Northwest, Inc. | DE | |||
Lennar Pacific Properties Management, Inc. | DE | |||
Lennar Pacific Properties, Inc. | DE | |||
Lennar Pacific, Inc. | DE | |||
Lennar PI Acquisition, LLC | NJ | |||
Lennar PI Property Acquisition, LLC | NJ | |||
Lennar PIS Management Company, LLC | DE | |||
Lennar PNW, Inc. | WA | |||
Lennar Point, LLC | NJ | |||
Lennar Port Imperial South, LLC | DE | |||
Lennar Realty, Inc. | FL | |||
Lennar Renaissance, Inc. | CA | |||
Lennar Reno, LLC | NV | Baker-Coleman Communities | ||
NV | Lennar Homes | |||
6
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
NV | Lennar Communities | |||
Lennar Rialto Investment LP | DE | |||
Lennar Riverside West Urban Renewal Company, L.L.C. | NJ | |||
Lennar Riverside West, LLC | DE | |||
Lennar Sacramento, Inc. | CA | |||
Lennar Sales Corp. | CA | |||
Lennar San Jose Holdings, Inc. | CA | |||
Lennar Sierra Sunrise, LLC | CA | |||
Lennar Southland I, Inc. | CA | |||
Lennar Southwest Holding Corp. | NV | |||
Lennar Spencer's Crossing, LLC | DE | |||
Lennar Sun Ridge, LLC | CA | |||
Lennar Texas Holding Company | TX | |||
Lennar Trading Company, LP | TX | |||
Lennar Ventures, LLC | FL | |||
Lennar West Valley, LLC | CA | |||
Lennar Winncrest, LLC | DE | |||
Lennar.com Inc. | FL | |||
Lennar/LNR Camino Palomar, LLC | CA | |||
Lennar/Shadeland, LLC | PA | |||
Lennar-Lantana Boatyard, Inc. | FL | |||
LEN-Ryan 1, LLC | FL | |||
Len-Verandahs, LLP | FL | |||
LFS Holding Company, LLC | DE | |||
LH Eastwind, LLC | FL | |||
LHC HP I, LLC | DE | |||
LHC HP II, LLC | DE | |||
LH-EH Layton Lakes Estates, LLC | AZ | |||
LHI Renaissance, LLC | FL | Club Oasis | ||
LMC 1001 Olive Investor, LLC | DE | |||
LMC 144th and Grant Investor, LLC | DE | |||
LMC 2026 Madison Holdings, LLC | DE | |||
LMC 2026 Madison Investor, LLC | DE | |||
LMC 85 South Union Holdings, LLC | DE | |||
LMC Berkeley I Investor, LLC | DE | |||
LMC Berry Hill Lofts Holdings, LLC | DE | |||
LMC Berry Hill Lofts Investor, LLC | DE | |||
LMC Bloomington Holdings, LLC | DE | |||
LMC Boca City Walk Developer, LLC | DE | |||
LMC Boca City Walk Investor, LLC | DE | |||
LMC Bolingbrook Holdings, LLC | DE | |||
LMC Central at McDowell, LLC | DE | |||
LMC Chandler and McClintock Holdings, LLC | DE | |||
7
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
LMC Charlotte Ballpark Developer, LLC | DE | |||
LMC Emeryville I Investor, LLC | DE | |||
LMC Emeryville I Lennar Investor, LLC | DE | |||
LMC Gateway Investor, LLC | DE | |||
LMC Gateway Venture, LLC | DE | |||
LMC Gilman Square Investor, LLC | DE | |||
LMC Hollywood Highland Investor, LLC | DE | |||
LMC Malden Station Investor, LLC | DE | LMI Soco Santa Fe, LLC | ||
LMC Millenia Investor, LLC | DE | |||
LMC Taylor Street Holdings, LLC | DE | |||
LMC West Loop Investor, LLC | DE | |||
LMI - Jacksonville Investor, LLC | DE | |||
LMI - South Kings Development Investor, LLC | DE | |||
LMI - West Seattle Holdings, LLC | DE | |||
LMI - West Seattle Investor, LLC | DE | |||
LMI - West Seattle, LLC | DE | |||
LMI (150 OCEAN) INVESTOR, LLC | DE | |||
LMI 99 Hudson Developer, LLC | DE | |||
LMI 99 Hudson Investor, LLC | DE | |||
LMI Cell Tower Investors, LLC | DE | |||
LMI Collegedale Investor, LLC | DE | |||
LMI Collegedale, LLC | DE | |||
LMI Contractors, LLC | DE | |||
LMI Glencoe Dallas Investor, LLC | DE | |||
LMI Glenview Investor, LLC | DE | |||
LMI Largo Park Investor, LLC | DE | |||
LMI Las Colinas Station, LLC | DE | |||
LMI Naperville Investor, LLC | DE | |||
LMI Pacific Tower, LLC | DE | |||
LMI Park Central Investor, LLC | DE | |||
LMI Park Central Two, LLC | DE | |||
LMI Peachtree Corners Investor, LLC | DE | |||
LMI Peachtree Corners, LLC | DE | |||
LMI Pearl Apartment Homes Investor, LLC | DE | |||
LMI Redwood City Investor, LLC | DE | |||
LMI TEMPE 601 W. RIO SALADO INVESTOR, LLC | DE | |||
LMI-AECOM Holdings, LLC | DE | |||
LMI-AECOM Jersey City, LLC | DE | |||
LMICS, LLC | DE | |||
LMI-JC Developer, LLC | DE | |||
LMI-JC, LLC | DE | |||
LNC at Meadowbrook, LLC | IL | |||
LNC at Ravenna, LLC | IL | |||
8
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
LNC Communities I, Inc. | CO | |||
LNC Communities II, LLC | CO | Fortress Genesee III, LLC | ||
LNC Communities III, Inc. | CO | |||
LNC Communities IV, LLC | CO | |||
LNC Communities IX, LLC | CO | |||
LNC Communities V, LLC | CO | |||
LNC Communities VI, LLC | CO | |||
LNC Communities VII, LLC | CO | |||
LNC Communities VIII, LLC | CO | |||
LNC Northeast Mortgage, Inc. | DE | |||
LNC Pennsylvania Realty, Inc. | PA | |||
Long Beach Development, LLC | TX | |||
Longleaf Acquisition, LLC | FL | |||
Lori Gardens Associates II, LLC | NJ | |||
Lori Gardens Associates III, LLC | NJ | |||
Lori Gardens Associates, L.L.C. | NJ | |||
Lorton Station, LLC | VA | |||
LS College Park, LLC | DE | |||
LW D'Andrea, LLC | DE | |||
Madrona Ridge L.L.C. | IL | |||
Madrona Village L.L.C. | IL | |||
Madrona Village Mews L.L.C. | IL | |||
Majestic Woods, LLC | NJ | |||
Marble Mountain Partners, LLC | DE | |||
Mid-County Utilities, Inc. | MD | |||
Miralago West Lennar, LLC | FL | |||
Mission Viejo 12S Venture, LP | CA | |||
Mission Viejo Holdings, Inc. | CA | |||
Moffett Meadows Partners, LLC | DE | |||
NASSA LLC | FL | |||
NC Crabtree Valley, LLC | DE | |||
NC Properties I, LLC | DE | |||
NC Properties II, LLC | DE | |||
North American Advantage Insurance Services, LLC | TX | |||
North American Asset Development Corporation | CA | |||
North American Exchange Company | CA | |||
North American National Title Solutions, LLC | FL | |||
North American National Title Solutions, LLC | DE | |||
North American National Title Solutions, LLC | MD | |||
North American Services, LLC | CA | |||
North American Title Agency, Inc. | NJ | North American Abstract Agency | ||
North American Title Alliance, LLC | FL | |||
North American Title Company (AZ) | AZ | |||
9
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
North American Title Company (FL) | FL | North American Title Company | ||
North American Title Company (IL) | IL | |||
North American Title Company (MD) | MD | |||
North American Title Company (MN) | MN | |||
North American Title Company (NV) | NV | |||
North American Title Company (TX) | TX | Southwest Land Title Company | ||
North American Title Company of Colorado | CO | |||
North American Title Company, Inc. (CA) | CA | |||
North American Title Company, LLC (OH) | OH | |||
North American Title Florida Alliance, LLC | FL | |||
North American Title Group, Inc. (FL) | FL | |||
North American Title Insurance Company | CA | |||
North American Title, LLC (UT) | UT | |||
North American Trust, Inc. | FL | |||
Northbridge L.L.C. | IL | |||
Northeastern Properties LP, Inc. | NV | |||
OHC/Ascot Belle Meade, LLC | FL | |||
One SR, L.P. | TX | |||
Osceola Trace, LLC | FL | |||
Palm Gardens At Doral Clubhouse, LLC | FL | |||
Palm Gardens at Doral, LLC | FL | |||
Palm Vista Preserve, LLC | FL | |||
PD-Len Boca Raton, LLC | DE | |||
PD-Len Delray, LLC | DE | |||
PG Properties Holding, LLC | NC | |||
Pioneer Meadows Development, LLC | NV | |||
Pioneer Meadows Investments, LLC | NV | |||
POMAC, LLC | MD | |||
Port Imperial South Building 14, LLC | NJ | |||
Portside Marina Developers, L.L.C. | NJ | |||
Portside Shipyard Developers, L.L.C. | NJ | |||
Portside SM Associates, L.L.C. | NJ | |||
Portside SM Holdings, L.L.C. | DE | |||
Prestonfield L.L.C. | IL | |||
Providence Lakes, LLP | FL | |||
PT Metro, LLC | DE | |||
Raintree Village II L.L.C. | IL | |||
Raintree Village L.L.C. | IL | |||
Renaissance Joint Venture | FL | |||
RES/CML 2009-1 Co-Investments, LP | DE | |||
RES/CML Investments, LLC | DE | |||
Reserve @ Pleasant Grove LLC | NJ | Lennar | ||
Reserve @ Pleasant Grove II LLC | NJ | Lennar | ||
10
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
Reserve at River Park, LLC | NJ | |||
Reserve at South Harrison, LLC | NJ | |||
Rialto Capital Advisors of New York, LLC | DE | |||
Rialto Capital Advisors, LLC | DE | |||
Rialto Capital Management, LLC | DE | |||
Rialto Capital Partners, LLC | DE | |||
Rialto Capital Services, LLC | DE | |||
Rialto Capital Servicing, LLC | DE | |||
Rialto CMBS, LLC | DE | |||
Rialto Corporation | DE | |||
Rialto Holdings, LLC | DE | |||
Rialto Investments, LLC | DE | |||
RIALTO MEZZ HOLDINGS, LLC | DE | |||
Rialto Mezz Partners GP, LLC | DE | |||
Rialto Mortgage Finance, LLC | DE | |||
Rialto Partners GP II, LLC | DE | |||
Rialto Partners GP, LLC | DE | |||
Rialto REGI, LLC | FL | |||
Rialto RL CML 2009-1, LLC | DE | |||
Rialto RL RES 2009-1, LLC | DE | |||
Rivendell Joint Venture | FL | |||
Rivenhome Corporation | FL | |||
RL BB FINANCIAL, LLC | FL | |||
RL BB-SC CLR V, LLC | SC | |||
RL BB-SC CLR VI, LLC | SC | |||
RL CMBS Holdings, LLC | DE | |||
RL CMBS Investor, LLC | DE | |||
RL CML 2009-1 Investments, LLC | DE | |||
RL CML 2009-1, LLC | DE | |||
RL REGI FINANCIAL, LLC | FL | |||
RL RES 2009-1 Investments, LLC | DE | |||
RL RES 2009-1, LLC | DE | |||
RMF Alliance, LLC | DE | |||
RMF Commercial, LLC | DE | |||
RMF Partner, LLC | DE | |||
RMF PR New York, LLC | DE | |||
RMF Sub 1, LLC | DE | |||
RMV, LLC | MD | |||
Rocking Horse Minerals, LLC | CO | |||
Rutenberg Homes of Texas, Inc. | TX | |||
Rutenberg Homes, Inc. (Florida) | FL | |||
Rye Hill Company, LLC | NY | |||
S. Florida Construction II, LLC | FL | |||
11
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
S. Florida Construction III, LLC | FL | |||
S. Florida Construction, LLC | FL | |||
San Felipe Indemnity Co., Ltd. | Bermuda | |||
San Lucia, LLC | FL | |||
Santa Ana Transit Village, LLC | CA | |||
Savannah Development, Ltd. | TX | |||
Savell Gulley Development, LLC | TX | |||
SC 521 Indian Land Reserve South, LLC | DE | |||
SC 521 Indian Land Reserve, LLC | DE | |||
Scarsdale, LTD. | TX | |||
Schulz Ranch Developers, LLC | DE | |||
Seminole/70th, LLC | FL | |||
Siena at Old Orchard L.L.C. | IL | |||
South Development, LLC | FL | |||
Southbank Holding, LLC | FL | |||
Spanish Springs Development, LLC | NV | |||
St. Charles Active Adult Community, LLC | MD | |||
Stoney Corporation | FL | |||
Stoney Holdings, LLC | FL | |||
Stoneybrook Clubhouse, Inc. | FL | |||
Stoneybrook Joint Venture | FL | |||
Storey Lake Club, LLC | FL | |||
Strategic Cable Technologies, L.P. | TX | |||
Strategic Holdings, Inc. | NV | Lennar Communications Ventures | ||
Strategic Technologies, LLC | FL | Strategic Cable Technologies - Texas, Inc. | ||
Summerfield Venture L.L.C. | IL | |||
Summerwood, LLC | MD | |||
SunStreet Energy Group, LLC | DE | |||
TCO QVI, LLC | DE | |||
Temecula Valley, LLC | DE | |||
Terra Division, LLC | MN | |||
Texas-Wide General Agency, Inc. | TX | |||
The Baywinds Land Trust | FL | Baywinds Land Trust D/B/A Club Vineyards | ||
The Bridges at Rancho Santa Fe Sales Company, Inc. | CA | |||
The Bridges Club at Rancho Santa Fe, Inc. | CA | |||
The LNC Northeast Group, Inc. | DE | |||
The Oasis Club at LEN-CG South, LLC | DE | |||
The Preserve at Coconut Creek, LLC | FL | |||
The Shipyard Communities, LLC | DE | |||
Treviso Holding, LLC | FL | |||
Tustin Villas Partners, LLC | DE | |||
Tustin Vistas Partners, LLC | DE | |||
U.S. Home Corporation | DE | Lennar | ||
12
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
DE | Lennar Corporation | |||
U.S. Home of Arizona Construction Co. | AZ | |||
U.S. Home Realty, Inc. | TX | |||
U.S. Insurors, Inc. | FL | |||
U.S.H. Los Prados, Inc. | NV | |||
U.S.H. Realty, Inc. | VA | |||
UAMC Holding Company, LLC | DE | |||
Universal American Mortgage Company of California | CA | Eagle Home Mortgage of California | ||
Universal American Mortgage Company, LLC | FL | Universal American Mortgage Company | ||
FL | UAMC | |||
FL | Eagle Funding | |||
FL | UAMC d/b/a Eagle Home Mortgage | |||
FL | Eagle Home Mortgage of Washington | |||
FL | Eagle Funding of Washington | |||
FL | Eagle Home Mortgage | |||
FL | Eagle Home Mortgage of Oregon | |||
FL | Eagle Home Mortgage of Utah | |||
FL | Eagle Home Mortgage of Wyoming | |||
USH - Flag, LLC | FL | |||
USH Equity Corporation | NV | |||
USH LEE, LLC | FL | |||
USH Woodbridge, Inc. | TX | |||
UST Lennar GP PIS 10, LLC | DE | |||
UST Lennar GP PIS 12, LLC | DE | |||
UST Lennar GP PIS 14, LLC | DE | |||
UST Lennar GP PIS 19, LLC | DE | |||
UST Lennar GP PIS 7, LLC | DE | |||
UST Lennar HW Scala SF Joint Venture | DE | |||
UST Lennar PIS 10, LP | DE | |||
UST Lennar PIS 12, LP | DE | |||
UST Lennar PIS 14, LP | DE | |||
UST Lennar PIS 19, LP | DE | |||
UST Lennar PIS 7, LP | DE | |||
UST Lennar PIS Joint Venture, LP | DE | |||
Valencia at Doral, LLC | FL | Valencia at Doral Club | ||
Venetian Lennar LLC | FL | |||
Vineyard Point 2009, LLC | CA | |||
Vista Palms Clubhouse, LLC | DE | |||
Waterview at Hanover, LLC | NJ | |||
WCP, LLC | SC | |||
West Chocolate Bayou Development, LLC | TX | |||
West Lake Village, LLC | NJ | |||
West Seattle Project X, LLC | DE | |||
13
LIST OF SUBSIDARIES AS OF NOVEMBER 30, 2014 | ||||
Company Name | State of Incorporation | DBAs | ||
West Van Buren L.L.C. | IL | |||
Westchase, Inc. | NV | |||
Westchase, Ltd. | TX | |||
Willowbrook Investors, LLC | NJ | |||
Winncrest Natomas, LLC | NV | |||
Woodbridge Multifamily Developer I, LLC | DE | |||
Wright Farm, L.L.C. | VA | |||
Xerxes Investor, LLC | DE | |||
14
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-142732, 333-179290 and 333-180887 on Forms S-8 and Registration Statement No. 333-199159 on Form S-3ASR of our reports dated January 23, 2015 relating to the financial statements and financial statement schedule of Lennar Corporation, and the effectiveness of Lennar Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Lennar Corporation for the year ended November 30, 2014.
/s/ Deloitte & Touche LLP
Miami, Florida
January 23, 2015
Exhibit 31.1
CHIEF EXECUTIVE OFFICER'S CERTIFICATION
I, Stuart A. Miller, certify that:
1. | I have reviewed this annual report on Form 10-K of Lennar Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/S/ STUART A. MILLER | |
Name: Stuart A. Miller Title: Chief Executive Officer | |
Date: January 23, 2015
Exhibit 31.2
CHIEF FINANCIAL OFFICER'S CERTIFICATION
I, Bruce E. Gross, certify that:
1. | I have reviewed this annual report on Form 10-K of Lennar Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/S/ BRUCE E. GROSS | |
Name: Bruce E. Gross | |
Title: Vice President and Chief Financial Officer | |
Date: January 23, 2015
Exhibit 32
Officers' Section 1350 Certifications
Each of the undersigned officers of Lennar Corporation, a Delaware corporation (the "Company"), hereby certifies that (i) the Company's Annual Report on Form 10-K for the year ended November 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Company's Annual Report on Form 10-K for the year ended November 30, 2014 fairly presents, in all material respects, the financial condition and results of operations of the Company, at and for the periods indicated.
/S/ STUART A. MILLER | |
Name: Stuart A. Miller | |
Title: Chief Executive Officer | |
/S/ BRUCE E. GROSS | |
Name: Bruce E. Gross | |
Title: Vice President and Chief Financial Officer | |
Date: January 23, 2015
Attachment: XBRL INSTANCE DOCUMENT
Attachment: XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
Attachment: XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
Attachment: XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
Attachment: XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
Attachment: XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
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