================================================================================ 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, 2000 Commission file number 1-13223 LNR Property Corporation (Exact name of registrant as specified in its charter) Delaware 65-0777234 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 760 Northwest 107th Avenue, Miami, Florida 33172 (Address of principal executive offices) (Zip Code) (305) 485-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value 10(cent)per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 __X__ 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. ____ As of February 14, 2001, 23,965,026 shares of common stock and 9,999,480 shares of Class B common stock (which can be converted into common stock) were outstanding. Of the total shares outstanding, 22,837,042 shares of common stock and 101,550 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $676,688,464 were held by non-affiliates of the registrant. Documents Incorporated by Reference Part of Form 10-K Into Which Document Into this Report is Incorporated LNR Property Corporation 2000 Annual Report To Shareholders* Parts I, II and IV LNR Property Corporation 2001 Part III Proxy Statement * The LNR Property Corporation 2000 Annual Report to Shareholders is incorporated herein only to the extent specifically stated. ================================================================================ 2 PART I THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO RISK AND UNCERTAINTY. ALTHOUGH THE COMPANY BELIEVES THE EXPECTATIONS REFLECTED IN ITS FORWARD LOOKING STATEMENTS ARE REASONABLE, IT IS POSSIBLE THEY WILL PROVE NOT TO HAVE BEEN CORRECT, PARTICULARLY GIVEN THE CYCLICAL NATURE OF THE REAL ESTATE MARKET. THE FACTORS, AMONG OTHERS, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD LOOKING STATEMENTS INCLUDE: (A) CHANGES IN DEMAND FOR COMMERCIAL REAL ESTATE NATIONALLY, IN AREAS IN WHICH THE COMPANY OWNS PROPERTIES, OR IN AREAS IN WHICH PROPERTIES SECURING MORTGAGES DIRECTLY OR INDIRECTLY OWNED BY THE COMPANY ARE LOCATED, (B) INTERNATIONAL, NATIONAL OR REGIONAL BUSINESS CONDITIONS WHICH AFFECT THE ABILITY OF MORTGAGE OBLIGORS TO PAY PRINCIPAL OR INTEREST WHEN IT IS DUE, (C) THE CYCLICAL NATURE OF THE COMMERCIAL REAL ESTATE BUSINESS, (D) CHANGES IN INTEREST RATES AND (E) CHANGES IN THE MARKET FOR VARIOUS TYPES OF REAL ESTATE BASED SECURITIES. Item 1. Business. Overview LNR Property Corporation ("LNR" and, together with its subsidiaries, the "Company") is a real estate investment, finance and management company, which structures and makes real estate and real estate related investments and, through its expertise in developing and managing properties and working out underperforming and non-performing commercial loans, seeks to enhance the value of those investments. The Company and its predecessors have been engaged in the development, ownership and management of commercial and multi-family residential properties since 1969. Over the last seven years, the Company has grown revenues and EBITDA at compound annual growth rates of 33.3% and 36.1%, respectively. LNR was formed by Lennar Corporation ("Lennar") in June 1997 to separate Lennar's real estate investment, finance and management business from its homebuilding business. On October 31, 1997, Lennar distributed the stock of LNR to Lennar's stockholders in a tax-free spin-off (the "Spin-off"). In connection with the Spin-off, the Company agreed that until 2002, it would not engage in homebuilding or related activities (other than purchasing securities backed by residential mortgages and providing financing to homebuilders or land developers) and Lennar agreed that until 2002, it would not engage in various activities in which the Company was engaged at the time of the Spin-off (which is most of the principal activities in which the Company currently is engaged). The Company's real estate investment activities primarily consist of: o acquiring, developing, managing and repositioning commercial and multi-family residential real estate properties, o investing in high-yielding real estate loans and purchasing at a discount portfolios of loans, backed by real estate, and o investing in unrated and non-investment grade rated commercial mortgage-backed securities ("CMBS") as to which the Company has the right to be special servicer (i.e., to oversee workouts of underperforming and non-performing loans). 3 The Company adjusts its investment focus from time to time to adapt to changes in markets and phases of the real estate cycle. The Company does not have specific policies as to the type of real estate related assets it will acquire, the percentage of its assets it will invest in particular types of real estate related assets or the percentage of the interests in particular entities it will acquire. Instead, it reviews, at least monthly, the types of real estate related investment opportunities which may at that time be available, the market factors which may affect various types of real estate related investments (including the likelihood of changes in interest rates or availability of investment capital) and other factors which may affect the attractiveness of particular investment opportunities. The Company performs extensive due diligence before making investments in order to evaluate investment risks and opportunities and see whether it will be able to use its skills to enhance the value of the investments. For example, before bidding for a CMBS investment, the Company performs an asset by asset evaluation of the assets underlying the CMBS, including site visits, analyses of rent rolls, vacancy rates, tenant strength, local markets as well as loan and borrower characteristics. The Company's formalized pre-investment procedures allow its senior management to exercise significant control and discipline over all its investment decisions. 4 At November 30, 2000, the Company's assets consisted of: Type of Asset Book Value Description/Comment ---------------------------------------------------------------------------------------------------- (In millions) Real estate properties $871.5 Rental apartment communities, office buildings, industrial/warehouse facilities, hotels, retail centers and land. Real estate loans 244.0 Primarily first mortgage loans. Also includes loans to developers and builders, sometimes with profit participations. Real estate securities 696.4 Unrated and non-investment grade rated tranches of CMBS pools acquired at significant discounts from face value, as to which the Company has the right to be special servicer and can seek to increase collections of underlying loans. Partnerships 354.0 o Real estate property partnership investments of $234.2 million (primarily Lennar Land Partners, a partnership with Lennar, and 60 partnership interests in affordable housing communities). o Real estate loan partnership investments of $14.2 million (primarily partnerships which acquired portfolios of loans and/or properties at discounts). o A real estate securities partnership investment of $105.6 million (Madison Square Company LLC, a vehicle that invests primarily in CMBS). Cash and other assets 183.0 Cash at November 30, 2000 consisted of $2.0 million of unrestricted cash and $85.3 million of restricted cash comprised primarily of: o $32.6 million of funds held in trust for asset purchases and development and o $52.3 million of short-term investment securities held as collateral for a letter of credit that provides credit enhancement to tax-exempt bonds. Other assets include several small investments in entities in related businesses, accounts receivable, interest receivable, deferred costs and other. --------------- Total $2,348.9 =============== 5 Real Estate Properties In 1969 Lennar began engaging in the development, ownership and management of commercial and residential multi-family rental real estate. Its initial activities of this type included owning and operating small office buildings, local neighborhood retail centers and other commercial and industrial facilities on properties being developed as part of Lennar's homebuilding operations, primarily in Florida. Gradually, this was expanded to general development, acquisition and management of commercial and residential multi-family rental real estate, as well as acquiring land for development and sale or leasing for commercial uses, throughout the United States. In most instances, the Company uses local talent to perform on-site management, leasing, maintenance and development activities. Over the years, the Company has established relationships with a large network of these experts across the country. The Company often partners with some of the developers to direct the development and repositioning of the properties. In these instances, the Company's employees closely supervise the operation of the properties and the activities of the outside management companies and developers. At November 30, 2000, the Company's real estate property portfolio, which includes stabilized properties and properties in various stages of development and/or lease-up, included: Type Number of Properties Square Feet/ Units/ Rooms -------------------------------------------------------------------------------------------------- Apartment communities 91 14,000 units Office buildings 23 5.5 million square feet Industrial/warehouse facilities 5 1.8 million square feet Hotels 9 1,885 rooms Retail centers 11 1.2 million square feet Land: Leased 21 2.2 million square feet (50 acres) Other - 570 acres Apartment Communities The Company's 91 apartment communities range in size from 20 to 600 units. These apartment communities are comprised of both market-rate and affordable housing communities. The apartment communities are geographically located as follows: Number of State Properties ----- ---------- Washington 19 Oregon 11 California 8 Texas 7 Nevada 7 Arizona 5 New Mexico 5 Virginia 5 Pennsylvania 4 Illinois 3 Montana 3 Colorado 3 Florida 3 South Carolina 2 Wisconsin 2 Other 4 ---------- 91 ========== 6 During 1998, the Company entered the business of owning, developing and syndicating multi-family and senior housing residential rental communities, which qualify for Low-Income Housing Tax Credits ("affordable housing communities"). The Company acquired from Pacific Harbor Capital, Inc., a wholly-owned subsidiary of PacifiCorp, controlling interests in a group of entities, as well as certain direct partnership interests, known as the Affordable Housing Group ("AHG"). As of November 30, 2000, AHG had ownership interests in approximately 10,300 affordable housing apartment units (80 communities), substantially all of which qualify for Low-Income Housing Tax Credits. These tax credits can be used to increase the Company's after-tax income by reducing income taxes or by selling tax credits through the syndication of partnership interests. Approximately 89% of the affordable housing communities were constructed by AHG or under its supervision. AHG acquired the other affordable housing communities after they were completed. When the Company acquired AHG in 1998, its strategy was to retain the tax credits generated through owning affordable housing communities and then use those credits to reduce the Company's overall effective tax rate. However, the demand for credits has since increased significantly and the Company found it could generate higher returns on its investment by selling the credits instead of holding them. The Company began to shift its strategy away from owning interests in affordable housing communities toward syndicating such interests. During 2000, the Company syndicated most of the tax credits related to nine AHG properties by placing the limited partnership interests of the entities which own the individual properties into a new limited liability company and selling a majority interest in that limited liability company. The Company retained a minority interest in the limited liability company. Office Buildings The Company's 23 office buildings range from one to 36 stories and have an aggregate of 5.5 million square feet of rentable office space. Eleven of the office buildings are in California, four are in Florida, two are in Georgia, two are in Utah, two are in North Carolina, one is in Louisiana and one is in Virginia. Industrial/Warehouse Facilities The Company's five industrial/warehouse/distribution facilities range from 53,000 square feet to 747,000 square feet of usable floor space. All of these facilities are in California. Hotels The Company's nine hotels have or will have a total of 1,885 rooms. Five of the hotels, representing 882 rooms, are stabilized and carry the name of a national chain. The other four hotels are under development or being repositioned. Retail Centers The retail centers in the Company's portfolio include: (i) two small neighborhood retail centers (sometimes referred to as "strip centers"), with between 30,000 square feet and 36,000 square feet of rentable store space, as well as parking areas and public areas, (ii) eight larger regional retail centers, with 58,000 square feet to 276,000 square feet of rentable store space, and (iii) one single tenant property with 85,000 square feet. Both of the small retail centers and the single-tenant property are located in Florida. Of the larger retail centers, three are in Florida, two are in Arizona, two are in California and one is in Louisiana. 7 Land In addition to the Company's operating properties, the Company owns commercially zoned land, 2.2 million square feet of which is leased to others under long-term ground leases and 570 acres of which is to be used for specific development opportunities or sold. The Company maintains a program of liability, property loss and damage and other insurance which covers all the Company's properties and which the Company believes is adequate to protect it against all reasonably foreseeable material insurable risks. Lennar Land Partners Before the Spin-off, Lennar and the Company transferred to a general partnership, which is 50% owned by the Company and 50% owned by Lennar, parcels of land or interests in land and other assets which had a total book value on Lennar's books at October 31, 1997 of approximately $372.4 million. In 1999, certain assets and liabilities of this land partnership were contributed at net book value to a second general partnership and Lennar and the Company each received 50% general partnership interests in the second partnership. The two partnerships are collectively referred to as Lennar Land Partners ("LLP"). The land was originally acquired by Lennar primarily to be used for residential home development. The parcels of land or interests in land contributed by the Company had been contributed to the Company by Lennar so the Company could contribute them to LLP and receive a 50% interest in LLP. From November 1, 1997 through November 30, 2000, LLP had land sale revenues of $665.8 million, of which $315.5 million was from sales to Lennar. During that period, LLP obtained control of 9,600 additional homesites, primarily through partnership arrangements. At November 30, 2000, LLP's land consisted of 17,487 potential home sites in 25 communities, of which 14 communities with 11,615 potential home sites are in Florida, five communities with 1,470 potential home sites are in Texas and six communities with 4,402 potential home sites are in California. Approximately 6% of the land was developed and ready to be built upon, 42% of the land was in various stages of development and 52% of the land was totally undeveloped. When Lennar contributed land to the Company and to LLP in 1997, Lennar retained options to purchase up to approximately 22% of the contributed land at prices it established. Through November 1999, almost all the options relative to the originally contributed land had either been exercised or terminated. On November 30, 1999, Lennar obtained options to purchase up to an additional 6,300 homesites at prices it established, subject to agreement by the Company. At November 30, 2000 Lennar had options remaining to purchase 2,740 homesites. The remaining land is available for sale to independent homebuilders or to Lennar at prices determined from time to time, which, as is discussed below, the Company must approve. LLP has an agreement with Lennar under which Lennar, for a fee, administers all day-to-day activities of LLP, including overseeing planning and development of properties and overseeing sales of land to Lennar and other builders. LLP is governed by an Executive Committee consisting of representatives of Lennar and of the Company, with Lennar's representatives and the Company's representatives each having in total one vote. This, in effect, gives each of Lennar and the Company a veto with regard to matters presented to the Executive Committee. LNR's by-laws require that all significant decisions relating to LLP be approved by a Board of Directors committee consisting entirely of directors who have no relationship with Lennar. Lennar may, but is under no obligation to, offer additional properties to LLP. Lennar is free to acquire properties for itself without any consideration of whether those properties might have been appropriate for LLP. 8 The Company is, in effect, able to veto any proposals that LLP acquire properties proposed by Lennar. Arrangements with regard to particular properties might include, (i) options to Lennar to purchase all or portions of properties, (ii) rights of first refusal for Lennar to acquire lots if other builders propose to acquire them, or (iii) buy/sell arrangements under which, if Lennar wanted to purchase lots on which it did not have an option, it would propose a purchase price and the Company would have the option to approve the sale to Lennar at that price or to purchase the lots for that price (probably in order to resell them to someone who would be willing to pay a higher price). The Company might seek to acquire commercial portions of properties owned or acquired by LLP or options relating to them. If it did, Lennar could, if it wanted to do so, veto acquisitions by the Company. Other than limited maintenance guarantees provided by the Company on a portion of LLP's debt, the debt of LLP is non-recourse to the Company. Real Estate Loans High-Yielding Real Estate Loans The Company invests in high-yielding real estate loan opportunities including primarily first mortgage loan participations and mezzanine loans. At November 30, 2000, the Company's real estate loan portfolio consisted of: (In thousands) Principal Amount of Type of Loan Loans ----------------------------------- ---------------- First mortgage loans $ 243,564 Mezzanine loans 13,283 ------- Total $ 256,847 ======= The types of loans and collateral held by the Company at November 30, 2000, were as follows: (In thousands) Principal Amount of Type of Loan Loans ----------------------------------- ---------------- First mortgage loans Mixed use $ 89,800 Hotel 51,000 Office buildings 42,318 Convention center 37,500 Multi-family 12,861 Shopping center 7,006 Industrial park 1,953 Residential land and other 1,126 Mezzanine loans 13,283 ------------ Total $ 256,847 ============ 9 The states in which the properties securing the Company's real estate loans were located were as follows: (In thousands) Principal Amount of State Loans --------------------- ---------------- California $ 53,598 New York 40,850 Nevada 37,500 Massachusetts 35,200 Texas 29,900 Georgia 23,800 Virginia 14,600 Florida 11,443 Minnesota 7,300 Indiana 2,656 --------------- Total $ 256,847 =============== The Company's first mortgage loan portfolio consists primarily of structured junior loan participations in high-quality short- to medium-term variable rate first mortgage real estate loans. The Company works with leading financial institutions in underwriting and structuring these loans. The senior participations are securitized in many cases by the financial institutions. The Company is designated as the special servicer for both the securitizations and the participations. The Company had $216.4 million of these investments at November 30, 2000. The mezzanine loans are made to developers or builders of residential communities. These loans are usually subordinate to construction loans, and often provide the Company, in addition to interest income, participations in profits after the developers or builders have achieved specified financial targets. The Company identifies opportunities to make commercial mortgage loans and residential development loans through relationships with other real estate companies, financial institutions, developers and brokers. The Company evaluates possible loans with in-house personnel, who perform site visits and do market, demographic and financial analyses with regard to the collateral for the loans. The Company applies guidelines, which change from time to time depending on the type of property and market conditions, relating to loan-to-value ratio, debt coverage and other financial ratios. When the Company makes subordinated loans, it may apply other guidelines, but these loans bear interest at rates that are higher than those on senior mortgage loans, and some of these loans provide the Company participations in profits from the underlying properties. Discounted Portfolios of Commercial Mortgage Loans In the early 1990's, the Company began acquiring portfolios of non-performing commercial mortgage loans and related pools of owned real estate assets in the United States. The Company formed partnerships with several financial institutions and real estate funds to purchase and handle the workout activities for over $5 billion of these distressed commercial assets. 10 In each of these partnerships, one of the Company's subsidiaries acts as the managing general partner and conducts the business of the partnership. The Company earns management fees and asset disposition fees from the partnerships and has carried interests in cash flow and sales proceeds once the partners have recovered their capital and achieved specified returns. The Company's original investments ranged from 15% to 50% of the partnerships' capital and totaled $165 million, out of a total of $684 million invested in the partnerships. By November 30, 2000, the partnerships had distributed a total of $1.4 billion to the partners, of which $406 million had been distributed to the Company. The Company also received management and asset disposition fees totaling approximately $62.0 million. As the U.S. real estate markets strengthened in the mid to late 1990's, substantially fewer large real estate portfolios became available at what the Company viewed as attractive prices. The Company has not, since August 1996, participated in a partnership which acquired a portfolio of non-performing real estate assets in the United States. Today, most of the assets from these domestic portfolios have been liquidated. Beginning in late 1997, the Company entered into several partnerships to acquire portfolios of non-performing commercial mortgage loans in Japan. In April 2000, the Company sold its investment interests in these Japanese real estate loan portfolios at a profit. The Company's principal activity with respect to distressed portfolios is to manage the workout of non-performing loans, including negotiating new or modified financing terms and foreclosing on defaulted loans. The assets generally are held only as long as is required to enhance their value and prepare them for sale. The Company believes its workout and property rehabilitation skills are the principal reasons financial institutions have sought the Company as a partner in acquiring portfolios of distressed assets and have given the Company management control of the partnerships. Debt financing for partnerships' acquisitions of real estate related asset portfolios has usually been on a non-recourse basis and with no guaranties by the Company or any other of the partners. In some cases, the lender must be repaid in full before a partnership can make cash distributions to the Company and its partners. Real Estate Securities Investments in CMBS As a further use of its loan and real estate workout capabilities, the Company acquires unrated and non-investment grade rated subordinated CMBS and provides "special servicing" for the mortgage pools to which they relate. Fitch IBCA, Inc. and Standard and Poor's, which rates special servicers of CMBS on the basis of management team, organizational structure, operating history, workout and asset disposition experience and strategies, information systems, investor reporting capabilities and financial resources, has given the Company their highest rating. At November 30, 2000, the Company was entitled to be the special servicer with regard to 65 securitized commercial mortgage pools represented by over 10,000 underlying properties in all 50 states. The Company had investments in subordinated CMBS related to 60 of those pools at November 30, 2000. Special servicing is the business of managing and working out the problem assets in a pool of commercial mortgage loans or other assets. For example, when a mortgage loan in a securitized pool goes into default, the special servicer negotiates with the borrower on behalf of the pool to resolve the situation. The Company uses as special servicer essentially the same workout skills it applies with regard to its distressed asset portfolios. Because the holders of the unrated CMBS receive everything that is collected after the more senior levels of CMBS have been paid in full, the Company and other holders of unrated CMBS are the principal beneficiaries of increased collections. Therefore, ownership of the unrated CMBS gives the Company an opportunity to profit from its special servicing in addition to receiving fees for being special servicer. The 11 Company has not purchased unrated CMBS unless it has had the right to be the special servicer of the mortgage pools to which they relate. The Company also, in some instances, purchases non-investment grade rated subordinated CMBS relating to commercial mortgage pools as to which the Company will act as special servicer. The Company expects to receive a yield on these securities based on the stated interest and amortization of the Company's purchase discount. The ratings of the subordinated CMBS are sometimes upgraded by the rating agencies if the performance of the pool exceeds initial expectations. This increases their market values and gives the Company an opportunity to achieve gains on the sale of the securities, as well as receiving the stated interest while it holds them. Therefore, purchases of non-investment grade rated subordinated securities, like purchases of unrated securities, are a means for the Company to profit from its workout skills. Particularly in periods of falling interest rates, there often are prepayments of mortgages underlying CMBS. Because the Company usually purchases CMBS at significant discounts from their face amounts, prepayments increase the Company's yield as a percentage of its investment. The Company's CMBS investments are collateralized by pools of mortgage loans on commercial real estate assets located across the country. Concentrations of credit risk with respect to these securities are limited due to the diversity of the underlying loans across geographical areas and diversity among property types. Madison Square Company LLC In early April 1999, the Company entered into a venture, Madison Square Company LLC ("Madison"), to acquire approximately $2.2 billion of high-yielding real estate related assets. The partners include an affiliate of Credit Suisse First Boston ("CSFB"), a company controlled by real estate investor Peter Bren and Sun America Life Insurance Co. The partners have total equity commitments of $490 million, $125 million of which is provided by the Company. CSFB has provided a credit facility to fund up to $1.76 billion of financing to the venture, which is non-recourse to the partners. At November 30, 2000, the Company's investment in the venture was approximately $105.6 million, representing a 25.8% ownership interest. The Company maintains a significant ongoing role in the venture, for which it earns fees, both as the special servicer for the purchased CMBS transactions and as the provider of management services. The Company also has an effective veto on Madison's investments. Quantitative and Qualitative Disclosures About Market Risk The Company's business activities contain elements of market risk. The primary market risks the Company are subject to include: (i) exposure to changes in demand for commercial real estate space in areas in which the Company owns properties, or in areas in which properties securing mortgages directly or indirectly owned by the Company are located, (ii) declines in the value of real estate assets due to changes in real estate markets or the economy in general, (iii) the ability of mortgagors to meet debt obligations, and (iv) interest rate risk. The first three risk factors noted above are affected primarily by general economic conditions and to some extent by the interest rate environment. Because these factors are not under the Company's control, the attempts by the Company to minimize these risks may not always be effective. The Company attempts to manage these market risks by maintaining a portfolio of assets that is diverse by segment, geographic area and property type. The Company does not invest in disproportionately large assets. No single asset owned by the Company at November 30, 2000 accounted for more than 3% of the Company's total assets. The Company will not make any investment before extensive hands-on property level due diligence is performed. For each asset, the Company will evaluate the local market, rental rates, vacancy rates and, if applicable, loan and borrower characteristics. Cash flows are evaluated at the property level and loan levels, if applicable and assumptions are stressed for downside scenarios. Before any investment is made, it must be approved by corporate senior management through a formal process. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond the control of the Company. The Company has an interest rate risk management policy with the objective of (i) managing its interest costs and (ii) reducing the effect of unpredictable changes in asset values related to movements in interest rates on the Company's available-for-sale securities. As more fully discussed in Note 5 to the Company's Consolidated Financial Statements, the Company employs hedging strategies to limit the effects of changes in interest rates on its operating income and cash flows and on the value of its available-for-sale securities. The Company's approach to managing interest rate risk is based primarily on match funding, with the objective that floating-rate assets be primarily financed by floating-rate liabilities and fixed-rate assets be primarily financed by fixed-rate liabilities. Most of the Company's floating rate assets are financed with floating rate debt. To the extent that the Company has fixed-rate assets financed with floating-rate debt, the Company periodically enters into derivative financial instruments, primarily interest rate swap agreements, to manage its interest costs and hedge against risks associated with changing interest rates. At November 30, 2000, 70% of the Company's existing indebtedness had interest at variable rates. Approximately 35% of this debt was match-funded against floating-rate assets and 15% was swapped to fixed rate. The remaining 50% of the variable-rate indebtedness was unmatched and unhedged. As a result, at year end, a 100 basis point change in LIBOR would have impacted the Company's net earnings by approximately 2.6%. Subsequent to November 30, 2000, the Company entered into additional interest rate swap agreements which fixed the interest rates on an additional 21% of variable rate debt that was outstanding at November 30, 2000. Including the impact of these swaps, a 100 basis point change in LIBOR would have impacted the Company's net earnings by 1.5%. At November 30, 1999, 67% of the Company's indebtedness had interest at variable rates. Approximately 6% of this debt was match-funded against floating-rate assets and 12% was swapped to fixed rate. The impact of a 100 basis point change in LIBOR at November 30, 1999 would have impacted the Company's net earnings by approximately 4.9%. To manage the risk associated with unpredictable changes in asset values related to movements in interest rates on the Company's available-for-sale securities, the Company periodically uses derivative financial instruments, primarily interest rate swap agreements or treasury securities. Changes in the market value of the Company's available-for-sale securities may not affect the Company's net earnings or cash flow directly but may affect the unrealized gains or losses recorded in stockholders' equity and may affect the Company's ability to borrow. The Company believes its interest rate risk management policy is generally effective. Nonetheless, the Company's profitability may be adversely affected during particular periods as a result of changing interest rates. In addition, hedging transactions using derivative instruments involve risks such as counter-party credit risk and legal enforceability of hedging contracts. The counter-parties to the Company's arrangements are major financial institutions with which the Company and its affiliates may also have other financial relationships. These counter-parties potentially expose the Company to credit loss in the event of non-performance. For the year ended November 30, 2000, the Company changed its presentation of market risk disclosure to provide more meaningful information related to the Company's market risk. The Company believes that the disclosures above present a complete and accurate representation of the market risk which impacts it. 12 Competition In virtually all aspects of its activities, the Company competes with a variety of public and private real estate development companies, real estate investment trusts, investment firms, investment funds, a variety of financial institutions and others. The principal area of competition is for the purchase of real estate assets and securities at prices which the Company believes will enable it to achieve its desired risk-adjusted returns. The Company believes that its access to investment opportunities through its relationships and presence in markets across the country, its access to capital for these asset classes, its ability to quickly underwrite and evaluate those opportunities and its expertise in real estate workout and management helps the Company to compete effectively in the purchase of those types of assets. In addition, its experience in adding value to real estate and its top rating as a special servicer to CMBS transactions often attract firms which have access to attractive investment opportunities but who do not have the Company's skills. Competitive conditions relating to apartment communities, office buildings, industrial/warehouse facilities, hotels and retail centers owned or operated by the Company vary depending on the locations of particular properties. Most often these facilities compete for tenants or other users based on their locations, the facilities provided and the pricing of the leases or room rates. As general economic conditions stayed at strong levels in 1999 and 2000, occupancies remained in balance in many of the Company's markets, which helped to reduce the effects of competition on existing properties and has allowed for, in certain instances, new development. The Company is not a significant national competitor with regard to any of the properties it owns. Investment Company Act The Company intends to conduct its business at all times so as not to become regulated as an investment company under the Investment Company Act of 1940. Accordingly, the Company does not expect to be subject to the restrictive provisions of the Investment Company Act. The Investment Company Act exempts, among others, entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). Under the current interpretation of the staff of the Securities and Exchange Commission, to qualify for this exemption, the entity must maintain at least 55% of its assets in Qualifying Interests, and maintain an additional 25% in Qualifying Interests or other real estate related assets. The Company's investments in real estate and mortgage loans generally constitute Qualifying Interests and the Company believes its investments in subordinated CMBS constitute Qualifying Interests when it has the right, as special servicer, to foreclose upon properties which secure loans that back the CMBS and to take the other actions a servicer may take in connection with defaulted loans. Analysis of the Company's assets at November 30, 2000 indicated that (i) more than 55% of its assets were Qualifying Interests and (ii) more than 80% of its assets were Qualifying Interests and other real estate related assets. Therefore, it qualifies for this exemption. If, however, due to a change in the Company's assets, or a change in the value of particular assets, the Company was to become an investment company which is not exempt from the Investment Company Act, either the Company would have to restructure its assets so it would not be subject to the Investment Company Act, or the Company would have to change materially the way it conducts its activities. Either of these changes could require the Company to sell substantial portions of its assets at a time it might not otherwise want to do so, and the Company could incur significant losses as a result. Further, in order to avoid becoming subject to the requirements of the Investment Company Act, the Company may be required at times to forego investments it would like to make or otherwise to act in a manner other than that which its management believes would maximize its earnings. 13 Regulation Commercial properties owned by the Company or partnerships in which it participates must comply with a variety of state and local regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used and some aspects of building design. In its loan workout activities, the Company sometimes is required to comply with federal and state laws designed to protect debtors against overbearing loan collection techniques. However, most laws of this type apply to consumer level loans (including home mortgages), but do not apply to commercial loans. The Company's hotels have to be licensed to conduct various aspects of their businesses, including sales of alcoholic beverages. Employees At November 30, 2000, the Company had 491 full time and 10 part time employees, of whom 10 were senior management, 60 were corporate staff, 274 were engaged in asset acquisitions, loan workouts and rehabilitation and disposition of properties and 157 were hotel personnel. None of the Company's employees is represented by a union. The Company believes its relationships with its employees are good. Item 2. Properties. For information about properties owned by the Company for use in its commercial activities, see Item 1. The Company maintains its principal executive offices at 760 Northwest 107th Avenue, Miami, Florida, in a building which was built and is owned by the Company. Those offices consist of approximately 17,375 square feet. The Company has additional offices in various office buildings it owns and the Company leases offices in eight other facilities. Item 3. Legal Proceedings. The Company is not subject to any legal proceedings other than suits in the ordinary course of its business, most of which are covered by insurance. LNR believes these suits will not, in aggregate, have a material adverse effect upon the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2000. 14 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters. The information required by Item 5 is incorporated by reference from page 64 of the Company's 2000 Annual Report to Stockholders. Item 6. Selected Financial Data. The information required by Item 6 is incorporated by reference on page 34 of the Company's 2000 Annual Report to Stockholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by Item 7 is incorporated by reference from pages 35 through 44 of the Company's 2000 Annual Report to Stockholders. Item 7a. Qualitative and Quantitative Disclosures About Market Risk. The information required by Item 7a is included in Item 1 above. Item 8. Financial Statements and Supplementary Data. The information required by Item 8 is incorporated by reference from pages 45 through 63 of the Company's 2000 Annual Report to Stockholders. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. 15 PART III Item 10. Directors and Executive Officers of the Registrant. Information about the Company's directors is incorporated by reference to the definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). The following individuals were LNR's executive officers at the date of this report: Name/Position Age Year of Election ------------- --- ---------------- Stuart A. Miller 43 1997 Chairman of the Board and Director Steven J. Saiontz 42 1997 Chief Executive Officer and Director Jeffrey P. Krasnoff 45 1997 President and Director Shelly Rubin 38 1997 Vice President and Chief Financial Officer Zena M. Dickstein 43 2000 General Counsel and Secretary Robert Cherry 38 1997 Vice President Steven I. Engel 54 1997 Vice President Mark A. Griffith 44 1997 Vice President David G. Levin 45 1997 Vice President Ronald E. Schrager 39 1997 Vice President David O. Team 40 1997 Vice President Steven N. Bjerke 39 2000 Corporate Controller Margaret A. Jordan 49 1997 Treasurer 16 Stuart A. Miller is the Company's Chairman of the Board. Mr. Miller became the Chairman of the Board of LNR when the Company was formed in June 1997. Mr. Miller has been the President and Chief Executive Officer of Lennar since April 1997. For more than five years prior to April 1997, Mr. Miller was a vice president of Lennar and held various executive positions with Lennar subsidiaries, including being the president of its principal homebuilding subsidiary from December 1991 to April 1997 and the president of its principal real estate investment and management division (the predecessor to a substantial portion of the Company's business) from April 1995 to April 1997. Mr. Miller is currently a Director of Lennar. He is the son of Leonard Miller (co-founder and Chairman of the Board of Lennar) and the brother-in-law of Steven J. Saiontz. Steven J. Saiontz is the Company's Chief Executive Officer. Mr. Saiontz became LNR's Chief Executive Officer and a Director when the Company was formed in June 1997. For more than five years prior to that, he was the President of Lennar Financial Services, Inc., a wholly-owned subsidiary of Lennar. Mr. Saiontz is currently a Director of Lennar. He is the brother-in-law of Stuart A. Miller and the son-in-law of Leonard Miller. Jeffrey P. Krasnoff is the Company's President. Mr. Krasnoff became LNR's President when the Company was formed in June 1997 and became a Director in December 1997. From 1987 until June 1997, he was a vice president of Lennar. From 1990 until he became the President of LNR, Mr. Krasnoff was involved almost entirely in Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). Shelly Rubin is a Vice President and the Chief Financial Officer of LNR. She became a Vice President and Chief Financial Officer when the Company was formed in June 1997. From May 1994 until June 1997, she was the principal financial officer of Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). From 1991 until May 1994, Ms. Rubin was employed by Burger King Corporation as the controller for its real estate division. Zena M. Dickstein is the Company's General Counsel and Secretary. She assumed this position when she joined the Company in June 2000. From 1987 to June 2000, Ms. Dickstein was at the law firm of Steel Hector and Davis LLP where she was Deputy Chair of the firm's real estate department, headed the firm's commercial leasing and real estate health care teams and served on various management committees of the law firm. Robert Cherry is a Vice President of LNR, responsible for sourcing and evaluating new investment opportunities. From March 1995 until October 1997, Mr. Cherry had similar responsibilities for LNR and Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). From March 1994 until February 1995, he was a vice president of G. Soros Realty Advisors/Quantum North America Realty Fund. Prior to that he held analyst positions with various entities including Moody's Investor Service and Sullivan & Cromwell. Steven I. Engel is a Vice President of LNR, responsible for managing the Japan office. From 1992 until October 1997, Mr. Engel primarily was responsible for the special servicing of the CMBS portfolio for LNR and Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). From 1987 to 1992, Mr. Engel was a real estate developer and attorney. Mark A. Griffith is a Vice President, responsible for managing LNR's Eastern Regional Division. From February 1990 until October 1997, Mr. Griffith had similar responsibilities for LNR and Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). 17 David G. Levin is a Vice President, responsible for sourcing and evaluating new investment opportunities. From February 1992 until early 1997, Mr. Levin was responsible for managing the Miami Division of Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business), which was at that time primarily focused on partnerships with the Morgan Stanley Real Estate Fund. Prior to that he had various positions with commercial real estate firms including managing director of Bear Stearns Real Estate Group. Ronald E. Schrager is a Vice President, responsible for managing the Real Estate Finance and Servicing Division of LNR, which is primarily focused on CMBS/special servicing. Since August 1992, he held several positions in Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business), managing various areas. Prior to that he served as a vice president of Chemical Bank's Real Estate Finance Group. David O. Team is a Vice President, responsible for the Company's Western Regional Division. From April 1996 until October 1997, Mr. Team had similar responsibilities for LNR and Lennar's real estate investment and management division (the predecessor to a substantial portion of the Company's business). From 1994 to 1996, Mr. Team was the owner and president of Windward Realty Group, a real estate development firm. From 1992 to 1993, he was a senior vice president with American Real Estate Group. Steven N. Bjerke is the Company's Controller. He assumed this position in January 2000. Mr. Bjerke joined LNR in April 1999 as Vice President of Strategic Planning. From February 1990 to March 1999, Mr. Bjerke was employed by Ryder System, Inc., where he held various positions in the accounting and finance functions, most recently as group director of planning for Ryder's truck leasing and rental division. Margaret A. Jordan is the Company's Treasurer. She also served as Secretary of LNR from January 2000 to June 2000. Ms. Jordan has been the Treasurer of LNR since joining the Company in September 1997. From February 1993 to August 1997, Ms. Jordan worked as an independent contractor and financial consultant to real estate businesses. From June 1987 to January 1993, Ms. Jordan was employed by Atlantic Gulf Communities Corporation, serving as assistant treasurer and then senior vice president and treasurer. Item 11. Executive Compensation. The information required by Item 11 is incorporated by reference from pages 6 through 9 of the Company's 2001 Proxy Statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated by reference from pages 2 through 4 of the Company's 2001 Proxy Statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). Item 13. Certain Relationships and Related Transactions. The information required by Item 13 is incorporated by reference from page 7 of the Company's 2001 Proxy Statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (A) 1. Financial Statements Items A through E are incorporated by reference from pages 45 through 63 of the Company's 2000 Annual Report to Stockholders. Combined financial statements of Lennar Land Partners and Lennar Land Partners II as of November 30, 2000 and 1999 and for the years ended November 30, 2000, 1999 and 1998. F-1 Financial statements of Madison Square Company LLC as of December 31, 2000 and 1999 and for the year ended December 31, 2000 and the period from March 25, 1999 (date of inception) through December 31, 1999. F-15 2. Consolidated Financial Statement Schedules Report of Independent Auditors F-27 Schedule II - Valuation and Qualifying Accounts F-28 Schedule III - Real Estate and Accumulated Depreciation F-29 Schedule IV - Mortgage Loans on Real Estate F-30 (B) 1. Reports on Form 8-K None (C) 1. Index to Exhibits 3.1 Certificate of Incorporation and Amendment.* 3.2 By-laws.* 10.1 Separation and Distribution Agreement between the Company and Lennar Corporation, dated June 10,1997.* 10.2 LNR Property Corporation Employee Stock Ownership/401(k) Plan.* 10.3 Shared Facilities Agreement between LNR Property Corporation and Lennar Corporation.* 10.4 Partnership Agreement by and between Lennar Land Partners Sub, Inc. and LNR Land Partners Sub, Inc.* 10.5 Revolving Credit Agreement dated as of December 5, 1997, among LNR Property Corporation and certain subsidiaries and Bank of America National Trust and Savings Association, as lender and agent.* 19 10.6 Master Repurchase Agreement dated as of December 8, 1997, between LNR Sands Holdings, Inc. and Goldman Sachs Mortgage Company.* 10.7 Reverse Repurchase Agreement dated as of October 21, 1997, between DLJ Mortgage Capital, Inc. and LNR Property Corporation, Lennar Capital Services, Inc., Nevada Securities Holdings, Inc., Lennar Securities Holdings, Inc., Lennar MBS, Inc. and LFS Asset Corp.* 10.8 Amended and Restated Credit Agreement dated as of October 31, 1997, between Lennar Capital Services, Inc. and Lennar MBS, Inc. as borrowers and Nationsbank of Texas, N.A. as lender.* 10.9 Credit Agreement among Lennar Land Partners as borrower, and the First National Bank of Chicago, et al.* 10.10 Revolving Credit Agreement dated as of November 6, 1997, by and between Lennar Capital Services, Inc. and The Bank of New York.* 10.11 Reverse Repurchase Agreement dated as of June 7, 1996, between CS First Boston (Hong Kong) Limited and Lennar Financial Services, Lennar MBS, Inc., Lennar Securities Holdings, Inc., and LFS Asset Corp.* 10.12 Credit Agreement dated as of May 15, 1998, between LNR Florida Funding, Inc., and German American Capital Corporation.* 10.13 Amended and Restated Credit Agreement dated as of October 4, 1999, by and between LNR Florida Funding, Inc., and German American Capital Corporation.* 10.14 LNR Property Corporation Savings Plan.* 10.15 Partnership Agreement by and between Lennar Land Partners Sub II, Inc. and LNR Land Partners Sub II, Inc.* 10.16 Second Amended and Restated Revolving Credit Agreement dated as of July 14, 2000, between LNR Property Corporation and certain subsidiaries, the lenders and Bank of America, N.A., as administrative agent, U.S. Bank, National Association, as syndication agent, Fleet National Bank, as documentation agent and Guaranty Federal Bank, F.S.B., as managing agent with Bank of America Securities LLC, as sole lead arranger and sole book manager. 10.17 Supplement and Amendment to Annex 1-A of the Master Repurchase Agreement dated August 17, 2000 and the Master Repurchase Agreement dated as of March 31, 2000, between Bear Stearns International Limited and LNR CMBS Holding Corp. 10.18 Second Supplemental Indenture dated as of February 8, 2001, between LNR Property Corporation and US Bank Trust National Association, as successor trustee (relating to LNR's 10-1/2% Senior Subordinated Notes due 2009.) (Incorporated by reference from Exhibit to Current Report on Form 8-K filed February 15, 2001.) 11.1 Statement Regarding Computation of Earnings Per Share. 13.1 Pages 34 through 64 of the 2000 Annual Report to Stockholders. 21.1 List of subsidiaries. ---------------------- * Previously filed. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LNR PROPERTY CORPORATION /s/ Steven J. Saiontz February 23, 2001 ----------------------------------------- Steven J. Saiontz Chief Executive Officer and Director (Principal Executive Officer) 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 Company and in the capacities and on the dates indicated: Signature and Title Date ------------------- ---- /s/ Stuart A. Miller February 23, 2001 ----------------------------------------- Stuart A. Miller Chairman of the Board and Director /s/ Steven J. Saiontz February 23, 2001 ----------------------------------------- Steven J. Saiontz Chief Executive Officer and Director (Principal Executive Officer) /s/ Jeffrey P. Krasnoff February 23, 2001 ----------------------------------------- Jeffrey P. Krasnoff President and Director /s/ Shelly Rubin February 23, 2001 ----------------------------------------- Shelly Rubin Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Steven N. Bjerke February 23, 2001 ----------------------------------------- Steven N. Bjerke Corporate Controller (Principal Accounting Officer) 21 /s/ Brian L. Bilzin February 23, 2001 ----------------------------------------- Brian L. Bilzin Director /s/ Sue M. Cobb February 23, 2001 ----------------------------------------- Sue M. Cobb Director /s/ Edward Thaddeus Foote II February 23, 2001 ----------------------------------------- Edward Thaddeus Foote II Director /s/ Stephen E. Frank February 23, 2001 ----------------------------------------- Stephen E. Frank Director /s/ Leonard Miller February 23, 2001 ----------------------------------------- Leonard Miller Director 22 REPORT OF INDEPENDENT AUDITORS To the Partners of Lennar Land Partners and Lennar Land Partners II: We have audited the accompanying combined balance sheets of Lennar Land Partners and Lennar Land Partners II, all of which are under common ownership and common management, (collectively, the "Partnerships") as of November 30, 2000 and 1999 and the related combined statements of operations, cash flows and partners' capital for the years ended November 30, 2000, 1999 and 1998. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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, the combined financial statements referred to above present fairly, in all material respects, the financial position of Lennar Land Partners and Lennar Land Partners II at November 30, 2000 and 1999, and the combined results of their operations and their cash flows for the years ended November 30, 2000, 1999 and 1998 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2001 F-1 Lennar Land Partners and Lennar Land Partners II Combined Balance Sheets November 30, 2000 and 1999 2000 1999 ------------ ----------- Assets Cash $ 14,695,398 48,141,744 Restricted cash -- 90,000,000 Land held for development and sale 218,171,259 276,235,050 Operating properties and equipment, net 45,622,856 17,635,188 Investments in partnerships 23,177,423 25,498,018 Other assets 18,498,526 20,627,032 ------------ ----------- Total assets $320,165,462 478,137,032 ============ =========== Liabilities and Partners' Capital Accounts payable and other liabilities $ 22,859,353 23,296,651 Deferred revenue 23,060,000 5,210,000 Due to affiliate 1,825,560 555,064 Mortgage notes and other debts payable 115,038,341 219,209,559 ------------ ----------- Total liabilities 162,783,254 248,271,274 Partners' capital 157,382,208 229,865,758 ------------ ----------- $320,165,462 478,137,032 ============ =========== See accompanying notes to combined financial statements. F-2 Lennar Land Partners and Lennar Land Partners II Combined Statements of Operations For the Years Ended November 30, 2000, 1999 and 1998 2000 1999 1998 ----------- ----------- ----------- Revenues Land sales: Affiliate homesite sales $112,273,630 109,327,044 90,716,843 Third party homesite sales 87,647,803 91,212,830 94,197,102 Third party acreage sales 15,353,949 17,965,220 39,454,724 ----------- ----------- ----------- Total land sales 215,275,382 218,505,094 224,368,669 Equity in earnings of partnerships 21,217,611 18,160,134 29,190,882 Club operations 3,428,590 3,027,448 2,158,698 Amortization of negative goodwill -- 1,351,112 9,502,911 Other 16,565,496 10,409,582 5,305,849 ----------- ----------- ----------- Total revenues 256,487,079 251,453,370 270,527,009 ----------- ----------- ----------- Costs and Expenses Cost of land sales: Affiliate homesite sales 72,700,370 77,415,895 66,426,824 Third party homesite sales 68,911,101 77,552,825 68,606,945 Third party acreage sales 7,935,841 11,265,515 25,383,793 ----------- ----------- ----------- Total cost of land sales 149,547,312 166,234,235 160,417,562 Selling, general and administrative 27,861,492 13,012,117 12,534,503 Management fees paid to affiliate 6,503,557 6,000,000 6,000,000 Club operations 3,258,268 3,061,932 2,333,494 ----------- ----------- ----------- Total costs and expenses 187,170,629 188,308,284 181,285,559 ----------- ----------- ----------- Net Income $ 69,316,450 63,145,086 89,241,450 =========== =========== =========== See accompanying notes to combined financial statements. F-3 Lennar Land Partners and Lennar Land Partners II Combined Statements of Partners' Capital For the Years Ended November 30, 2000, 1999 and 1998 Lennar Land LNR Land Partners Sub, Inc. Partners Sub, Inc. and Lennar and LNR Land Partners Land Partners Sub II, Inc. Sub II, Inc. Total ------------- ------------- ------------ Balance at November 30, 1997 $ 92,582,300 92,582,300 185,164,600 Contributions 4,450,000 4,450,000 8,900,000 Distributions (42,000,000) (42,000,000) (84,000,000) Net income 44,620,725 44,620,725 89,241,450 ------------- ------------- ------------ Balance at November 30, 1998 99,653,025 99,653,025 199,306,050 Distributions (16,292,689) (16,292,689) (32,585,378) Net income 31,572,543 31,572,543 63,145,086 ------------- ------------- ------------ Balance at November 30, 1999 114,932,879 114,932,879 229,865,758 Contributions 2,000,000 2,000,000 4,000,000 Distributions (72,900,000) (72,900,000) (145,800,000) Net income 34,658,225 34,658,225 69,316,450 ------------- ------------- ------------ Balance at November 30, 2000 $ 78,691,104 78,691,104 157,382,208 ============= ============= ============ See accompanying notes to combined financial statements. F-4 Lennar Land Partners and Lennar Land Partners II Combined Statements of Cash Flows For the Years Ended November 30, 2000, 1999 and 1998 2000 1999 1998 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 69,316,450 63,145,086 89,241,450 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net 1,084,423 (970,692) (7,763,691) Equity in earnings of partnerships (21,217,611) (18,160,134) (29,190,882) Gain on sales of operating properties and equipment (6,782,226) -- -- Changes in assets and liabilities: Decrease in land held for development and sale 36,885,909 56,675,913 72,240,180 (Increase) decrease in other assets 2,128,506 2,271,709 (5,876,994) Increase (decrease) in accounts payable and other liabilities (437,298) (22,830,010) 18,590,441 Increase in deferred revenue 17,850,000 5,210,000 -- Increase (decrease) in due to affiliate 1,270,496 (553,128) (7,816,078) ------------- ------------- ------------- Net cash provided by operating activities 100,098,649 84,788,744 129,424,426 ------------- ------------- ------------- Cash flows from investing activities: Operating properties and equipment: Additions (13,649,216) (1,460,753) (464,637) Proceeds from sales 12,251,730 -- -- Investments in partnerships -- (50,847,716) (27,789,507) Distributions from partnerships 23,823,709 49,055,656 39,314,754 ------------- ------------- ------------- Net cash provided by (used in) investing activities 22,426,223 (3,252,813) 11,060,610 ------------- ------------- ------------- Cash flows from financing activities: Net borrowings (repayments) under revolving credit facilities 68,963,236 (9,070,153) 3,356,498 Mortgage notes and other debts payable: Proceeds from borrowings -- 117,643,531 4,448,103 Principal payments (173,134,454) (34,758,035) (63,131,658) Decrease (increase) in restricted cash 90,000,000 (90,000,000) -- Contributions received from partners 4,000,000 -- 8,900,000 Distributions to partners (145,800,000) (32,585,378) (84,000,000) ------------- ------------- ------------- Net cash used in financing activities (155,971,218) (48,770,035) (130,427,057) ------------- ------------- ------------- Net increase (decrease) in cash (33,446,346) 32,765,896 10,057,979 Cash at beginning of year 48,141,744 15,375,848 5,317,869 ------------- ------------- ------------- Cash at end of year $ 14,695,398 48,141,744 15,375,848 ============= ============= ============= Supplemental disclosures of non-cash investing and financing activities: Contribution of land to partnerships $ -- -- 18,125,732 Consolidation of entity previously accounted for under the equity method - assets and liabilities recorded: Land held for development and sale $ -- 83,132,482 -- Mortgage notes and other debts payable -- (39,000,000) -- Other, net -- (2,387,513) -- Investments in partnerships -- (41,744,969) -- ------------- ------------- ------------- $ -- -- -- ============= ============= ============= See accompanying notes to combined financial statements. F-5 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements 1. Organization and Summary of Significant Accounting Policies Description of Organization and Operations Lennar Land Partners ("LLP") is a Florida general partnership which was formed at the close of business on October 31, 1997 through the contribution of assets and related liabilities by Lennar Land Partners Sub, Inc. ("Lennar Sub I"), a wholly-owned subsidiary of Lennar Corporation ("Lennar"), and LNR Land Partners Sub, Inc. ("LNR Sub I"), a wholly-owned subsidiary of LNR Property Corporation ("LNR"). All amounts were recorded by LLP at the carrying value of the partners. Lennar Sub I and LNR Sub I each received 50% partnership interests in LLP. In July 1999, certain assets and liabilities of LLP were contributed at net book value to a second general partnership, Lennar Land Partners II ("LLP II"). Lennar, through Lennar Land Partners Sub II, Inc. ("Lennar Sub II"), and LNR, through LNR Land Partners Sub II, Inc. ("LNR Sub II"), each received 50% partnership interests in LLP II. Lennar Sub I is the managing general partner of LLP and Lennar Sub II is the managing general partner of LLP II. LLP and LLP II (the "Partnerships") are under common ownership and management and are engaged in the acquisition, development and sale of land. Additionally, the Partnerships own and operate recreational facilities in several of the communities they develop. The Partnerships also invest in partnerships (and similar entities) which acquire, develop and sell land and, in certain instances, also build and sell homes. Basis of Combination The accompanying combined financial statements include the accounts of the Partnerships, their wholly-owned subsidiaries and partnerships (and similar entities) in which a controlling interest is held. The Partnerships' investments in partnerships (and similar entities) in which less than a controlling interest is held are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated. In 1999, the Partnerships obtained a controlling interest in one of its partnerships which was being accounted for by the equity method. At such time, the Partnerships began consolidating the assets and liabilities of the entity. The effect on the Combined Balance Sheets of consolidating this entity is included in the Combined Statements of Cash Flows under Supplemental Disclosures of Non-Cash Investing and Financing Activities. Use of Estimates 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 that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-6 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 1. Organization and Summary of Significant Accounting Policies (continued) Revenue Recognition Revenues from land sales are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash The Partnerships consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Land Held for Development and Sale The cost of land held for development and sale includes direct and indirect costs, capitalized interest and property taxes. The cost of land, major infrastructure, amenities and other common costs are apportioned among the parcels within a real estate community. Land is carried at cost, unless the land within a community is determined to be impaired, in which case the impaired land will be written down to fair value. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets be evaluated for impairment based on undiscounted future cash flows of the assets. Write-downs of land deemed to be impaired will be recorded as adjustments to the cost basis of the respective land. As of November 30, 2000 and 1999, there were no assets considered impaired under the provisions of this statement. Interest and Real Estate Taxes Interest and real estate taxes attributable to land and operating properties are capitalized and added to the cost of those properties as long as the properties are being actively developed. During 2000, 1999 and 1998, interest costs of $10,472,188, $6,585,214 and $10,283,403, respectively, were incurred and $9,048,037, $6,328,383 and $10,283,403, respectively, were capitalized. Operating Properties and Equipment Operating properties and equipment are recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 39 years and for equipment is 2 to 15 years. Negative Goodwill At the formation of LLP, certain assets and the related negative goodwill were contributed. The negative goodwill was amortized over the lives of the assets acquired that gave rise to the negative goodwill. Negative goodwill was fully amortized at November 30, 1999. F-7 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 1. Organization and Summary of Significant Accounting Policies (continued) Income Taxes No provision for income taxes has been included in the combined financial statements for the Partnerships since the payment of such taxes is the obligation of the partners. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Partnerships to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Partnerships' results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Partnerships beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Partnership's results of operations or financial position. Reclassifications Certain prior year amounts have been reclassified to conform with the 2000 presentation. F-8 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 2. Land Held for Development and Sale Land held for development and sale consists of individual homesites and land parcels for sale to homebuilders, including Lennar. These properties are located in Florida, California, Texas and Arizona. Land parcels are in various stages of development at November 30, 2000 and 1999. 3. Operating Properties and Equipment Operating properties and equipment at November 30, 2000 and 1999 consisted of the following: 2000 1999 ------------ ------------ Community recreational facilities $ 43,598,589 14,823,419 Sales center 1,890,549 1,890,549 ------------ ------------ Total land and buildings 45,489,138 16,713,968 Furniture, fixtures and equipment 3,064,197 3,259,254 ------------ ------------ 48,553,335 19,973,222 Accumulated depreciation (2,930,479) (2,338,034) ------------ ------------ $ 45,622,856 17,635,188 ============ ============ F-9 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 4. Investments in Partnerships Summarized financial information on a combined 100% basis related to the Partnerships' significant partnerships and similar entities accounted for by the equity method as of November 30, 2000 and 1999 and for the years ended November 30, 2000, 1999 and 1998 was as follows: 2000 1999 ------------ ------------ Assets: Cash $ 11,676,310 4,583,899 Real estate inventories 105,959,116 126,322,905 Other assets 3,819,111 2,595,562 ------------ ------------ $121,454,537 133,502,366 ============ =========== Liabilities and equity: Accounts payable and other liabilities $ 18,380,492 29,861,086 Notes and mortgages payable 55,066,610 39,174,379 Equity of: The Partnerships 23,177,423 25,832,402 Others 24,830,012 38,634,499 ------------ ------------ $121,454,537 133,502,366 ============ =========== 2000 1999 1998 ------------ ------------ ------------ Revenues $139,289,132 210,032,897 206,294,488 Costs and expenses 104,852,299 171,286,026 140,533,692 ------------ ------------ ------------ Earnings of partnerships $ 34,436,833 38,746,871 65,760,796 ============ ============ ============ The Partnerships' share of earnings $ 21,217,611 18,160,134 29,190,882 ============ ============ ============ At November 30, 2000 and 1999, the Partnerships' equity interests in these partnerships ranged from 33% to 50%. These partnerships are primarily involved in the acquisition, development and sale of residential land. The Partnerships share in the profits and losses of these partnerships and, when appointed the manager of the partnerships, receive fees for the management of the assets. The outstanding debt of these partnerships is not guaranteed by the Partnerships. However, both Lennar and LNR provide limited maintenance guarantees on the debt of one of the partnerships (see Notes 7 and 8). F-10 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 5. Accounts Payable and Other Liabilities Accounts payable and other liabilities at November 30, 2000 and 1999 consisted of the following: 2000 1999 ----------- ----------- Accounts payable $ 5,978,564 12,729,777 Deposits 4,939,348 3,204,965 Deferred income 2,400,339 880,533 Accrued property taxes 1,573,865 2,791,743 Other liabilities 7,967,237 3,689,633 ----------- ----------- $22,859,353 23,296,651 =========== =========== 6. Deferred Revenue The Partnerships entered into a Club Option Agreement whereby the Partnerships granted to a private equity membership club (the "Club") the right and option to purchase certain recreational facilities (the "Club Facilities"). Pursuant to the Club Option Agreement, all membership contributions received by the Club are paid to the Partnerships as a non-refundable option deposit and shall be applied toward the purchase price of the Club Facilities. Deferred revenue of $23,060,000 and $5,210,000 had been collected as of November 30, 2000 and 1999, respectively. F-11 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 7. Mortgage Notes and Other Debts Payable Mortgage notes and other debts payable at November 30, 2000 and 1999 consisted of the following: 2000 1999 ------------ ------------ Revolving credit facilities with floating interest rates (ranging from 8.4% to 9.5% at November 30, 2000), secured by certain real estate, due through 2002 $107,231,936 40,000,000 Mortgage notes on land, with a fixed interest rate of 7% at November 30, 2000, secured by certain real estate, due 2002 7,656,405 29,498,081 Term loan note with a floating interest rate, collateralized by cash, paid in 2000 -- 90,000,000 Term loan note with a floating interest rate, secured by certain real estate, paid in 2000 -- 43,167,199 Revolving credit notes payable with floating interest secured by certain real estate, paid in 2000 -- 107,756 Unsecured notes payable 150,000 16,436,523 ------------ ------------ $115,038,341 219,209,559 ============ ============ In 2000, the Partnerships obtained a $75,000,000 revolving credit facility with a financial institution, which was initially used to refinance existing indebtedness and subsequently used to acquire land, land development and for other general purposes, including distributions to partners. This credit facility matures in February 2002 and is subject to a one-year extension at the request of the Partnerships and with the consent of the financial institution. Borrowings under this credit facility are limited by certain borrowing base calculations and are collateralized by real estate in the borrowing base. At November 30, 2000, $56,670,992 was outstanding. Interest is payable monthly and is tied to the Prime Rate. The interest rate was 9.5% at November 30, 2000. Additionally in 2000, the Partnerships obtained a $20,000,000 revolving credit facility with a financial institution for the financing of certain real estate. This credit facility matures in January 2002 and is subject to a one-year extension at the request of the Partnerships and with the consent of the financial institution. Borrowings under this credit facility are limited by certain borrowing base calculations and are collateralized by real estate in the borrowing base. Both Lennar and LNR provide limited maintenance guarantees on this obligation. At November 30, 2000, $10,560,944 was outstanding. Interest is based on LIBOR and was 8.4% at November 30, 2000. F-12 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 7. Mortgage Notes and Other Debts Payable (continued) In 1999, the Partnerships obtained a controlling interest in one of its partnerships which was being accounted for by the equity method. This partnership has a $40,000,000 line of credit facility with a financial institution. This credit facility matured in December 2000 and was modified subsequent to year end. The modification provides for a new maturity date of December 2001 and quarterly principal payments of $5,000,000. This facility is subject to a one-year extension at the request of the Partnerships and with the consent of the financial institution. Interest is payable monthly and is based on LIBOR. Lennar provides limited maintenance guarantees on this obligation. Outstanding borrowings on the line of credit are collateralized by real estate and were $40,000,000 at November 30, 2000 and 1999. The interest rate at November 30, 2000 and 1999 was 8.4% and 7.2%, respectively. The minimum aggregate principal maturities of mortgage notes and other debts payable subsequent to November 30, 2000 are as follows: 2001 - $22,806,405 and 2002 - $92,231,936. 8. Related Party Transactions Lennar is paid a monthly fee for managing the day-to-day operations of the Partnerships. As manager, Lennar is also entitled to reimbursement for all out-of-pocket expenses directly incurred in its capacity as manager (the "Direct Expenses") including, but not limited to, costs and expenses of employees (salary, bonus and benefits), contractors, agents, professional fees, telephone, travel, productions and reproductions of documents and postage. In addition to the Direct Expenses, Lennar shares some of its employees, contractors, agents, facilities and equipment and other expenses with the Partnerships (the "Indirect Expenses"). The reimbursement for the Indirect Expenses is reflected as management fees paid to affiliate in the combined statements of operations. The Partnerships reimbursed Lennar $2,835,875, $1,534,164 and $1,683,251 for Direct Expenses in 2000, 1999 and 1998, respectively, and $6,503,557, $6,000,000 and $6,000,000 for Indirect Expenses in 2000, 1999 and 1998, respectively. The Partnerships, in the ordinary course of business, sell land to Lennar. During 2000, these land sales amounted to $112,273,630 in revenues and generated gains totaling $39,573,260. During 1999, these land sales amounted to $109,327,044 in revenues and generated gains totaling $31,911,149. During 1998, these land sales amounted to $90,716,843 in revenues and generated gains totaling $24,290,019. The Partnerships believe amounts paid by Lennar for land sales approximate amounts that would have been paid by independent third parties. At November 30, 2000, Lennar and LNR provided limited maintenance guarantees on certain indebtedness totaling $10,560,944 of the Partnerships' debt and each provided a 50% limited maintenance guarantee on $36,863,000 of the debt of one of the Partnerships' partnerships. At November 30, 2000, Lennar provided limited maintenance guarantees on certain indebtedness totaling $40,150,000 of the Partnerships' debt. During 2000, 1999 and 1998, the Partnerships paid the partners guarantee fees totaling $33,554, $283,721 and $632,004, respectively. During 1999, the Partnerships entered into a transaction with Lennar that was accounted for as a nonmonetary exchange of similar assets. The net assets received in the transaction were recorded by the Partnerships at the net book value of the assets given up of $42,173,384. F-13 Lennar Land Partners and Lennar Land Partners II Notes to Combined Financial Statements (continued) 8. Related Party Transactions (continued) Lennar funds the deficits of the community recreational facilities of the Partnerships' non-master planned communities. During 2000, 1999 and 1998, the Partnerships received deficit funding from Lennar of $508,109, $521,198 and $1,144,890, respectively. At November 30, 2000 and 1999, the Partnerships owed Lennar $1,825,560 and $555,064, respectively, for advances, Indirect Expenses and Direct Expenses. 9. Commitments and Contingent Liabilities The Partnerships are subject to the usual obligations associated with entering into contracts for the purchase, development and sale of real estate in the routine conduct of its business. The Partnerships are parties 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 financial condition of the Partnerships. Through an arrangement with Lennar as managing partner, the Partnerships are committed, under various letters of credits, to perform certain development activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under this arrangement totaled $9,400,000 at November 30, 2000. F-14 Report of Independent Auditors To the Members of Madison Square Company LLC We have audited the accompanying balance sheets of Madison Square Company LLC (the Company) as of December 31, 2000 and 1999, and the related statements of income, members' equity, and cash flows for the year ended December 31, 2000 and the period from March 25, 1999 (date of inception) through December 31, 1999. 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 auditing standards generally accepted in the 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, the financial statements referred to above present fairly, in all material respects, the financial position of Madison Square Company LLC as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the year ended December 31, 2000 and the period from March 25, 1999 (date of inception) through December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Miami, Florida February 6, 2001 F-15 Madison Square Company LLC Balance Sheets December 31, 2000 1999 ---------------------- (in thousands) Assets Cash and cash equivalents $ 2,153 $ 5,190 Investment securities 1,512,561 1,638,669 Other assets 14,550 17,265 ---------------------- Total assets $1,529,264 $1,661,124 ====================== Liabilities and members' equity Accounts payable and accrued expenses $ 5,132 $ 5,775 Loan payable to affiliate 1,098,705 1,263,145 ---------------------- Total liabilities 1,103,837 1,268,920 Members' equity 425,427 392,204 ---------------------- Total liabilities and members' equity $1,529,264 $1,661,124 ====================== See accompanying notes. F-16 Madison Square Company LLC Statements of Income Period from March 25 1999 (date of inception) Year ended through December 31, December 31, 2000 1999 ------------ -------------- (in thousands) Revenues: Interest income $227,342 $121,053 Other income 19,863 4,886 -------------------------- Total revenues 247,205 125,939 Expenses: General and administrative expenses 9,604 9,611 Interest expense 91,061 53,522 -------------------------- Total expenses 100,665 63,133 -------------------------- Net income $146,540 $ 62,806 ========================== See accompanying notes. F-17 Madison Square Company LLC Statements of Members' Equity Year ended December 31, 2000 and the period from March 25, 1999 (date of inception) through December 31, 1999 (in thousands) Madison Square Madison LNR Best Management Square Madison Property LLC Equity, Inc. Square, Inc. Fund, L.P. ---------------------------------------------------------------------- Initial members' contributions $ 444 $ 95,427 $ 63,073 $ 63,073 Contributions from members 191 40,963 27,075 23,394 Assignment of member interest -- -- -- (93,787) Distributions to members (50) (10,789) (7,130) (4,486) Net income 122 26,302 17,385 11,806 ---------------------------------------------------------------------- Balance at December 31, 1999 707 151,903 100,403 -- Distributions to members (3,188) (40,302) (30,138) -- Net income 3,248 53,264 38,703 -- ----------------------------------------------------------------------- Balance at December 31, 2000 $ 767 $ 164,865 $ 108,968 $ -- ======================================================================= Sun America Life Total BPF Insurance BPF/LNR Members' LLC Co. Partnership Equity ---------------------------------------------------------------------- Initial members' contributions $ -- $ -- $ -- $ 222,017 Contributions from members 3,681 37,504 -- 132,808 Assignment of member interest 93,787 -- -- -- Distributions to members (2,644) (328) -- (25,427) Net income 5,579 1,612 -- 62,806 --------------------------------------------------------------------- Balance at December 31, 1999 100,403 38,788 -- 392,204 Distributions to members (30,138) (9,551) -- (113,317) Net income 38,703 12,622 -- 146,540 --------------------------------------------------------------------- Balance at December 31, 2000 $ 108,968 $ 41,859 $ -- $ 425,427 ===================================================================== See accompanying notes F-18 Madison Square Company LLC Statements of Cash Flows Period from March 25 1999 (date of inception) Year ended through December 31, December 31, 2000 1999 ---------------------------- (in thousands) Operating activities Net income $ 146,540 $ 62,806 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of purchase discount (16,134) (2,327) Changes in operating assets and liabilities: Decrease in investment securities (deferred interest) 1,421 21,409 Decrease (increase) in other assets 2,715 (2,979) (Decrease) increase in accounts payable and accrued expenses (643) 5,775 ---------------------------- Net cash provided by operating activities 133,899 84,684 Investing activities Purchase of investment securities -- (1,750,052) Principal repayments from investment securities 140,821 78,015 ---------------------------- Net cash provided by (used in) investing activities 140,821 (1,672,037) Financing activities Proceeds from loan payable to affiliate -- 1,400,042 Principal payments on loan payable to affiliate (164,440) (136,897) Cash contributions from members -- 354,825 Cash distributions to members (113,317) (25,427) ---------------------------- Net cash (used in) provided by financing activities (277,757) 1,592,543 ---------------------------- Net (decrease) increase in cash and cash equivalents (3,037) 5,190 Cash and cash equivalents at beginning of period 5,190 -- ---------------------------- Cash and cash equivalents at end of period $ 2,153 $ 5,190 ============================ See accompanying notes. F-19 Madison Square Company LLC Notes to Financial Statements December 31, 2000 1. Organization and Nature of Business Madison Square Company LLC (Company), a Delaware limited liability company, was formed on March 25, 1999, for the purpose of investing in unrated and non-investment grade rated commercial mortgage backed securities (CMBS), as further discussed in Notes 2 and 3. The Company's members currently consist of BPF/LNR Partnership (BPF/LNR), a non-equity managing member, and as non-managing members, Madison Square Management LLC (Madison), a 0.1815% member, Madison Square Equity, Inc. (Madison Equity), a 39.0084% member, LNR Madison Square, Inc. (LNR), a 25.78285% member, BPF LLC (BPF LLC), a 25.78285% member, and SunAmerica Life Insurance Co. (SunAmerica), a 9.2444% member. The original members of the Company were Madison, as managing member, and as non-managing members, Madison Equity, LNR, and Best Property Fund, L.P. (BPF). On July 1, 1999, effective as of March 25, 1999, BPF transferred to LNR an interest in the Company relating to a capital commitment in the amount of $25 million and a related capital contribution in the amount of $12.6 million, causing BPF and LNR to have equal members' interest of 28.4091%. Effective October 20, 1999, BPF assigned its interest to BPF LLC. On November 3, 1999, BPF/LNR was admitted as a non-equity member. SunAmerica was admitted as a member on November 4, 1999, after purchasing its interest from the then existing members. Lastly, on November 22, 1999, the members' ownership percentages were equalized to achieve the target ownership percentages as if all capital commitments were fully funded. Going forward, the ownership percentages that currently exist will remain constant and any additional capital contributions will be made in those proportions. The Operating Agreement sets forth the basis for capital contributions, allocations and distributions to the members including allocations of profits and losses, special allocations for tax purposes and distributions of cash flow from the Company. The Company will cease to exist on March 31, 2004, unless sooner terminated or further extended pursuant to the provisions in the Operating Agreement. F-20 Madison Square Company LLC Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies Cash and Cash Equivalents For purposes of the statements of cash flow, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Concentrations of credit risk and market risk associated with cash and cash equivalents are considered low due to the credit quality of the issuers of the financial instruments held by the Company and due to their short duration to maturity. Investment Securities Investment securities, which consist of investments in rated and unrated portions of various issues of CMBS and a participating whole loan pool, are accounted for in accordance with Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity Securities. FAS 115 requires that debt and equity securities that have determinable fair values be classified as available-for-sale unless they are classified as held-to-maturity or trading. 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 December 31, 2000 and 1999, all investment securities held by the Company are classified as held-to-maturity. Interest Income Recognition In accordance with Financial Accounting Standards Statement No. 91, Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, the Company recognizes interest income on its CMBS using the effective interest method, which results in a level yield over the projected life of the investments. Changes in estimated yields are due to revisions in estimates of future credit losses, losses incurred and actual prepayment speeds. During 2000 and 1999, the Company recognized income based upon yields ranging from approximately 11.3% to 34.3% and 9.6% to 34.3%, respectively, with a weighted average of 14.9% and 12.7%, respectively. F-21 Madison Square Company LLC Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Impact of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which is required to be adopted in years beginning after June 15, 1999. Subsequent to the issuance of FAS 133, the Financial Accounting Standards Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, which extended the effective date to fiscal years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new statements will have a significant effect on earnings or the financial position of the Company. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Income Tax Matters The accompanying financial statements include no provision for income taxes, since pursuant to the provisions of the applicable federal, state, and local taxing authorities, each item of income, gain, loss, deduction or credit is reportable by the members. F-22 Madison Square Company LLC Notes to Financial Statements (continued) 3. Investment Securities Investment securities are stated at amortized cost which represents actual cost adjusted for discount accretion using the effective interest method. Investment securities consists of the following (in thousands): December 31, 2000 1999 --------------------------- Certificate face value $2,037,435 $2,184,605 Purchase discount (502,044) (524,528) Deferred interest (22,830) (21,408) --------------------------- $1,512,561 $1,638,669 =========================== In general, principal payments on each class of security are made in the order of the stated maturities of each class so that no payment of principal will be made on any class until all classes having an earlier maturity date have been paid in full. Each security is, in effect, subordinate to other securities of classes with earlier maturities. The principal repayments on a particular class are dependent upon collections on the underlying mortgages, affected by prepayments and extensions, and as a result, the actual maturity of any class of securities may differ from its stated maturity. In addition, the Company has an investment in a participating whole loan pool and has begun to receive principal payments from this investment. At December 31, 2000, the Company's investment securities, with stated maturities through 2023, have coupon rates ranging from 5.86% to 9.56%. The investments represent securities that are collateralized by pools of mortgage loans on commercial real estate assets located across the country. Concentrations of credit risk with respect to these securities are limited due to the diversity of the underlying loans across geographical areas and diversity among property types. In addition, the Company only invests in these securities when one of its affiliates performs significant due diligence analysis on the real estate supporting the underlying loans and when it has the right to select an affiliate as special servicer for the entire securitization. The special servicer impacts the performance of the securitization by using its loan workout and asset management expertise to resolve non-performing loans. F-23 Madison Square Company LLC Notes to Financial Statements (continued) 4. Loan Payable to Affiliate The purchases of the investments were partially financed by loans under the Company's credit facility of $1.76 billion from Credit Suisse First Boston Mortgage Capital, LLC (CSFB), an affiliate of Madison and Madison Equity. Interest is payable at a rate per annum equal to the sum of the adjusted LIBOR plus 125 basis points during the original term of the facility (7.94% and 7.71% at December 31, 2000 and 1999, respectively). The loans are collateralized by substantially all of the assets of the Company and have an original maturity of March 31, 2002. The Credit Agreement provides for two one-year extensions. Upon each extension, the underlying interest rate will increase by 100 basis points. The Company has the option to prepay the loans at any time prior to the maturity date without penalty. The Credit Agreement allowed for additional borrowings through March 31, 2000. As of December 31, 2000, the Company had no available borrowings under the Credit Agreement. Pursuant to the Credit Agreement, the borrower is required to make interest and principal payments on a monthly basis. Principal payments are made as defined in the Credit Agreement. Interest payments made to CSFB totaled $91.4 million and $50.3 million for the year ended December 31, 2000 and for the period from March 25, 1999 (date of inception) through December 31, 1999, respectively. 5. Related Party Transactions Management Fees From March 25, 1999 to November 2, 1999, the Operating Agreement provided for management fees to be paid to the Managing Company Group, as defined, which included Terra Management LLC (Terra), an affiliate of Madison and Madison Equity. A portion of the management fee was then distributed to Lennar Partners, Inc. (LPI), an affiliate of LNR, for services rendered in connection with the Administration and Servicing Agreement. Effective November 3, 1999, the Operating Agreement was amended to provide for payment of the management fees to the managing partnership, BPF/LNR, which distributes a portion of the fee to LPI and Terra. The remainder of the fee is distributed to BPF LLC and LNR, the partners of BPF/LNR. F-24 Madison Square Company LLC Notes to Financial Statements (continued) 5. Related Party Transactions (continued) The management fee is calculated as 1.5%, per annum, of the Net Cash Flow Value, as defined, payable on a quarterly basis in arrears. During 2000 and 1999, the Company incurred management fees of approximately $7.0 million and $3.7 million, respectively. At December 31, 2000 and 1999, included in accounts payable and accrued expenses is approximately $1.8 million and $1.5 million, respectively, related to this fee. Other During 2000 and 1999, the Company reimbursed affiliates approximately $2.0 million and $911,000, respectively, for certain overhead expenses including payroll, rent and other administrative expenses. At December 31, 2000 and 1999, included in accounts payable and accrued expenses is approximately $50,000 and $355,000, respectively, related to this reimbursement. 6. Fair Value of Financial Instruments Statement of Financial Standards No. 107, Disclosures about Fair Value of Financial Instruments (FAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates could not be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. F-25 Madison Square Company LLC Notes to Financial Statements (continued) 6. Fair Value of Financial Instruments (continued) The following table presents the carrying amount and estimated fair value of financial instruments held by the Company (in thousands): Carrying Fair Amount Value --------------------------- December 31, 2000 Assets: Cash and cash equivalents $ 2,153 $ 2,153 Investment securities 1,512,561 1,569,579 Liabilities: Loan payable to affiliate 1,098,705 1,098,705 December 31, 1999 Assets: Cash and cash equivalents $ 5,190 $ 5,190 Investment securities 1,638,669 1,674,197 Liabilities: Loan payable to affiliate 1,263,145 1,263,145 The following methods and assumptions were used by the Company in estimating fair value: Cash and Cash Equivalents--The amount reported in the Balance Sheets approximates fair value. Investment Securities--The fair value is calculated by discounting the estimated future cash flows at a rate which approximates current market. Loan Payable to Affiliate--The amount reported in the Balance Sheets approximates fair value as it is primarily tied to market rates of interest. F-26 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of LNR Property Corporation: We have audited the consolidated financial statements of LNR Property Corporation and subsidiaries (the "Company") as of November 30, 2000 and 1999, and for each of the three years in the period ended November 30, 2000, and have issued our report thereon dated January 16, 2001, except for note 18 as to which the date is February 26, 2001; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of LNR Property Corporation, listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 16, 2001 F-27 LNR PROPERTY CORPORATION Schedule II Valuation and Qualifying Accounts Years Ended November 30, 2000, 1999, and 1998 Additions ------------------ Charged Charged (Credited) Beginning to Costs to Other Ending Description Balance and Expenses Accounts (Deductions) Balance ----------- ---------- ------- ------- ---------- ---------- Year ended November 30, 2000 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 597,000 958,000 -- -- 1,555,000 ========== ======= ======= ========== ========== Deferred income and unamortized discounts $5,360,000 -- -- (1,177,000)(A) 4,183,000 ========== ======= ======= ========== ========== Loan loss reserve $2,038,000 -- -- -- 2,038,000 ========== ======= ======= ========== ========== Year ended November 30, 1999 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 117,000 662,000 153,000 (335,000) 597,000 ========== ======= ======= ========== ========== Deferred income and unamortized discounts $6,451,000 -- -- (1,091,000)(A) 5,360,000 ========== ======= ======= ========== ========== Loan loss reserve $2,948,000 -- -- (910,000) 2,038,000 ========== ======= ======= ========== ========== Year ended November 30, 1998 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 703,000 278,000 -- (864,000) 117,000 ========== ======= ======= ========== ========== Deferred income and unamortized discounts $6,706,000 -- 773,000 (1,028,000)(A) 6,451,000 ========== ======= ======= ========== ========== Loan loss reserve $2,038,000 910,000 -- -- 2,948,000 ========== ======= ======= ========== ========== Notes: (A) Includes amortization of discounts F-28 LNR PROPERTY CORPORATION AND SUBSIDIARIES Schedule III Real Estate and Accumulated Depreciation (D)(E) Year ended November 30, 2000 Costs Capitalized Initial Cost Subsequent to to Company Acquisition -------------------------- ------------------------- Building and Carrying Description Encumbrances Land Improvements Improvements Costs ----------- ------------ ------------ ------------ ------------ ----------- Rental office property- GA ........... $ 41,761,000 $ 5,238,000 $ 20,020,000 $ 37,320,000 $ 2,525,000 NC ........... 33,978,000 4,480,000 40,320,000 262,000 -- CA ........... -- 26,670,000 15,104,000 2,571,000 10,000 apartment property- VA ........... 24,830,000 5,915,000 1,538,000 34,873,000 3,991,000 Other miscellaneous properties which are individually less than 5% of total ..... 372,953,000 131,461,000 221,411,000 296,677,000 8,881,000 ------------ ------------ ------------ ------------ ----------- $473,522,000 $173,764,000 $298,393,000 $371,703,000 $15,407,000 ============ ============ ============ ============ =========== Gross Amount at Which Date of Carried at Accumulated Completion of Date Close of Period Depreciation(B) Construction Acquired ---------------------------------------- ----------- ------------ -------- Description Land(A) Buildings(A) Total(C) ----------- ------------ ------------ ------------ Rental office property- GA ........... $ 5,238,000 $ 59,865,000 $ 65,103,000 $ 3,991,000 1999 1996 NC ........... 4,480,000 40,582,000 45,062,000 337,000 Completed when acquired 2000 CA ........... 26,670,000 17,685,000 44,355,000 7,827,000 Completed when acquired 1998 apartment property- VA ........... 5,915,000 40,402,000 46,317,000 -- 2001 1997 Other miscellaneous properties which are individually less than 5% of total ..... 131,461,000 526,969,000 658,430,000 35,671,000 Various Various ------------ ------------ ------------ ----------- $173,764,000 $685,503,000 $859,267,000 $47,826,000 ============ ============ ============ =========== Notes: (A) Includes related improvements and capitalized carrying costs. (B) Depreciation is calculated using the straight-line method over the estimated useful lives which vary from 10 to 40 years. (C) The aggregate gross cost of the listed property for Federal income tax purposes was $725,981,000 at November 30, 2000. (D) The listed real estate includes operating properties completed or under construction. (E) Reference is made to Notes 1, 7 and 11 of the consolidated financial statements. (F) The changes in the total cost of real estate properties and accumulated depreciation for the three years ended November 30, 2000 are as follows (in thousands): 2000 1999 1998 ----------- ----------- --------- Cost: Balance at beginning of year $ 1,005,652 746,748 257,376 Additions, at cost 335,239 446,922 501,075 Cost of real estate sold (152,016) (169,642) (27,187) Transfers (329,608) (18,376) 15,484 ----------- ----------- --------- Balance at end of year $ 859,267 1,005,652 746,748 =========== =========== ========= Accumulated depreciation: Balance at beginning of year $ 39,192 39,943 31,904 Depreciation and amortization charged against earnings 27,850 24,637 12,283 Depreciation on real estate sold (8,663) (22,441) (4,244) Transfers (10,553) (2,947) -- ----------- ----------- --------- Balance at end of year $ 47,826 39,192 39,943 =========== =========== ========= F-29 LNR PROPERTY CORPORATION AND SUBSIDIARIES Schedule IV Mortgage Loans on Real Estate November 30, 2000 Principal Amount of Loans Subject to Carrying Delinquent Final Periodic Face Amount of Principal Interest Maturity Payment Prior Amount of Mortgages or Description Rate Date Terms Liens Mortgages (A)(B)(C) Interest ------------------------------ ------------- --------- --------------------- ----------- ------------ ----------- ---------- First mortgage notes secured by real estate and other: Mixed use - TX, GA, MA Libor + 650 2003 Interest Only $ 40,000,000 40,000,000 Convention center - NV Libor + 550 2001 Interest Only 37,500,000 37,500,000 Mixed use - MA Libor + 650 2002 Interest Only 35,200,000 35,200,000 Hotel - FL, CA & NY Libor + 750 2002 Interest Only 30,000,000 30,000,000 Hotel - NY Libor + 700 2001 Interest Only 21,000,000 21,000,000 Office building - TX Libor + 625 2002 Interest Only 21,000,000 21,000,000 Office building - CA 8.456% 2003 Varying Payment 16,307,000 13,781,000 Conference Center - VA Libor + 750 2003 Interest Only 14,600,000 14,600,000 Multifamily - CA Libor + 625 2003 Interest Only 12,100,000 12,100,000 Office building - NY Libor + 650 2001 Interest Only 5,000,000 5,000,000 Retail Center - NY 9.75%-10.50% 2003 Principal and Interest 4,350,000 150,000 Other 5.89%-15.00% 2000-2011 Various 6,507,000 2,411,000 ------------ ----------- ---------- 243,564,000 232,742,000 -- Second mortgage notes secured by real estate: Residential Development - CA 12.50% 2003 Varying Payment 2,935,000 2,935,000 Residential Development - CA 15.00% 2001 Varying Payment 2,651,000 2,651,000 Residential Development - CA 12.00% 2001 Varying Payment 2,832,000 2,832,000 Residential Development - CA 22.00% 2003 Varying Payment 2,507,000 2,507,000 Residential Development - CA 22.00% 2002 Varying Payment 1,910,000 1,910,000 Residential Development - CA 10.00% 2001 Varying Payment 448,000 448,000 ------------ ----------- ---------- 13,283,000 13,283,000 -- ------------ ----------- ---------- 256,847,000 246,025,000 Loan Loss Reserve (2,038,000) ------------ ----------- ---------- $256,847,000 243,987,000 -- ============ =========== ========== Notes: (A) For Federal income tax purposes, the aggregate basis of the listed mortgages was $255,671,000 at November 30, 2000. (B) Carrying amounts are net of unamortized discounts. (C) The changes in the carrying amounts of mortgages for the years ended November 30, 2000, 1999 and 1998 are as follows: 2000 1999 1998 ------------- ----------- ------------ Balance at beginning of year $ 152,827,000 97,855,000 86,849,000 Additions (deductions): New mortgage loans, net 164,655,000 83,901,000 137,242,000 Collections of principal (74,797,000) (30,885,000) (126,432,000) Amortization of discount 1,177,000 1,091,000 1,106,000 Change in loan loss reserve 0 910,000 (910,000) Other 125,000 (45,000) ------------- ----------- ------------ Balance at end of year $ 243,987,000 152,827,000 97,855,000 ============= =========== ============ F-30 EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 10.16 Second Amended and Restated Revolving Credit Agreement dated as of July 14, 2000, between LNR Property Corporation and certain subsidiaries, the lenders and Bank of America, N.A., as administrative agent, U.S. Bank, National Association, as syndication agent, Fleet National Bank, as documentation agent and Guaranty Federal Bank, F.S.B., as managing agent with Bank of America Securities LLC, as sold lead arranger and sole book manager. 10.17 Supplement and Amendment to Annex 1-A of the Master Repurchase Agreement dated August 17, 2000 and the Master Repurchase Agreement dated as of March 31, 2000 between Bear, Stearns International Limited and LNR CMBS Holding Corp. 11.1 Statement Regarding Computation of Earnings Per Share. 13.1 Pages 34 through 65 of the 2000 Annual Report to Stockholders. 21.1 List of subsidiaries.