General Growth challenging Howard Hughes heirs over Summerlin payments

By Steve Green (contact)

Wednesday, June 30, 2010 | 12:19 p.m.

General Growth Properties Inc., the bankrupt developer of the Summerlin planned community in Las Vegas, is challenging claims by the heirs of billionaire Howard Hughes that they should be paid in full for their interest in 8,900 acres of undeveloped Summerlin land.

In a bankruptcy filing Tuesday, General Growth attorneys said the Hughes heirs' recovery in the case is likely to be just a "small fraction" of the equity value of the company that it plans to distribute to shareholders once the bankruptcy case is concluded.

That's a far cry from what General Growth was saying before it filed for bankruptcy last year. Before the bankruptcy filing, General Growth disclosed to investors that if it had to settle up with the Hughes heirs as required by its contract with them, they would own so much General Growth stock that they would control the company.

The coming bankruptcy court showdown between General Growth and the Hughes heirs relates to a controversy that has its beginnings in the 1950s, when the billionaire Hughes acquired 25,000 acres of desert land in western Las Vegas that eventually became Summerlin -- named for his paternal grandmother.

After Hughes' death in 1976, a company owned by his heirs, Howard Hughes Corp., developed the land. In 1996, they sold Howard Hughes Corp. and its land holdings, including the Summerlin acreage, to Rouse Co. General Growth acquired Rouse in 2004.

Because of uncertainties about the value of the land in 1996, the heirs arranged to be paid over time for 50 percent of the value of the land as it was developed. As the Las Vegas economy boomed, they ended up collecting $540 million on top of the initial purchase price of $500 million. Under terms of the buyout deal, they had been receiving payments in General Growth stock under a "contingent stock agreement" or CSA.

But those payments stopped after development in Summerlin slowed with the recession and after General Growth -- best known as a shopping mall owner -- filed for bankruptcy protection last year. Ever since the bankruptcy filing, the Hughes heirs, organized as various groups and represented by various attorneys, have been agitating in the bankruptcy case to receive a final payment that was supposed to happen based on a 2009 appraisal of the remaining land.

The land at the end of 2009 had a book value of $1.115 billion and now has a taxable value of about $430 million, court records show.

The Hughes heirs' latest attempt to get paid was made this month in the form of a bankruptcy court motion asking that an appraisal panel be established and that any disputes over the final payment be submitted to mediation and binding arbitration.

"The debtors are solvent and have represented that all claimants will be satisfied in full. To provide 'insurance' for that outcome, the debtors have recently issued warrants to an investor group valued in excess of $500 million. There accordingly is no justification for not providing the Hughes Heirs with their contractual rights under the CSA," the heirs said in their filing.

But General Growth, in Tuesday's filing, suggested the heirs may not receive everything they hope for.

"As holders of contingent equity interests, the Hughes Heirs are not entitled to any recovery unless and until the claims of unsecured creditors are satisfied in full, and they only are entitled to a small fraction of the remaining equity value and a distribution pari passu (on par) with existing holders of GGP common stock. The Hughes Heirs’ various filings in these cases appear intended to sew confusion about the value to which they are entitled and create uncertainty in the minds of investors by creating the specter of large liability that would dilute both the recovery of existing shareholders and potentially the value of any plan investment," General Growth said in its filing.

Based on preliminary appraisal information, however, the debtors are confident that the value allocable to the Hughes heirs will be just a small fraction of the total equity value that will be available for distribution to holders of equity interests in General Growth Properties. The debtors will propose a plan that delivers this value to the Hughes Heirs in stock, a note or any other appropriate plan consideration."

General Growth also objected to the heirs' plans for an appraisal panel to be set up, saying appraisals are under way or have been completed.

"The Hughes heirs want to determine the value of the Summerlin master planned community as if the bankruptcy had not occurred, using a cumbersome panel appraisal process that would delay the conclusion of the Chapter 11 cases, add unnecessary costs, and make it more difficult for interested constituencies ... to participate," the filing said.

General Growth said the resolution of the Heirs' claims should be accomplished by the court "rather than through a time-consuming mediation and arbitration process."

"The most efficient and timely way to determine of the value of the approximately 8,900 gross acres of land left in the Summerlin master planned community is for the court to schedule an estimation hearing, hear the testimony of appraisers for each side, and determine the value for purposes of allowance of the Hughes heirs obligations. The debtors then can advance the plan of reorganization process without delay. The parties have engaged appraisers and have nearly completed appraisals of the Summerlin master planned community assets and an estimation hearing can be conducted promptly," General Growth said in its filing.

A July 22 hearing is set in bankruptcy court in New York on how the issue will be resolved.

General Growth separately on Tuesday said it expects to file its Chapter 11 reorganization plan and accompanying disclosure statement on or about July 9 and that it asked the bankruptcy court for an extension of its exclusive period in which to file the reorganization plan through Oct. 18. The current exclusivity period expires on July 15.

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Chicago-based General Growth, which filed for bankruptcy protection last year after it became overwhelmed with $24.6 billion in debt, has substantial interests in the Las Vegas economy outside of Summerlin.

General Growth owns Las Vegas Strip shopping malls Fashion Show, Shoppes at the Palazzo and the Grand Canal Shoppes at the Venetian on the Las Vegas Strip; as well as the Boulevard and Meadows malls. It also owns the unfinished and mothballed Shops at Summerlin Centre.

On March 31, Chicago-based General Growth filed a motion for approval of procedures in which investment groups have agreed to pump $6.55 billion into the company, including the more than $500 million in warrants mentioned by the Hughes heirs in their filing. The investors are Brookfield Asset Management, Pershing Square Capital Management and Fairholme Capital Management

The plan calls for General Growth to distribute to General Growth shareholders shares in "GGO," or General Growth Opportunities, a new company that would own certain "non-core assets" such as all of General Growth's master-planned communities and certain malls.

Summerlin, the Shops at Summerlin Centre, the TPC Summerlin golf course, an interest in Summerlin Hospital property and an option to acquire air rights to the Fashion Show mall would be transferred to GGO under the plan.

Some of the Hughes heirs have objected to the plan to transfer Summerlin to "GGO," saying it amounts to an unfair transfer of value to GGO.