Notes to Interim Consolidated Financial Statements
1. Accounting Developments
The unaudited interim consolidated financial statements, which reflect all adjustments (consisting of normal recurring items or items discussed herein) that management believes necessary to fairly state results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in our audited consolidated financial statements for the year ended December 31, 2017, which are included in our Annual Report filed on Form 10-K/A for such year (the “2017 10-K/A”). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 2017 was extracted from the audited annual consolidated financial statements and does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements.
There is no other comprehensive income for the three and nine months ended September 30, 2018 and 2017.
During the three and nine months ended September 30, 2018, other than the following, there were no significant updates made to the Company’s significant accounting policies. The accounting policy changes are attributable to the adoption of the Financial Accounting Standards Board (“FASB”) guidance on Revenue from Contracts with Customers (the "new revenue standard"). These revenue recognition policy updates are applied prospectively in our financial statements from January 1, 2018 forward using the modified retrospective approach. Reported financial information for the historical comparable period was not revised and continues to be reported under the accounting standards in effect during the historical periods.
Revenue Recognition Policies
Real estate sales revenues:
• Real estate sales revenues are recognized at a point in time when the related transaction is completed.
• Variable consideration, such as profit participation, is included in the transaction price for real estate sales at the point in time when the transaction is completed only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved.
Contract service revenues:
• Contract service revenues are recognized over time as performance obligations are met.
Co-op marketing fee income:
• Co-op marketing fee income is recognized over time as performance obligations are met, generally the term of the master marketing program that relates to the selling period of the associated home product being sold by our customer.
See Accounting Developments - Adopted Accounting Standards below and Note 9 for further information.
Accounting Developments - Adopted Accounting Standards
Revenue Recognition. In May 2014, the FASB issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In addition, the FASB issued guidance on gain or loss from the derecognition of
nonfinancial assets which would include real estate. We have adopted both of the new standards as of January 1, 2018 using the modified retrospective approach and recorded cumulative earnings to our opening accumulated deficit of $1,250,000, which is net of taxes of $550,000. Accordingly, the new revenue standard is applied in our financial statements from January 1, 2018 forward and reported financial information for historical comparable periods is not revised and continues to be reported under the accounting standards in effect during those historical periods. Our implementation efforts included the identification of revenue streams within the scope of the guidance and the evaluation of certain revenue contracts.
The impact of adoption is primarily related to real estate revenues that were deferred on open sales contracts as of December 31, 2017 under the previously existing accounting guidance, which would have been recognized in prior periods under the new revenue standard and costs to complete related to the previously deferred revenue that are not related to performance obligations under the contract with the customer but are costs associated with completion of real estate improvements that would have been expensed in prior periods under the new revenue standard. The impact of the adoption is also related to the timing of recognition of fee income. The new revenue guidance does not apply to revenue associated with leasing activities or interest income. The new revenue standard primarily impacts the following revenue recognition and presentation accounting policies:
• Real estate sales revenues. Revenues from the sales of real estate are recognized at a point in time when the related transaction is completed. The majority of our real estate sales of land, lots, and homes transfer the goods and services to the customer ("buyer") at the close of escrow when title transfers to the buyer and the buyer has the benefit and control of the goods and services. If performance obligations under the contract with the customer related to a parcel of land, lot or home are not yet complete when title transfers to the buyer, revenue associated with the incomplete performance obligation is deferred until the performance obligation is completed.
• Real estate sales revenues - variable. Revenues under real estate contracts with customers that are associated with price or profit participation were historically recognized as participation thresholds were met by the customer. Under the new revenue standard, revenue from these activities is recognized at a point in time when the related transaction is complete, performance obligations by us have been met, and only to the extent it is probable that a significant reversal in the estimated amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved.
• Real estate costs to complete. Costs to complete improvements related to sold real estate was not expensed until the work was complete under the previously existing guidance and revenue associated with the costs to complete was deferred until the work was complete under the percentage of completion method. Under the new revenue standard, costs to complete improvements that are associated with the sold real estate but do not transfer to the customer as performance obligations under the terms of the contract are estimated at the completion of the real estate transaction and expensed as a cost of the sale.
• Co-op marketing and advertising fees. Co-op marketing fees were recognized at the time of sale of a home by our builder customer to a homebuyer under the previously existing accounting guidance. Under the new revenue standard, the co-op fees are recognized over time as performance obligations by us are met, generally the term of the master marketing program that relates to the sales period for the home product being sold by our builder customer.
• Contract service revenues. Under our limited liability company agreements with our builder partners at the Village of Escaya project, we will earn overhead management fees and marketing fees based on a percentage of the retail sales prices under homebuyer contracts. We will also recognize contract service revenues over time as our performance obligations are met, generally the anticipated term of our oversight of the infrastructure improvements for the Village of Escaya. We also earn revenue from the initial land sale together with the performance obligation to complete improvements over time as the performance obligation is satisfied.
Cash Flow Classifications. In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. We adopted this guidance in the first quarter of 2018. Prior periods were retrospectively adjusted to conform to the current period presentation. The adoption of the guidance did not have a material impact on our Consolidated Statements of Cash Flows. Upon adoption, we recorded an increase of $30,000 in Net cash used for operating activities for the nine months ended September 30, 2017 related to reclassifying the changes in our restricted cash balance from operating activities to the cash, cash equivalents and restricted cash balances within the Consolidated Statements of Cash Flows.
Accounting Developments- Accounting Standards to be Adopted in Future Periods
Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of all leases that are longer than one year onto the balance sheet, which will result in the recognition of a right of use asset and a corresponding lease liability. The right of use asset and lease liability will be measured initially using the present value of the remaining rental payments. A significant portion of the population of contracts that will be subject to recognition on our Consolidated Statements of Financial Condition have been identified; however, their initial measurement still remains under evaluation. We are currently modifying our lease accounting systems to enable us to comply with the accounting requirements of this guidance. Lessor accounting will remain substantially similar to current accounting policies for leases. However, leasing costs that are currently eligible to be capitalized as initial direct costs will be immediately expensed under the new guidance. In July 2018, the FASB issued additional guidance on leases which allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings upon adoption. The Company continues to evaluate the impact of adoption, including the election of certain practical expedients, on the Company’s financial position and/or results of operations. The guidance is effective for annual and interim periods beginning after December 15, 2018. We plan on adopting the lease standard in the first quarter of 2019 with a cumulative-effect adjustment to opening retained earnings in the period of adoption.
2. Intangibles, Net
As more fully discussed in the Annual Report on Form 10-K for the year ended December 31, 2014, intangible assets include above market leases and leases in place and intangible liabilities include below market leases which were recorded at fair value when we acquired substantially all of the real estate properties and operations of Leucadia National Corporation, now known as Jefferies Financial Group Inc. ("Jefferies"), the membership interests in Brooklyn Renaissance Plaza ("BRP Holding") and Brooklyn Renaissance Hotel LLC ("BRP Hotel") and cash in exchange for 7.5 million of our common shares (the "Acquisition") during 2014.
A summary of intangible assets is as follows (in thousands):
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September 30, 2018
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December 31, 2017
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Amortization
(in years)
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Above market lease contracts, net of accumulated amortization of $10,341 and $8,833
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$
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533
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$
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2,041
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1 to 24
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Lease in place value, net of accumulated amortization of $3,356 and $3,122
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730
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964
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1 to 24
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Intangible assets, net
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$
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1,263
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$
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3,005
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Below market lease contracts, net of accumulated amortization of $4,122 and $3,658
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$
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1,466
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$
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1,930
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1 to 24
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The amortization of above and below market lease contracts is recognized in Rental income. Above market lease values are amortized over the remaining terms of the underlying leases, and below market lease values are amortized over the initial terms plus the terms of any below market renewal options of the underlying leases. The estimated future amortization expense recognized in Rental income for the above market lease intangible assets is as follows: remainder of 2018 - $150,000; 2019 - $50,000; 2020 - $50,000; 2021 - $50,000; 2022 - $50,000 and thereafter - $200,000. The estimated future negative amortization expense recognized in Rental income for the below market lease intangible assets is as follows: remainder of 2018 - $(100,000); 2019 - $(250,000); 2020 - $(200,000); 2021 - $(150,000); 2022 - $(150,000) and thereafter - $(600,000).
The amortization of lease in place intangible assets is reflected in Depreciation and amortization expenses and amortized over the life of the related lease. The estimated future amortization expense for the lease in place intangible asset for each of the next five years is as follows: remainder of 2018 - $50,000; 2019 - $100,000; 2020 - $100,000; 2021 - $100,000; 2022 - $50,000 and thereafter - $350,000. Amortization expense on lease in place intangible assets was $50,000 and $100,000 for the three months ended September 30, 2018 and 2017, respectively, and was $250,000 and $400,000 for the nine months ended September 30, 2018 and 2017, respectively.
3. Equity Method Investments
Otay project:
In April 2016, through a HomeFed subsidiary, we formed a limited liability company, HomeFed Village III Master, LLC ("Village III Master"), to own and develop an approximate 450-acre community planned for 992 homes in the Otay Ranch General Plan Area of Chula Vista, California. We entered into an operating agreement with three builders as members of Village III Master to build and sell 948 homes within the community. We made an initial non-cash capital contribution of $20,000,000 which represents the fair market value of the land we contributed to Village III Master after considering proceeds of $30,000,000 we received from the builders at closing, which represents the value of their capital contributions. The historical book value of the land we contributed to Village III Master is $15,150,000, which represents a basis difference of $4,850,000. Village III Master is considered a variable interest entity which we do not consolidate since we are not deemed to be the primary beneficiary (all members share joint control through a management committee). Two of our executive officers were members of the eight-member management committee designated to consider major decisions for the Village III Master. As a result of having significant influence, we accounted for it under the equity method of accounting as of December 31, 2016.
In January 2017, we recorded the final map that subdivided the approximately 450-acre parcel of land in the Otay Ranch General Plan Area of Chula Vista, California, which is now known as the Village of Escaya. We formed three limited liability companies (each a “Builder LLC”) to own and develop 948 homes within Escaya and entered into individual operating agreements with each of the three builders as members of each Builder LLC. Upon admittance of the three builders into their respective Builder LLC, each of the three builders
withdrew as members of Village III Master, which is now a wholly owned subsidiary of HomeFed Corporation. On January 5, 2017, we made an aggregate capital contribution valued at $20,000,000 of unimproved land and $13,200,000 of completed infrastructure improvements to the three Builder LLCs, representing land and completed improvement value at inception of the Builder LLCs. In addition to the $30,000,000 contribution made by the builders, as mentioned above, and $2,250,000 of capitalizable land improvements, the builders made an additional cash contribution of $20,000,000 in January 2017 upon final map subdivision and entry into their respective Builder LLCs, which was used to fund infrastructure costs completed by us. Although each of the three Builder LLCs is considered a variable interest entity, we do not consolidate any of them since we are not deemed to be the primary beneficiary as we share joint control with each Builder LLC through a management committee and we lack authority over establishing home sales prices and accepting offers.
Our maximum exposure to loss is limited to our equity commitment in each Builder LLC. Additionally, we are responsible for the remaining cost of developing the community infrastructure with funding guaranteed by us under the respective operating agreements for which we received a capital credit of $78,600,000 ("Cost Cap"), and we are responsible for any costs in excess of this limit to complete the community infrastructure. During the third quarter of 2018, the cost of infrastructure improvements in the Village of Escaya that is attributable to the Builder LLCs exceeded the Cost Cap by $2,900,000, and we expect to incur additional costs until we complete our infrastructure obligations. The builders are responsible for the construction and the selling of the 948 homes with funding guaranteed by their respective parent entities.
We are contractually obligated to obtain infrastructure improvement bonds on behalf of each Builder LLC. See Note 13 for more information.
Brooklyn Renaissance Plaza and Hotel:
We own a 61.25% membership interest in BRP Holding. Although we have a majority interest, we concluded that we do not have control but only have the ability to exercise significant influence on this investment. As such, we account for BRP Holding under the equity method of accounting. We also own a 25.8% membership interest in BRP Hotel, which we account for under the equity method of accounting.
Summarized financial information:
Under the equity method of accounting, our share of the investee’s underlying net income or loss is recorded as income (loss) from equity method investments. The recognition of our share of the investees’ results takes into account any special rights or priorities of investors and book basis differences; accordingly, we employ the hypothetical liquidation at book value model to calculate our share of the investees’ profits or losses. Under the equity method of accounting related to the Builder LLCs, we also consider any costs in excess of the Cost Cap since we don't receive an incremental claim to additional capital for the Builder LLCs.
At September 30, 2018 and December 31, 2017, our equity method investments are comprised of the following (in thousands):
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September 30, 2018
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December 31, 2017
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BRP Holding
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$
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5,574
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$
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86,093
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BRP Hotel
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18,227
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22,651
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Builder LLCs
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15,684
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14,552
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Total
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$
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39,485
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$
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123,296
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On February 28, 2018, BRP Holding satisfied, in full, the $8,750,000 principal balance of a portion of the self-amortizing New York City Industrial Revenue Bonds, with the proceeds of a new $198,350,000 fully amortizing 21-year structured lease-back financing. Approximately $157,250,000 of the proceeds was distributed to members of which we received $82,000,000 as a BRP Holding distribution that was used, in part, to fully satisfy our outstanding preferred equity balances for BRP Holding and BRP Hotel, and $6,000,000 for the satisfaction of a receivable under the pooling agreement with BRP Leasing.
Income (losses) from equity method investments includes the following for the three and nine months ended September 30, 2018 and 2017 (in thousands):
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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2018
|
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2017
|
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2018
|
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2017
|
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BRP Holding
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$
|
992
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$
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2,921
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$
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(5,832)
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$
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8,386
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BRP Hotel
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(708)
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(343)
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2,878
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(1,324)
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Builder LLCs
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—
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(300)
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5,802
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(374)
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Total
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$
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284
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$
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2,278
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$
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2,848
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$
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6,688
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The following table provides summarized data with respect to our equity method investments as of September 30, 2018 and 2017 and for the nine months ended September 30, 2018 and 2017 (in thousands):
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2018
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2017
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Assets
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$
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421,791
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$
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350,860
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Liabilities
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364,171
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200,263
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For the nine months ended September 30,
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2018
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2017
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Total revenues
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$
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248,407
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$
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90,267
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Income from continuing operations before extraordinary items
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32,163
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14,145
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Net income
|
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32,163
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14,145
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4. Debt
Construction loans:
In March 2018, we entered into construction loan agreements for $58,850,000, the proceeds of which will be used for the construction of the town center portion of the Village of Escaya known as The Residences and Shops at Village of Escaya, which is comprised of 272 apartments, approximately 20,000 square feet of retail space, and a 10,000 square foot community facility building. The outstanding principal amount of the loan will bear interest at 30-day LIBOR plus 3.15%, subject to adjustment on the first of each calendar month, and the loan is collateralized by the property underlying the related project with a guarantee by us. Monthly draws are permitted under the loan agreement once evidence of our investment into the project reaches $35,000,000, including land value. As of October 26, 2018, no amounts have been drawn under the loan. The loan matures on March 1, 2021 with one 12-month extension subject to certain extension conditions as set forth in the loan agreements.
In April 2018, we entered into a $31,450,000 loan agreement, the proceeds of which were used for homebuilding under the fee builder arrangement at the San Elijo Hills project. The loan was comprised of a $20,200,000 revolving component and a $11,200,000 non-revolving component, which was drawn at the close of the loan, proceeds of which were $10,300,000, which is net of fees, costs, and interest reserve. The loan was scheduled to mature on October 5, 2019, with one 6-month extension subject to certain extension conditions as set forth in the loan agreement. In August 2018, the principal balance outstanding of $9,050,000 was paid in full. Unamortized issuance costs of $250,000 were expensed during the three and nine months ended September 30, 2018.
Lines of Credit:
In April 2015, we entered into a $15,000,000 revolving line of credit agreement. Loans outstanding under this line of credit bear interest at monthly LIBOR plus 2.6% and were collateralized by the Rampage property. The draw period was set to expire on January 1, 2021, and the loan would have matured on January 1, 2035. The
revolving line of credit was terminated upon the closing of the sale of the Rampage property in January 2018. There is also a $3,000,000 operational line of credit available which was collateralized by the Rampage property’s crops and matured on January 1, 2018. No amounts were drawn under either line of credit.
Senior Notes:
On June 30, 2015, we issued $125,000,000 principal amount of 6.5% Senior Notes due 2018 (the “Old Notes”) in a private placement. The Old Notes were fully and unconditionally guaranteed by our wholly-owned domestic subsidiaries and any of our future domestic wholly-owned subsidiaries and would have matured on June 30, 2018. The Old Notes were senior unsecured obligations and the guarantees were the senior unsecured obligations of the Guarantors.
On September 27, 2017, we and certain of our domestic wholly-owned subsidiaries as guarantors (the “Guarantors”) entered into purchase agreements (collectively, the “Purchase Agreements”) with certain investors named therein (the “Purchasers”) pursuant to which we agreed to issue to the Purchasers an aggregate of $75,000,000 of 6.5% Senior Notes due 2019 (the “Notes”) in a private placement. Pursuant to the terms of the Purchase Agreements, the purchase price for the Notes was 100% of the principal amount. The Notes were issued pursuant to an indenture dated September 27, 2017 among us, the Guarantors, and Wilmington Trust, N.A., as trustee. The maturity date of the Notes was October 1, 2019, and the Notes were fully and unconditionally guaranteed by the Guarantors on the terms provided in the Indenture. The Notes were senior unsecured obligations of the Company and the guarantees were the senior unsecured obligations of the Guarantors. Pursuant to the Placement Agency Agreement, Jefferies Group LLC (“Jefferies Group”), a wholly-owned subsidiary of Jefferies, received a fee of $100,000 for acting as the placement agent and the closing agent.
On September 28, 2017, we used proceeds of the Notes, together with cash on hand, to redeem all of the outstanding Old Notes. After considering the repurchases and redemption, there is no remaining principal due under the Old Notes. In connection with the extinguishment of the Old Notes, the remaining capitalized issuance costs of approximately $350,000 were expensed.
On April 20, 2018, we used cash on hand to redeem $37,500,000 aggregate principal amount of the Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. On April 30, 2018, we used cash on hand to redeem the remaining $37,500,000 aggregate principal amount of the Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest and satisfied and discharged the Indenture in accordance with its terms.
EB-5 Program:
We intend to fund our Otay Land project in part by raising funds under the Immigrant Investor Program administered by the U.S. Citizenship and Immigration Services ("USCIS") pursuant to the Immigration and Nationality Act ("EB-5 Program"). This program was created to stimulate the U.S. economy through the creation of jobs and capital investments in U.S. companies by foreign investors. The program allocates a limited number of immigrant visas per year to qualified individuals seeking lawful permanent resident status on the basis of their investment in a U.S. commercial enterprise. Regional centers are organizations, either publicly owned by cities, states or regional development agencies or privately owned, which facilitate investment in job-creating economic development projects by pooling capital raised under the EB-5 Program. Geographic areas within regional centers that are rural areas or areas experiencing unemployment numbers higher than the national unemployment average rates are designated as Targeted Employment Areas (“TEA”). The EB-5 program is set to expire on December 7, 2018. Various reforms and bills have been proposed and will be considered by Congress in the coming months.
EB-5 Program - The Village of Escaya:
In February 2017, we formed Otay Village III Lender, LLC, which is intended to serve as a new commercial enterprise (“NCE”) under the EB-5 Program. The NCE is managed by Otay Village III Manager, LLC, a wholly owned subsidiary of HomeFed. The NCE raised $125,000,000 by offering 250 units to qualified accredited
EB-5 investors for a subscription price of $500,000 per unit, which is the minimum investment that an investor in a TEA project is required to make pursuant to EB-5 Program rules. The proceeds of the offering will be used to repay any outstanding bridge loan provided by HomeFed to its wholly owned subsidiary HomeFed Village III LLC, a job creating entity under the EB-5 Program, and to fund infrastructure costs related to the development of the Village of Escaya.
EB-5 Program- The Village 8 West (Cota Vera):
In July 2018, we formed Otay Village 8 Lender, LLC, which is intended to serve as a NCE under the EB-5 Program. The NCE is managed by Otay Village 8 Manager, LLC, a wholly owned subsidiary of HomeFed. The NCE is seeking to raise up to $134,000,000 by offering up to 268 units in the NCE to qualified accredited EB-5 investors for a subscription price of $500,000 per unit. The proceeds from the offering will be used to repay any outstanding bridge loan provided by HomeFed to its wholly owned subsidiary HomeFed Village 8, LLC, a job creating entity under the EB-5 Program, and to fund infrastructure costs related to the development of Cota Vera.
Each NCE has offered the units to investors primarily located in China, Vietnam, South Korea and India either directly or through relationships with agents qualified in their respective countries, in which case the NCE will pay an agent fee. Once an investor’s subscription and funds are accepted by the NCE, the investor must file an I-526 petition with the USCIS seeking approval of the investment’s suitability under the EB-5 Program requirements and the investor’s suitability and source of funds. All investments are held in an escrow account and will not be released until the investor files their I-526 petition with the USCIS and we have identified and provided collateral to secure the amount of the funds drawn from escrow. Prior to approval by the USCIS, funds may be drawn from the escrow account with a HomeFed guarantee that funds will be returned in the event the EB-5 projects are not approved. In December 2017, the Village of Escaya project was approved by the USCIS. The Cota Vera project has been submitted for approval by the USCIS. Each loan term is 5 years with two one-year options to extend by us with principal due in full at maturity. The effective interest rate is approximately 3.5%, payable as certain milestones are achieved according to various agreements with agents and investors.
At September 30, 2018, we have a $92,000,000 principal amount outstanding under the Village of Escaya EB-5 Program. There are no amounts outstanding under the Cota Vera EB-5 Program.
At September 30, 2018, we are in compliance with all debt covenants which include, among other requirements, limitations on incurrence of debt, collateral requirements and restricted use of proceeds.
Real estate held for development includes capitalized interest, including amortization of issuance costs and debt discount, of $3,700,000 and $5,900,000 for the nine months ended September 30, 2018 and 2017, respectively.
Debt is presented on the Balance Sheet net of issuance costs of $7,200,000 and $3,200,000 and debt discount of $0 and $100,000 at September 30, 2018 and December 31, 2017, respectively.
5. Income Taxes
During 2017, we effectively settled our 2014 federal tax examination with the IRS and, as a result, recorded an $8,600,000 reduction to deferred tax liabilities and a $4,700,000 reduction to unrecognized tax benefits. The statute of limitations with respect to the Company’s federal income tax returns has expired for all years through 2013, and with respect to California state income tax returns through 2012. We are currently under examination by the City of New York for the year ended 2014. We do not expect that resolution of this examination will have a significant effect on our consolidated financial position, but it could have a significant impact on the consolidated results of operations for the period in which resolution occurs.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the "Tax Act"). SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to
complete the accounting under Accounting Standards Codification 740, Income Taxes ("ASC 740"). While the initial estimated impact of the Tax Act was calculated using all available information, we anticipate modifications based on the procedures set forth under SAB 118. This process is applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) where a reasonable estimate cannot yet be made, taxes are reflected in accordance with the law prior to the enactment of the Tax Act.
Due to the complex nature of the Tax Act, we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of certain elements for which our analysis is not yet complete, we recorded a provisional estimate in the financial statements. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. The ultimate impact of the Tax Act may differ from this estimate, possibly materially, due to refinement of our calculations based on updated information, changes in interpretations and assumptions, and guidance that may be issued and actions we may take in response to the Tax Act. We note that the Tax Act is complex and we continue to assess the impact that various provisions will have on our business. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected, we consider the accounting for the deferred tax asset remeasurements and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. During the nine months ended September 30, 2018, we revised our prior estimate and recorded a $1,700,000 increase to our income tax expense related to sequestration on our corporate alternative minimum tax credits under the Tax Act.
6. Earnings Per Common Share
Basic and diluted earnings (loss) per share amounts were calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The numerators and denominators used to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
Numerator – net income (loss) attributable to HomeFed Corporation common shareholders
|
$
|
(12,430)
|
|
$
|
470
|
|
$
|
(2,984)
|
|
$
|
14,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share– weighted average shares
|
15,478
|
|
15,451
|
|
15,476
|
|
15,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
—
|
|
45
|
|
—
|
|
32
|
|
|
|
|
|
Stock options
|
—
|
|
3
|
|
—
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share– weighted average shares
|
15,478
|
|
15,499
|
|
15,476
|
|
15,485
|
|
|
|
|
If the effect of restricted stock units and stock options were not antidilutive due to our loss, weighted average shares outstanding would have increased by 24,000 and 25,000 for the three and nine months ended September 30, 2018, respectively.
7. Fair Value Information
The carrying amounts and estimated fair values of our principal financial instruments that are not recognized on a recurring basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
Carrying Amount
|
|
Fair
Value
|
|
Carrying Amount
|
|
Fair
Value
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Notes (a)
|
$
|
—
|
|
$
|
—
|
|
$
|
74,590
|
|
$
|
75,470
|
|
EB-5 (b)
|
84,823
|
|
92,000
|
|
43,623
|
|
46,500
|
|
|
|
|
|
|
|
|
|
(a) The fair value of the long-term debt was determined by utilizing available market data inputs that are considered level 2 inputs. Quoted prices are available but trading is infrequent. We utilized the available market data based on the quoted market prices to determine an average fair market value over the last 10 business days of the reporting period.
(b) The fair value approximates the principal amount of the EB-5 debt utilizing available market data inputs that are considered level 3 inputs.
During the third quarter of 2018, we concluded that our Pacho leasehold was impaired and recorded a$17,450,000 pre-tax charge (the entire carrying value of the leasehold), of which $1,750,000 is attributable to the non-controlling interest. See Note 12 for more information.
During the third quarter of 2018, we concluded that our real estate in Maine was partially impaired due to a recent weakness in local housing market conditions. We recorded a write-down of $750,000 and thus reducing the carrying value to $3,300,000 which we believe reflects the fair value of the property.
No other assets or liabilities were measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017.
8. Related Party Transactions
In 2015, Mr. Steinberg, the chairman of our Board of Directors, and Mr. Cumming, who then was one of our directors, each entered into a Purchase Agreement with us and the Guarantors, pursuant to which they each purchased the Old Notes with a value of $5 million, or four percent (4%), of the principal amount of the Old Notes issued, which were fully redeemed on September 28, 2017 on the same terms as other redemptions.
On September 27, 2017, Mr. Steinberg entered into a Purchase Agreement with us and our wholly-owned subsidiaries, as guarantors, pursuant to which he purchased Notes with a value of $7 million, or 9.3%, of the principal amount of the Notes issued (such purchases and the redemption of the Old Notes, collectively, the “Affiliate Note Transactions”). Mr. Steinberg is considered to be a Related Person under our Related Person Transaction Policy (the "Policy"). Accordingly, the Audit Committee considered the Affiliate Note Transactions and approved, and recommended to the Board the approval of, the Affiliate Note Transactions, which were unanimously approved by the Board (with Mr. Steinberg abstaining from the vote). Pursuant to Placement Agency Agreements, Jefferies acted as Placement Agent for the Old Notes and for the Notes. Jefferies Group is a wholly-owned subsidiary of Jefferies. Jefferies is our affiliate and a Related Person under the Policy. Accordingly, pursuant to and in accordance with the Policy, the Audit Committee considered the Placement Agency Agreements and approved, and recommended to the Board the approval of, the Placement Agency Agreements, which were unanimously approved by the Board (with Mr. Friedman, Chairman of the Executive Committee of Jefferies Group, Mr. Steinberg and Mr. Hallac abstaining from the vote). Pursuant to the Placement Agency Agreements for the Old Notes, Jefferies received a fee equal to 50 basis points from the gross proceeds of the offering, received a fee equal to 50 basis points of the outstanding balance of the Old Notes on the first anniversary of the issue date and received a fee equal to 50 basis points of the outstanding balance on the second anniversary of the issue date. Pursuant to the Placement Agency Agreements for the Notes, Jefferies received a fee of $100,000. Additionally, we and each of the guarantors has agreed to indemnify Jefferies against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to reimburse Jefferies all reasonable out-of-pocket expenses incurred in connection with any action or claim for which indemnification has or is reasonably likely to be sought by Jefferies. In April 2018, we fully redeemed the Notes (see Note 4 for more information).
Builder LLCs:
Two of our executive officers are members of the four-member management committee at each Builder LLC and are designated to consider major decisions for each of the three Builder LLCs. Each Builder LLC appointed two members to the management committee, which is controlled jointly by us and the respective builder. HomeFed is contractually obligated to obtain infrastructure improvement bonds on behalf of the Builder LLCs. See Note 13 for more information. HomeFed may also be responsible for the funding of the real estate improvement costs for the infrastructure of the development if our subsidiary that invested in each Builder LLC fails to do so.
Brooklyn Renaissance Plaza:
As more fully discussed in the 2017 10-K/A, BRP Leasing held a master lease at BRP Holding and subleased the office space to multiple tenants. BRP Leasing was obligated to pay future minimum annual rental expense (exclusive of month-to-month leases, real estate taxes, maintenance and certain other charges). The obligations under the master lease ended October 2018, and leasing activities are now directly managed and handled by BRP Holding. Beginning in November 2018, we will realize income from this office space through BRP Holding under the equity method of accounting other than for approximately 92,000 square footage occupied by the United States General Services Administration ("USGSA"). The USGSA is currently in a temporary holdover period under its expiring lease until governmental approval for the USGSA to extend its lease with BRP Holding occurs.
Jefferies:
Pursuant to an administrative services agreement, Jefferies provides us certain administrative and accounting services, including providing the services of our Secretary. Administrative services fee expenses were $45,000 and $135,000 for each of the three and nine months ended September 30, 2018 and 2017, respectively. The administrative services agreement automatically renews for successive annual periods unless terminated in accordance with its terms. We sublease office space to Jefferies under a sublease agreement until October 2018. Amounts reflected in other income pursuant to this agreement were $3,000 and $9,000, respectively, for each of the three and nine months ended September 30, 2018 and 2017.
Jefferies is contractually obligated to obtain infrastructure improvement bonds on behalf of the San Elijo Hills project. See Note 13 for more information.
Berkadia:
Berkadia Commercial Mortgage LLC ("Berkadia") is a commercial mortgage banking and servicing joint venture formed in 2009 with Jefferies and Berkshire Hathaway Inc. During the first quarter of 2018, Berkadia was paid a brokerage advisory fee of $100,000 related to the new construction loan for Village of Escaya and a $400,000 advisory fee related to the refinance of a loan at BRP Holding. Both transactions were approved by the Audit Committee under the Related Party Transaction Policy.
9. Revenues from Contracts with Customers
The following table presents our total revenues separated for our revenues from contracts with customers and our other sources of revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2018
|
|
For the Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
Sales of real estate
|
|
$
|
21,400
|
|
$
|
73,774
|
|
Contract service revenues
|
|
7,768
|
|
29,552
|
|
Co-op marketing and advertising fees
|
|
119
|
|
385
|
|
Total revenues from contracts with customers
|
|
29,287
|
|
103,711
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
Rental income
|
|
5,996
|
|
17,796
|
|
Total revenue from other sources
|
|
5,996
|
|
17,796
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
35,283
|
|
$
|
121,507
|
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties.
Revenues generated through the sales of real estate are our primary source of revenues from contracts with customers. Agreements with customers for these sales typically consist of the type and quantity of real estate to be sold and delivered to the customer, the transaction price for the real estate to be delivered, the closing date when the customer takes control of the real estate, deposit and final payment terms related to the real estate transaction price, performance obligations related to improvements, if any, that will be completed by us, the consideration of any price or profit participation revenue related to the contract, and fee income related to marketing and advertising services. The transaction price associated with the real estate is generally fixed and revenue is recognized at a point in time when the customer takes control of the real estate. The transaction price related to profit or price participation is a variable component of the transaction price and is recognized at the time the customer takes control of the real estate if it can be reasonably estimated and it is probable that a significant reversal in the amount of revenue recognized will not occur.
Under our limited liability company agreements with builders at the Village of Escaya project, we earn contract service revenues based on a percentage of the retail home price of the homes sold by the builders to
homebuyers. We record the contract service revenues over time as performance obligations are met, generally our obligation of completing the improvements and providing management oversight related to the completion of the infrastructure improvements for Village of Escaya.
Co-op marketing and advertising fee income is calculated based on a percentage of the retail home price for the homes sold by our customers to homebuyers. We record co-op marketing and advertising fee income over time as performance obligations are met, generally the term of the master marketing program that relates to the sales period of the home product being sold by our customer.
Disaggregation of Revenue
The following presents our revenues from contracts with customers disaggregated by project for the three months ended September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Otay
|
San Elijo
|
Ashville Park
|
The Market Common
|
SweetBay
|
Rampage
|
BRP Leasing
|
Pacho
|
Total Real Estate Segment
|
Total Corporate Segment
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of real estate
|
|
$
|
—
|
$
|
11,198
|
$
|
—
|
$
|
—
|
$
|
10,180
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
21,378
|
$
|
—
|
$
|
21,378
|
|
Profit participation from real estate sales
|
|
—
|
—
|
13
|
9
|
—
|
—
|
—
|
—
|
22
|
—
|
22
|
|
Contract service revenues
|
|
7,768
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
7,768
|
—
|
7,768
|
|
Co-op marketing and advertising fees
|
|
—
|
94
|
25
|
—
|
—
|
—
|
—
|
—
|
119
|
—
|
119
|
|
Total revenues from contracts with customers
|
|
7,768
|
11,292
|
38
|
9
|
10,180
|
—
|
—
|
—
|
29,287
|
—
|
29,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
—
|
—
|
—
|
2,585
|
62
|
—
|
3,339
|
7
|
5,993
|
3
|
5,996
|
|
Total revenue from other sources:
|
|
—
|
—
|
—
|
2,585
|
62
|
—
|
3,339
|
7
|
5,993
|
3
|
5,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues:
|
|
$
|
7,768
|
$
|
11,292
|
$
|
38
|
$
|
2,594
|
$
|
10,242
|
$
|
—
|
$
|
3,339
|
$
|
7
|
$
|
35,280
|
$
|
3
|
$
|
35,283
|
The following presents our revenues from contracts with customers disaggregated by project for the nine months ended September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Otay
|
San Elijo
|
Ashville Park
|
The Market Common
|
SweetBay
|
Rampage
|
BRP Leasing
|
Pacho
|
Total Real Estate Segment
|
Total Corporate Segment
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of real estate
|
|
$
|
—
|
$
|
28,552
|
$
|
—
|
$
|
700
|
$
|
18,066
|
$
|
26,000
|
$
|
—
|
$
|
—
|
$
|
73,318
|
$
|
—
|
$
|
73,318
|
|
Profit participation from real estate sales
|
|
—
|
—
|
13
|
443
|
—
|
—
|
—
|
—
|
456
|
—
|
456
|
|
Contract service revenues
|
|
29,552
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
29,552
|
—
|
29,552
|
|
Co-op marketing and advertising fees
|
|
—
|
300
|
85
|
—
|
—
|
—
|
—
|
—
|
385
|
—
|
385
|
|
Total revenues from contracts with customers
|
|
29,552
|
28,852
|
98
|
1,143
|
18,066
|
26,000
|
—
|
—
|
103,711
|
—
|
103,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
—
|
—
|
—
|
7,672
|
192
|
—
|
9,902
|
21
|
17,787
|
9
|
17,796
|
|
Total revenue from other sources:
|
|
—
|
—
|
—
|
7,672
|
192
|
—
|
9,902
|
21
|
17,787
|
9
|
17,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues:
|
|
$
|
29,552
|
$
|
28,852
|
$
|
98
|
$
|
8,815
|
$
|
18,258
|
$
|
26,000
|
$
|
9,902
|
$
|
21
|
$
|
121,498
|
$
|
9
|
$
|
121,507
|
Information on Remaining Performance Obligations and Revenue Recognized from Past Performance
We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
During the three and nine months ended September 30, 2018, revenues related to performance obligations satisfied (or partially satisfied) in previous periods that were recognized were insignificant.
Contract Balances
The timing of revenue recognition may differ from the timing of payment by customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.
We had receivables related to revenues from contracts with customers of $650,000 and $1,300,000 at September 30, 2018 and January 1, 2018, respectively. There were no recorded impairment charges related to those receivables during the three and nine months ended September 30, 2018 and no deferred revenue was recorded at September 30, 2018 and January 1, 2018, respectively.
10. Interest and Other Income
Other income includes service income related to a utility bundling service agreement with the homeowners at the Ashville Park project. Income of $100,000 and $90,000, respectively, was recognized during the three months ended September 30, 2018 and 2017 and $290,000 and $260,000, respectively, was recognized during the nine months ended September 30, 2018 and 2017.
Interest and other income includes interest income of $50,000 for the three months ended September 30, 2018 and was not significant for the three months ended September 30, 2017, and $120,000 and $25,000 for the nine months ended September 30, 2018 and 2017, respectively.
11. Real Estate Sales Activity
Rampage property:
In January 2018, we closed on the sale of the Rampage property for $26,000,000. The agreement was assigned to a qualified intermediary under an Exchange Agreement to facilitate a 1031 like-kind exchange for tax purposes. In July 2018, we completed the 1031 like-kind exchange and acquired $13,400,000 of replacement property, primarily consisting of improvements at the mixed-use apartment and retail project at the Village of Escaya, and the remaining proceeds of $12,600,000 is no longer restricted and can be used for any business operation. We recorded a gain on the sale of approximately $17,300,000 for the nine months ended September 30, 2018. The sale of Rampage property did not meet the GAAP criteria to be classified as a discontinued operation.
Otay Land project:
The grand opening at the Village of Escaya occurred in June 2017. During the nine months ended September 30, 2018, 267 homes were sold through our three limited liability companies, the Builder LLCs, which are joint ventures with three local homebuilders. We apply the equity method of accounting for the activity related to the Builder LLCs.
San Elijo Hills project:
The 48,800 square feet of commercial space in phase one and two of the Towncenter and the 12 multi-family units in phase two were sold during the first quarter of 2017 to a local developer for a cash payment of $5,800,000.
The third phase of the Towncenter is a 2.5 acre parcel of land entitled for 12 multi-family units (formerly designated as a church site) and sold for $1,600,000 during the third quarter of 2018.
During June 2015, we entered into an agreement with a local San Diego based luxury homebuilder to construct and sell on our behalf, for a fee, up to 58 homes at the San Elijo Hills project. We received a $500,000 deposit during the third quarter of 2015 which is reflected in Other liabilities. This deposit is a builder performance deposit that will be fully refundable to the builder after the builder performs all of its requirements under the agreement. Sales began during the second quarter of 2017, and we sold 6 and 17 homes for $9,600,000 and $26,950,000 during the three and nine months ended September 30, 2018, respectively. For the nine months ended September 30, 2017, we sold 9 of these homes for $13,100,000. As of October 26, 2018, we have entered into agreements to sell 22 single family homes at the San Elijo Hills project under this agreement for aggregate cash proceeds of $38,650,000, which are expected to begin closing in the fourth quarter of 2018.
Ashville Park project:
There were no sales at the Ashville Park project during the three and nine months ended September 30, 2018 and 2017. The entitlement effort to re-plan Villages C, D and E was impacted by a delay within the City of Virginia Beach. In 2014 and 2016, severe storm events caused regional flooding, and large portions of the City of Virginia Beach’s storm water management system did not perform as expected. In 2016, the City of Virginia Beach hired outside civil engineers to study the system and provide possible solutions. The study is now complete and reveals that significant improvements to the storm water management system within the City of Virginia Beach are needed. In August 2018, the City of Virginia Beach approved our plans for 116 homes in Village C. The approval provides that we dedicate approximately 25 acres of land, which we had planned for 44 homes and open space known as Village D, to the City of Virginia Beach to be used as part of the City storm water management solution.
The Market Common:
For the three and nine months ended September 30, 2018 and 2017, we closed on sales of real estate at The Market Common as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
Number of units sold
|
|
Revenue from contracts with customers
|
|
Number of units sold
|
|
Cash Proceeds
|
|
Number of units sold
|
|
Revenue from contracts with customers
|
|
Number of units sold
|
|
Cash Proceeds
|
|
Single family lots
|
—
|
|
$
|
—
|
|
8
|
|
$
|
400,000
|
|
10
|
|
$
|
500,000
|
|
30
|
|
$
|
1,380,000
|
|
Multi-family lots
|
—
|
|
—
|
|
7
|
|
180,000
|
|
8
|
|
200,000
|
|
15
|
|
380,000
|
|
Profit sharing agreements
|
N/A
|
|
—
|
|
N/A
|
|
200,000
|
|
N/A
|
|
450,000
|
|
N/A
|
|
950,000
|
As of October 26, 2018, we have entered into an agreement to sell 52 single family lots for $2,600,000 and 118 multi-family lots for $3,300,000 at The Market Common to a homebuilder. A non-refundable option deposit of $25,000 was transferred from Jefferies to us as part of the Acquisition.
SweetBay project:
During May 2015, we signed an agreement with a local builder to construct and sell on our behalf, for a fee, up to 183 homes at the SweetBay project. We sold 23 and 44 single family homes for $8,200,000 and $16,050,000 for the three and nine months ended September 30, 2018, respectively. During the third quarter of 2018, we received and recognized an additional $2,000,000 as sales of real estate due to a court determination of the final purchase price of land related to the 2016 sale of seven acres of land to the Florida Department of Transportation to be used for the expansion of State Road 390.
As of October 26, 2018, we have entered into agreements to sell 31 single family homes at the SweetBay project under this agreement for aggregate cash proceeds of $10,350,000 which are expected to close in 2018 and 2019.
We sold 21 and 53 single family homes for $6,900,000 and $18,550,000 during the three and nine months ended September 30, 2017, respectively.
12. Real Estate Held for Development
We previously reported that we may not develop the Pacho Property unless we are able to obtain fee title from Pacific Gas & Electric (“PG&E”) within a reasonable period of time. The original 99-year lease term to the Pacho Property expires in 2067. The lease includes an option to renew it for an additional 99-year term.
We have made no progress in obtaining the fee title from PG&E. Moreover, because of questions recently raised in the media as to whether the term of our leasehold validly runs until 2166 (including the option term), in August we notified PG&E that we formally exercised the option and that we intend to commence a declaratory relief proceeding to confirm our leasehold is valid until 2166 and is not rendered shorter by the provisions of California Civil Code section 718. In September, PG&E responded and asserted for the first time that it contends California Civil Code section 717 ends the lease in 2019, which we will dispute.
We concluded that our Pacho leasehold was impaired and recorded a $17,450,000 pre-tax charge (the entire carrying value of the leasehold), of which $1,750,000 is attributable to the non-controlling interest in the third quarter of 2018.
We intend to proceed with the declaratory relief action. We will also continue our efforts to obtain fee title from PG&E, although we believe it is unlikely that we will be able to do so on acceptable terms. We will not develop
the Pacho Property unless we obtain fee title or are successful in finally establishing the validity of the leasehold until 2166. An adverse determination in that proceeding will further our already asserted, but unrecognized claims against the insurer of leasehold title and the real estate counsel that represented us in our 2014 purchase of the leasehold interest. However, there is no assurance we will be successful in these matters.
13. Commitments and contingencies
In May 2018, our corporate office lease was amended to add 2,240 square feet of office space and extend the lease through January 31, 2025.
BRP Leasing holds a master lease at BRP Holding and subleases the office space to multiple tenants. See Note 8 for information concerning BRP Leasing’s minimum annual rental expense.
For real estate development projects, we are generally required to obtain infrastructure improvement bonds at the beginning of construction work and warranty bonds upon completion of such improvements. These bonds are issued by surety companies to guarantee satisfactory completion of a project and provide funds primarily to a municipality in the event we are unable or unwilling to complete certain infrastructure improvements. As we develop the planned area and the municipality accepts the improvements, the bonds are released. Should the respective municipality or others draw on the bonds for any reason, certain of our subsidiaries would be obligated to pay.
Specifically for the San Elijo Hills project, Jefferies is contractually obligated to obtain these bonds on behalf of the project pursuant to the terms of agreements entered into when the project was acquired by us. We are responsible for paying all third party fees related to obtaining the bonds.
As of September 30, 2018, the amount of outstanding bonds for each project is as follows:
|
|
|
|
|
|
|
|
|
Amount of outstanding bonds
|
|
Otay Land project
|
$
|
56,200,000
|
|
San Elijo Hills project
|
650,000
|
|
Ashville Park project
|
800,000
|
|
The Market Common
|
400,000
|
The Market Common is required to provide a letter of credit for the benefit of the City of Myrtle Beach to secure the completion of certain infrastructure improvements in the amount of $1,250,000. We placed $1,250,000 on deposit with a qualified financial institution to obtain the replacement letter of credit. In July 2018, the letter of credit expired and was released by the City of Myrtle Beach based on substantial completion of the infrastructure improvements.
BRP Leasing is required to keep a minimum of $500,000 on deposit in an escrow account to secure its lease obligations. At September 30, 2018, $1,400,000 was in the escrow account and is classified as restricted cash. Our obligation to secure the lease ended in October 2018, and the escrow account has been closed.
We agreed to indemnify Jefferies for certain lease obligations of BRP Leasing that were assumed from a former subsidiary of Jefferies that was sold to a third party prior to the Acquisition. The former subsidiary of Jefferies remains the primary obligor under the lease obligations and Jefferies agreed to indemnify the third party buyer. Our obligations under the primary lease expired in October 2018 and BRP Leasing will no longer have any indemnity obligations.
We completed environmental remediation activities on approximately 30 acres of undeveloped land owned by Flat Rock Land Company, LLC (“Flat Rock”), a subsidiary of Otay in February 2013, and received final approval of the remediation from the County of San Diego Department of Environmental Health in June 2013.
In 2014, Otay and Flat Rock commenced a lawsuit in California Superior Court seeking compensation from the parties who they believed were responsible for the contamination of the property. In February 2015, the trial court denied us any recovery and entered judgment in favor of the defendants as to all causes of action. In post-trial proceedings, the defendants sought, and the trial court allowed, reimbursement for court costs, of $350,000. Although our appeal of the judgment stayed the defendants’ right to collect court costs pending resolution of the appeal, we accrued $350,000 during the first quarter of 2016 as we believed at the time that such loss was probable and reasonably estimable. The defendants also sought, but were denied, recovery of attorney’s fees in the amount of approximately $13,500,000, which the defendants appealed.
On September 26, 2017, the Fourth District Court of Appeals (the “Appellate Court”) affirmed in part and reversed in part the judgment and remanded the matter to the trial court for further proceedings. The Appellate Court determined that Otay and Flat Rock were the prevailing parties and awarded their costs on appeal, the $350,000 cost award in favor of the defendants was reversed by operation of law, and the defendants’ appeal of the trial court’s denial of the defendants’ claim for attorneys’ fees was dismissed as being moot. The defendants’ requests for rehearing with the Appellate Court were summarily denied.
The decision of the Appellate Court became final on October 27, 2017 and was upheld by the California Supreme Court in January 2018. The matter will be remanded to the Superior Court for further proceedings consistent with the Appellate Court’s decision. In the fourth quarter of 2017, we reversed the accrual of the cost award plus accrued interest totaling $400,000. No assurances can be given as to the ultimate outcome of this matter.
We are subject to litigation which arises in the course of our business. We do not believe that the ultimate resolution of any such matters will materially affect our consolidated financial position, our consolidated results of operations or liquidity.
14. Share-Based Compensation
1999 Stock Incentive Plan:
On August 8, 2018, options to purchase an aggregate of 7,000 shares of Common Stock were granted to the members of the Board of Directors under our 1999 Stock Incentive Plan at an exercise price of $50.50 per share, the market price per share on the grant date. Options granted become exercisable in four equal installments starting one year from date of grant and must be exercised within five years from date of grant and will be expensed equally over the four year vesting period. As of September 30, 2018, 249,650 shares are available under the 1999 Stock Incentive Plan.
2017 RSU Plan:
On August 4, 2017, the Board of Directors adopted an RSU Opportunity Plan (the “2017 RSU Plan”) under which 66,000 shares of Common Stock are authorized for issuance to our executive officers. The restricted stock units (“RSUs”) may be granted at the end of the performance period based on the degree to which performance criteria has been satisfied at the sole discretion of the Board of Directors. The performance period ends on December 31, 2019, and awards will be issued no later than April 1, 2020.
2014 RSU Plan:
On August 13, 2014, the Board of Directors adopted an RSU Opportunity Plan (the "2014 RSU Plan”) under which 100,000 shares of Common Stock were authorized for issuance to our executive officers. Participants were eligible for RSU awards based on satisfaction of performance criteria established by the Board of Directors in 2014. The performance period under the 2014 RSU Plan ended on December 31, 2016. The Board of Directors evaluated the participants' performance against the performance criteria and awarded an aggregate of 75,000 RSUs to the participants on March 15, 2017. Fifty percent of the RSU award under the 2014 RSU Plan vested on December 31, 2017 and settled on January 29, 2018, and the remaining fifty percent will vest on December 31, 2018, provided that the executive officer has been continuously employed by the Company through the applicable vesting date.
The 2014 RSU grant consisted of two settlement features: (1) 22,500 RSUs remain to be settled through the issuance of shares of Common Stock within 30 days of the vesting date; this component is classified as an equity award. The closing price on March 15, 2017 of $44.20 was used to value this component of the award. Stock compensation expense for this component of the award was $250,000 and $300,000 for the three months ended September 30, 2018 and 2017, respectively and $750,000 and $700,000 for the nine months ended September 30, 2018 and 2017, respectively; and (2) 15,000 RSUs remain to be settled in cash based on the average closing price over a period of ten trading days immediately preceding the date of declaration which must occur within thirty days of the vesting date. This component is classified as a liability award, which requires us to measure the fair value of the award at the end of each reporting period. Using a fair value approach, stock compensation expense for this component of the award was $150,000 and $200,000 for the three months ended September 30, 2018 and 2017, respectively, and $650,000 and $400,000 for the nine months ended September 30, 2018 and 2017, respectively.
15. Segment Information
We currently have two reportable segments—real estate and corporate. Real estate operations consist of a variety of residential land development projects and commercial properties and other unimproved land, all in various stages of development. Real estate also includes contract service revenues, contract service expenses and the equity method investments in BRP Holding, BRP Hotel and the Builder LLCs in the Otay Land project. Corporate primarily consists of investment income and overhead expenses. Our farming segment, which we no longer report, consisted of the Rampage property which included an operating grape vineyard and an almond orchard under development which was sold in January 2018. Revenue from the sale of the Rampage property is included in our real estate segment.
Certain information concerning our segments for the three and nine months ended September 30, 2018 and 2017 is presented in the following table (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Real estate
|
$
|
35,280
|
|
$
|
22,595
|
|
$
|
121,498
|
|
$
|
87,303
|
|
Farming
|
—
|
|
3,411
|
|
—
|
|
3,411
|
|
Corporate
|
3
|
|
3
|
|
9
|
|
9
|
|
Total consolidated revenues
|
$
|
35,283
|
|
$
|
26,009
|
|
$
|
121,507
|
|
$
|
90,723
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and noncontrolling interest:
|
|
|
|
|
|
|
|
|
Real estate
|
$
|
(13,698)
|
|
$
|
2,113
|
|
$
|
7,050
|
|
$
|
10,938
|
|
Farming
|
—
|
|
2,100
|
|
—
|
|
(59)
|
|
Corporate
|
(3,175)
|
|
(3,123)
|
|
(10,235)
|
|
(8,436)
|
|
Total consolidated income (loss) from continuing operations before income taxes and noncontrolling interest
|
$
|
(16,873)
|
|
$
|
1,090
|
|
$
|
(3,185)
|
|
$
|
2,443
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses:
|
|
|
|
|
|
|
|
|
Real estate
|
$
|
576
|
|
$
|
817
|
|
$
|
2,037
|
|
$
|
2,488
|
|
Farming
|
—
|
|
95
|
|
—
|
|
247
|
|
Corporate
|
20
|
|
15
|
|
54
|
|
44
|
|
Total consolidated depreciation and amortization expenses
|
$
|
596
|
|
$
|
927
|
|
$
|
2,091
|
|
$
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets employed:
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
Real estate
|
|
|
$
|
521,988
|
|
$
|
538,636
|
|
|
|
Farming
|
|
|
—
|
|
9,925
|
|
|
|
Corporate
|
|
|
56,296
|
|
59,386
|
|
|
|
Total consolidated assets
|
|
|
$
|
578,284
|
|
$
|
607,947
|
|
|
Farming revenues were generally recognized during the second half of the year when the crop was harvested and sold.