NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Five Point Holdings, LLC, a Delaware limited liability company (the “Holding Company” and, together with its consolidated subsidiaries, the “Company”), is an owner and developer of mixed-use planned communities in California. The Holding Company owns all of its assets and conducts all of its operations through Five Point Operating Company, LP, a Delaware limited partnership (the “Operating Company”), and its subsidiaries.
The Company has two classes of shares outstanding: Class A common shares and Class B common shares. Holders of Class A common shares and holders of Class B common shares are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, and are both entitled to receive distributions at the same time. However, the distributions paid to holders of our Class B common shares are in an amount per share equal to 0.0003 multiplied by the amount paid per Class A common share.
The Company presents noncontrolling interests on the Company’s consolidated balance sheet and classifies such interests within capital but separate from the Company’s Class A and Class B members’ capital. Noncontrolling interests represent equity interests in the Company’s consolidated subsidiaries held by partners in the Operating Company, excluding the Holding Company, and members in The Shipyard Communities, LLC (the “San Francisco Venture”), excluding the Operating Company (see Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation— The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of consolidation—The accompanying consolidated financial statements include the accounts of the Company and the accounts of all subsidiaries in which the Company has a controlling financial interest and the accounts of variable interest entities (“VIEs”) in which the Company is deemed to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. Under the voting interest model, controlling financial interest is generally defined as a majority ownership of voting rights. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is its primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements, or changes in influence and control over any entity, that affect the characteristics of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis.
Use of estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Management evaluates its estimates on an ongoing basis and makes revisions to these estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
Concentration of risk—As of December 31, 2021, the Company’s inventories and the Company’s unconsolidated entities’ inventories and properties are all located in California. The Company is subject to risks incidental to the ownership, development, and operation of commercial and residential real estate. These include, among others, the risks normally associated with changes in the general economic climate in the communities in which the Company operates, trends in the real estate industry, availability of land for development, changes in tax laws, interest rate levels, availability of financing, and potential liability under environmental and other laws.
The Company’s credit risk relates primarily to cash deposits, cash equivalents, contract assets and other miscellaneous financial assets. Cash deposit accounts at each institution are in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company’s risk management policies define parameters of acceptable market risk and strive to limit exposure to credit risk.
Noncontrolling interests—The Company presents noncontrolling interests and classifies such interests within capital but separate from the Company’s Class A and Class B members’ capital when the criteria for permanent equity classification has been
met. Net income (loss) attributable to the noncontrolling interests on the consolidated statement of operations represents the portion of earnings attributable to the economic interest in the Company’s subsidiaries held by the noncontrolling interests. The Company allocates income (loss) to noncontrolling interests based on the substantive profit sharing provisions of the applicable subsidiary operating agreements.
Revenue recognition—Under Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts With Customers, which the Company adopted on January 1, 2018, revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. At contract inception, the Company assesses the goods and services promised in its contract with its customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or a series of services) that is distinct. Identified performance obligations are assessed by considering implicit and explicitly stated promises.
Land sales and Land sales—related party—Revenues from land sales are recognized when the Company satisfies the performance obligation at a point in time when the control of the land passes to its customers. The transfer of control typically occurs when title passes at the close of escrow and the customer is able to direct the use of, control and obtain substantially all of the benefits from the land. The transaction price typically contains fixed and variable components in which the fixed consideration represents the stated purchase price for the land and the gross proceeds received at the time of closing. Some of the Company’s residential homesite sale agreements contain a profit participation provision, a variable form of consideration, whereby the Company receives from homebuilders a portion of profit after the builder has received an agreed-upon margin. If the project profitability falls short of the participation threshold, no additional revenue is received. In most contracts, at the time of the land sale, the estimate of profit participation, if any, is constrained, as there are significant factors outside of the Company’s control that will impact whether participation thresholds will be met. In addition, some residential homesite sale agreements contain a provision requiring the homebuilder to pay a marketing fee per residence sold, as a percentage of the home sale price. Such fees are estimated as a variable form of consideration and the amount the Company expects to be entitled to receive from the homebuilder is recognized as revenue at the time of land sale. Since payment for variable consideration is received in future periods, but the Company has completed its performance obligation, a contract asset is recorded for contingent variable consideration, if any, included in the transaction price. At the end of each reporting period, variable consideration is reassessed to ensure changes in circumstances or constraints are appropriately reflected in the estimated transaction price. Changes in estimates of variable components of transaction prices could result in cumulative catch-up adjustments to revenue in subsequent periods. In some cases, the Company may be obligated to perform post-closing development obligations on the sold land and as a result may defer a portion of the transaction price.
Management Services—related party—Revenues from management services are recognized as the customer consumes the benefits of the performance obligation satisfied over time. The transaction price pertaining to management services revenue may be comprised of fixed and variable components. In some of its development management agreements, the Company receives compensation equal to the actual general and administrative costs incurred by the Company as it performs services. In these circumstances, the Company acts as the principal and recognizes management fee revenues on these reimbursements in the same period that these costs are incurred because the amount to which the Company has the right to invoice corresponds directly with the value consumed by the customer for the Company’s performance to date. The Company’s management agreements may also contain incentive compensation fee provisions contingent on the financial performance of a customer. In making estimates of incentive compensation the Company expects to be entitled to receive in exchange for providing management services, significant assumptions and judgments are made in evaluating the factors that may determine the amount of consideration the Company will ultimately receive. Cash flow projections of the project being developed are typically utilized in making such estimates. These cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development, general and administrative costs, the expected contract period, and other factors. The Company includes in the transaction price an estimate of incentive compensation only to the extent that a significant reversal of revenue is not probable. Incentive compensation revenue from management services is recognized evenly over the expected contract term, as the performance obligation is satisfied. When changes in estimates and assumptions occur, the estimate of the amount of incentive compensation the Company expects to be entitled to receive and constraints on the estimate may change, resulting in a cumulative catch-up being recorded in the period of the change. A contract asset is recognized when there is a timing difference between recognition of revenue upon satisfaction of performance obligations and revenues becoming billable.
Operating properties—Included in operating properties revenues in the consolidated statements of operations are revenues from the Company’s agriculture, energy and other miscellaneous operations. Agriculture crop and energy revenues are recognized at a point in time when control is transferred to the customer. Agriculture and other leasing revenue is recognized in accordance with applicable lease accounting guidance.
Impairment of assets—Long-lived assets, including inventory and the Company’s intangible asset, are reviewed for impairment when events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Impairment indicators for long-lived inventory assets include, but are not limited to, significant increases in horizontal development costs, significant decreases in the pace and pricing of home sales within the Company’s communities and surrounding areas and political and societal events that may negatively affect the local economy. For operating properties, impairment indicators may include
significant increases in operating costs, decreased utilization, and continued net operating losses. If indicators of impairment exist, and the undiscounted cash flows expected to be generated by a long-lived asset are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such long-lived asset to its estimated fair value. The Company generally estimates the fair value of its long-lived assets using a discounted cash flow model or sales comparison approach of the underlying property or a combination thereof.
The Company’s projected cash flows for each long-lived inventory asset are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development costs, and other factors. For operating properties, the Company’s projected cash flows also include estimates and assumptions about the use and eventual disposition of such properties, including utilization, capital expenditures, operating expenses, and the amount of proceeds to be realized upon eventual disposition of such properties.
In determining these estimates and assumptions, the Company utilizes historical trends from past development projects of the Company in addition to internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics and unemployment rates.
Using all available information, the Company calculates its estimate of projected cash flows for each asset. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in determining each asset’s fair value generally depends on the asset’s projected life and development stage.
Share-based payments— Share-based payments are recognized on a straight-line basis over the service period in the statement of operations based on measurement date fair values. Forfeitures, if any, are accounted for in the period when they occur.
Cash and cash equivalents—Included in cash and cash equivalents are short-term investments that have original maturity dates of three months or less. The carrying amount approximates fair value due to the short-term nature of these investments.
Restricted cash and certificates of deposit—Restricted cash and certificates of deposit consist of cash, cash equivalents, and certificates of deposit held as collateral on open letters of credit related to development obligations or because of other legal obligations of the Company that require the restriction.
Properties and equipment—Properties and equipment primarily relate to the Company’s agriculture operating properties’ businesses and are recorded at cost. Properties and equipment, other than agriculture land, are depreciated over their estimated useful lives using the straight-line method. At the time properties and equipment are disposed of, the asset and related accumulated depreciation, if any, are removed from the accounts, and any resulting gain or loss is credited or charged to earnings. The estimated useful life for land improvements and buildings is 10 to 40 years while the estimated useful life for furniture, fixtures, and equipment is two to 15 years.
Investments in unconsolidated entities—For investments in entities that the Company does not control, but exercises significant influence, the Company uses the equity method of accounting. The Company’s judgment with regard to its level of influence or control of an entity involves consideration of various factors including the form of its ownership interest, its representation in the entity’s governance, its ability to participate in policy-making decisions, and the rights of other investors to participate in the decision-making process to replace the Company as manager or to liquidate the entity. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for the Company’s share in the earnings (losses) of the venture, impairments and cash contributions and distributions. Any difference between the carrying amount of the equity method investment on the Company’s balance sheet and the underlying equity in net assets on the entity’s balance sheet results in a basis difference which is adjusted as the related underlying assets are depreciated, amortized, or sold and the liabilities are settled. The Company’s interests in Heritage Fields LLC (the “Great Park Venture”), Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”) and FP-HS Lot Option Joint Venture - Valencia, LLC (the “Valencia Landbank Venture”) were accounted for using the equity method for all years presented in the accompanying consolidated financial statements.
The Company eliminates a portion of intra-entity profits resulting from land sales between the Company and its unconsolidated entities until the assets are sold to a third-party. Cumulative distributions from unconsolidated entities are treated as returns on investment to the extent of the Company's share of cumulative earnings from the investment and included in the Company's consolidated statements of cash flows as cash flow from operating activities. Cumulative distributions in excess of the Company's share of cumulative earnings are treated as returns of investment and included in the Company's consolidated statements of cash flows as cash flows from investing activities.
The Company evaluates the recoverability of its investment in unconsolidated entities by first reviewing each investment for any indicators of impairment. If indicators are present, the Company estimates the fair value of the investment. If the carrying value of the investment is greater than the estimated fair value, management makes an assessment of whether the impairment is “temporary” or “other-than-temporary.” In making this assessment, management considers the following: (1) the length of time and the extent to
which fair value has been less than cost, (2) the financial condition and near-term prospects of the entity, and (3) the Company’s intent and ability to retain its interest long enough for a recovery in market value. If management concludes that the impairment is “other-than-temporary,” the Company reduces the investment to its estimated fair value. During the year ended December 31, 2020, the Company recognized an other-than-temporary impairment charge of $26.9 million related to the Company’s investment in Great Park Venture (see Note 4). No other-than-temporary impairments were identified during the years ended December 31, 2021 or 2019.
Inventories—Inventories primarily include land held for development and sale. Inventories are stated at cost, less reimbursements, unless the inventory within a community is determined to be impaired, in which case the impaired inventory would be written down to fair market value. Capitalized direct and indirect inventory costs include land, land in which the Company has the rights to receive in accordance with a disposition and development agreement, horizontal development costs, real estate taxes, and interest related to financing development and construction. During the years ended December 31, 2021, 2020 and 2019, the Company incurred interest expense, including amortization of debt issuance costs, all of which was capitalized into inventories, of $54.5 million, $55.2 million and $49.7 million, respectively. Horizontal development costs can be further broken down to costs incurred to entitle and permit the land for its intended use; costs incurred for infrastructure projects, such as public schools, utilities, roads, and bridges; and site costs, such as grading and amenities, to bring the land to a saleable state. Certain public infrastructure project costs incurred by the Company are eligible for reimbursement, typically, from the proceeds of Community Facilities District (“CFD”) bond debt, state and federal grants or property tax assessments. Costs that cannot be clearly associated with the acquisition, development, and construction of a real estate project and selling expenses are expensed as incurred. Selling and advertising costs were $9.3 million, $3.3 million and $1.7 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Capitalized inventory costs that are allocated to individual parcels within a project are allocated to the parcels benefited using relative sales value. Under the relative sales value method, each parcel sold in the project under development is allocated costs incurred and estimates of future inventory costs in proportion to the sales price of the sold parcel relative to the estimated overall sales prices of the project. Since this method requires the Company to estimate future development costs and the expected sales price for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
Intangible Asset—The Company records intangible asset amortization expense over the expected contract period based on the pattern in which the Company expects to recognize the economic benefits from the intangible asset.
Receivables—The Company evaluates the carrying value of receivables, which includes receivables from related parties, at each reporting date to determine the need for an allowance of expected credit loss. At December 31, 2021 and 2020, there was no material allowance for credit loss.
Leases—Under ASC Topic 842, Leases, the Company determines at contract inception if an arrangement contains a lease. If the contract contains a lease, the Company determines the classification of such lease. The Company has elected the practical expedient to not separate lease and nonlease components for both lessee and lessor arrangements. For operating leases with an expected term greater than one year in which the Company is the lessee, operating right of use (“ROU”) assets and operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
When the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is derived from assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. The Company only includes renewal options in the lease term when it is reasonably certain that it will exercise such options.
The Company excludes the recognition of short-term leases on the balance sheet and lease payments for short term leases are recognized as an expense in the consolidated statements of operations on a straight-line basis over the lease term.
Fair value measurements—ASC Topic 820, Fair Value Measurement, emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly
Level 3—Significant inputs to the valuation model are unobservable
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Contingent consideration assumed in a business combination is remeasured at fair value each reporting period until the contingency is resolved and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in results from operations.
Income taxes—The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
The Holding Company has elected to be treated as a corporation for U.S. federal, state, and local tax purposes and determines the provision or benefit for income taxes on an interim basis using an estimate of its annual effective tax rate and the impact of specific events as they occur.
The Company’s estimate of the Holding Company’s annual effective tax rate is subject to change based on changes in federal and state tax laws and regulations, the Holding Company’s ownership interest in the Operating Company and the Operating Company’s ownership in the San Francisco Venture, and the Company’s assessment of its deferred tax asset valuation allowance. Cumulative adjustments are made in interim periods in which the Company identifies a change in its estimate of the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, the Company’s utilization experience with operating loss and tax credit carryforwards and tax planning alternatives are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse effect or beneficial effect on the Holding Company’s income tax provision and net income or loss in the period the determination is made. The Holding Company recognizes interest or penalties related to income tax matters in income tax expense.
Miscellaneous other income—Miscellaneous other income consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net periodic pension benefit | $ | 290 | | | $ | 356 | | | $ | 35 | |
Other | 1,382 | | | — | | | 13 | |
Other—related party | 2,048 | | | — | | | — | |
Total miscellaneous other income | $ | 3,720 | | | $ | 356 | | | $ | 48 | |
Recently adopted accounting pronouncements—Although there have been several new accounting pronouncements recently issued by the Financial Accounting Standards Board that the Company has adopted or will adopt, the Company does not believe any of these accounting pronouncements had or will have a material impact on the Company’s consolidated financial statements or disclosures.
3. REVENUES
The following tables present the Company’s consolidated revenues disaggregated by revenue source and reporting segment (see Note 15) (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Valencia | | San Francisco | | Great Park(1) | | Commercial(1) | | Total |
Land sales and land sales—related party | $ | 182,786 | | | $ | — | | | $ | — | | | $ | — | | | $ | 182,786 | |
Management services—related party | — | | | — | | | 38,675 | | | 406 | | | 39,081 | |
Operating properties | 785 | | | — | | | — | | | — | | | 785 | |
| 183,571 | | | — | | | 38,675 | | | 406 | | | 222,652 | |
Operating properties leasing revenues | 1,194 | | | 548 | | | — | | | — | | | 1,742 | |
| $ | 184,765 | | | $ | 548 | | | $ | 38,675 | | | $ | 406 | | | $ | 224,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Valencia | | San Francisco | | Great Park(1) | | Commercial(1) | | Total |
Land sales and land sales—related party | $ | 122,617 | | | $ | — | | | $ | — | | | $ | — | | | $ | 122,617 | |
Management services—related party | — | | | 835 | | | 26,900 | | | 397 | | | 28,132 | |
Operating properties | 994 | | | 595 | | | — | | | — | | | 1,589 | |
| 123,611 | | | 1,430 | | | 26,900 | | | 397 | | | 152,338 | |
Operating properties leasing revenues | 1,281 | | | — | | | — | | | — | | | 1,281 | |
| $ | 124,892 | | | $ | 1,430 | | | $ | 26,900 | | | $ | 397 | | | $ | 153,619 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Valencia | | San Francisco | | Great Park(1) | | Commercial(1) | | Total |
Land sales and land sales—related party | $ | 140,058 | | | $ | 885 | | | $ | — | | | $ | — | | | $ | 140,943 | |
Management services—related party | — | | | 2,385 | | | 36,873 | | | 322 | | | 39,580 | |
Operating properties | 1,642 | | | 725 | | | — | | | — | | | 2,367 | |
| 141,700 | | | 3,995 | | | 36,873 | | | 322 | | | 182,890 | |
Operating properties leasing revenues | 1,490 | | | — | | | — | | | — | | | 1,490 | |
| $ | 143,190 | | | $ | 3,995 | | | $ | 36,873 | | | $ | 322 | | | $ | 184,380 | |
(1) The tables above do not include revenues of the Great Park Venture and the Gateway Commercial Venture, which are included in the Company’s reporting segment totals (see Notes 4 and 15).
The Company, through Five Point Communities, LP (“FP LP”), and Five Point Communities Management, Inc., (“FP Inc.” and together with FP LP, the “Management Company”), has a development management agreement, as amended and restated (“A&R DMA”), with the Great Park Venture. The A&R DMA had an original term commencing on December 29, 2010 and ending on December 31, 2021 (the “Initial Term”). By mutual agreement, the Initial Term has been extended through April 30, 2022 while the terms of renewal are being discussed. In addition to a fixed base fee and variable cost reimbursements, the Initial Term of the A&R DMA included incentive compensation that becomes payable in connection with and as a percentage of distributions made to the members of the Great Park Venture, including distributions made in periods after the Initial Term. Consideration in the form of contingent incentive compensation from the A&R DMA was recognized as revenue and a contract asset as services were provided over the contract term. During the year ended December 31, 2021, the Great Park Venture made distributions to its members that resulted in the Company receiving incentive compensation payments of $21.3 million (see Note 9). Due to the contingencies associated with estimating the amount of incentive compensation that ultimately will become payable for services provided through the Initial Term, the Company has constrained, under the guidance of ASC Topic 606, its estimate of incentive compensation revenues such that the Company believes that a significant reversal of revenues is not probable of occurring. As the contingencies are resolved and incentive compensation payments are made in future periods, the Company may record adjustments to revenue to reflect changes in the Company’s estimate of incentive compensation expected to be received. Significant judgment is involved in management’s estimate of the amount of variable consideration included in the transaction price. In making this estimate, management utilizes projected cash flows of the operations of the Great Park Venture. These cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price
appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development, general, and administrative costs, the expected contract period, and other factors.
Contract balances are recorded on the consolidated balance sheet in either related party assets or other assets for receivables from customers and contract assets (unbilled receivables) depending on whether the customer is a related party. Similarly, contract liabilities (deferred revenue) are included in accounts payable and other liabilities or related party liabilities.
The opening and closing balances of the Company’s contract assets for the year ended December 31, 2021 were $85.1 million ($78.1 million related party, see Note 9) and $87.6 million ($79.1 million related party, see Note 9), respectively. The increase of $2.5 million between the opening and closing balances of the Company’s contract assets primarily resulted from a timing difference between when payments are made and the Company’s recognition of revenue earned for the performance of management services in the period. Offsetting the timing difference was a reduction of $21.3 million from the receipt of incentive compensation payments from the Great Park Venture.
The opening and closing balances of the Company’s contract assets for the year ended December 31, 2020 were $73.0 million ($68.1 million related party) and $85.1 million ($78.1 million related party, see Note 9), respectively. The increase of $12.1 million between the opening and closing balances of the Company’s contract assets primarily result from a timing difference between the Company’s recognition of revenue earned for the performance of management services and no contractual payments due from the customer during the period.
The opening and closing balances of the Company’s other receivables from contracts with customers and contract liabilities for the years ended December 31, 2021 and 2020 were insignificant.
The Company applies the disclosure exemptions associated with remaining performance obligations for contracts with an original expected term of one year or less, contracts for which revenue is recognized in proportion to the amount of services performed and variable consideration that is allocated to wholly unsatisfied performance obligations for services that form part of a series of services.
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
Great Park Venture
The Great Park Venture has two classes of interests—“Percentage Interests” and “Legacy Interests.” The Operating Company owned 37.5% of the Great Park Venture’s Percentage Interests as of December 31, 2021. Legacy Interest holders were entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from participation in subsequent distributions of cash depending on the performance of the Great Park Venture. The holders of the Percentage Interests will receive all other distributions.
During the year ended December 31, 2021, the Great Park Venture made aggregate distributions of $51.0 million to holders of Legacy Interests and $204.3 million to holders of Percentage Interests. The Company received $76.6 million for its 37.5% Percentage Interest. With the distributions to the holders of Legacy Interests during the year ended December 31, 2021, the Great Park Venture fully satisfied the $476.0 million priority distribution rights and reduced the remaining maximum participating Legacy Interest distribution rights to $82.7 million.
The Great Park Venture is the owner of Great Park Neighborhoods, a mixed-use planned community located in Orange County, California. The Company, through the A&R DMA, manages the planning, development and sale of the Great Park Neighborhoods and supervises the day-to-day affairs of the Great Park Venture. The Great Park Venture is governed by an executive committee of representatives appointed by only the holders of Percentage Interests. The Company serves as the administrative member but does not control the actions of the executive committee. The Company accounts for its investment in the Great Park Venture using the equity method.
The carrying value of the Company’s investment in the Great Park Venture, acquired through a series of acquisitions in May 2016 (the “Formation Transactions”), is higher than the Company’s underlying share of equity in the carrying value of net assets of the Great Park Venture resulting in a basis difference. The Company’s earnings or losses from the equity method investment are adjusted by amortization and accretion of the basis differences as the assets (mainly inventory) and liabilities that gave rise to the basis difference are sold, settled or amortized.
During the year ended December 31, 2021, the Great Park Venture recognized $62.8 million in land sale revenues to related parties of the Company and $346.8 million in land sale revenues to third parties. Land sale revenues to third parties included $236.6 million in revenues from homesites sold to an unaffiliated land banking entity whereby a related party of the Company retained the option to acquire these homesites in the future from the land bank entity. Land sales to related parties included $57.4 million in sales to an entity in which the Great Park Venture holds a 10% interest (the “Great Park Landbank Venture”). The Great Park Landbank Venture is a land banking entity that was formed in June 2021. The Great Park Venture made an initial contribution of $4.6 million for its interest and accounts for the investment under the equity method of accounting. During the year ended December 31, 2020, the Great Park Venture recognized $2.7 million in land sale revenues to related parties of the Company and
$22.1 million in land sale revenues to third parties. During the year ended December 31, 2019, the Great Park Venture recognized $133.3 million in land sale revenues to a related party of the Company and $137.7 million in land sale revenues to third parties, of which $31.0 million relates to homesites sold to a land banking entity whereby a related party of the Company has retained the option to acquire these homesites in the future from the land banking entity.
The following table summarizes the statements of operations of the Great Park Venture for the years ended December 31, 2021, 2020 and 2019 (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Land sale and related party land sale revenues | $ | 409,555 | | | $ | 24,827 | | | $ | 270,970 | |
Home sale revenues | 26,172 | | | — | | | — | |
Cost of land sales | (301,247) | | | (15,304) | | | (179,836) | |
Cost of home sales | (20,022) | | | — | | | — | |
Other costs and expenses | (57,540) | | | (38,929) | | | (56,248) | |
Net income (loss) of Great Park Venture | $ | 56,918 | | | $ | (29,406) | | | $ | 34,886 | |
The Company’s share of net income (loss) | $ | 21,344 | | | $ | (11,027) | | | $ | 13,082 | |
Basis difference amortization | (14,912) | | | (2,073) | | | (6,900) | |
Other-than-temporary investment impairment | — | | | (26,851) | | | — | |
Equity in earnings (loss) from Great Park Venture | $ | 6,432 | | | $ | (39,951) | | | $ | 6,182 | |
The following table summarizes the balance sheet data of the Great Park Venture and the Company’s investment balance as of December 31, 2021 and 2020 (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
Inventories | $ | 687,235 | | | $ | 916,127 | |
Cash and cash equivalents | 140,004 | | | 128,850 | |
Receivable and other assets | 32,550 | | | 24,449 | |
Total assets | $ | 859,789 | | | $ | 1,069,426 | |
Accounts payable and other liabilities | $ | 128,677 | | | $ | 139,929 | |
| | | |
Redeemable Legacy Interests | 82,719 | | | 133,695 | |
Capital (Percentage Interest) | 648,393 | | | 795,802 | |
Total liabilities and capital | $ | 859,789 | | | $ | 1,069,426 | |
The Company’s share of capital in Great Park Venture | $ | 243,147 | | | $ | 298,426 | |
Unamortized basis difference | 78,127 | | | 93,039 | |
The Company’s investment in the Great Park Venture | $ | 321,274 | | | $ | 391,465 | |
At each reporting period, and when events and circumstances dictate, the Company evaluates its equity method investment in the Great Park Venture for impairment. This evaluation focuses on the recoverability of the carrying value based upon the discounted value of distributions the Company expects to receive from the Great Park Venture. This evaluation is performed at the investment level and is separate and apart from impairment evaluations on long-lived assets, such as the Company’s consolidated inventory balances, that focus on recoverability with undiscounted cash flows. The Company evaluates the investment as a whole and does not evaluate the underlying assets of the Great Park Venture for impairment. If the Great Park Venture records an impairment charge against its assets, the Company will recognize its share of the loss, adjusted for basis differences. During the years ended December 31, 2021, 2020 and 2019, the Great Park Venture did not recognize any impairment losses on its long-lived assets.
In March 2020, the Company determined that an other-than-temporary impairment existed for the Company’s investment in the Great Park Venture and recognized a $26.9 million impairment charge that is included in equity in earnings from unconsolidated entities on the consolidated statement of operations during the year ended December 31, 2020.
Below are the most significant unobservable inputs used in the Company’s discounted cash flow model to determine the estimated fair value (level 3) of the Company’s investment in the Great Park Venture at the time the other-than-temporary impairment was recognized:
| | | | | | | | |
Unobservable inputs | | Range |
Annual home price appreciation | | 0% - 7% |
Annual horizontal development cost appreciation | | 0% - 3% |
Average annual absorption of homesites (market rate homesites) | | 900 |
2020 home price range | | $640,000 - $1,300,000 |
Unlevered discount rate | | 9% |
Gateway Commercial Venture
The Company owned a 75% interest in the Gateway Commercial Venture as of December 31, 2021. The Gateway Commercial Venture is governed by an executive committee in which the Company is entitled to appoint two individuals. One of the other members of the Gateway Commercial Venture is also entitled to appoint two individuals to the executive committee. The unanimous approval of the executive committee is required for certain matters, which limits the Company’s ability to control the Gateway Commercial Venture, however, the Company is able to exercise significant influence and therefore accounts for its investment in the Gateway Commercial Venture using the equity method. The Company is the manager of the Gateway Commercial Venture, with responsibility to manage and administer its day-to-day affairs and implement a business plan approved by the executive committee.
The Gateway Commercial Venture owns one commercial office building and approximately 50 acres of commercial land with additional development rights at a 73 acre office, medical, research and development campus located within the Great Park Neighborhoods (the “Five Point Gateway Campus”). The Five Point Gateway Campus consists of four buildings totaling approximately one million square feet. Prior to May 2020, the Gateway Commercial Venture owned and operated all four buildings.
In August 2020, the Gateway Commercial Venture closed on the sale of two buildings at the Five Point Gateway Campus, comprising a total of approximately 660,000 square feet of research and development space for a purchase price of $355.0 million. The sale of the buildings, which had a total carrying value of approximately $278.0 million, resulted in a gain of approximately $74.8 million, net of transaction costs. Concurrently, the Gateway Commercial Venture, using net proceeds generated from the sale, made a debt payment of $245.0 million to its lender and a distribution of $107.0 million to its members, of which approximately $80.3 million was distributed to the Company.
In May 2020, the Gateway Commercial Venture closed on the sale of approximately 11 acres of land and an approximately 189,000 square foot building for a purchase price of $108.0 million. The sale of this land and building, which had a carrying value of approximately $67.5 million, resulted in a gain of approximately $37.4 million, net of transaction costs. Concurrently, the Gateway Commercial Venture, using net proceeds generated from the sale, made a debt payment of $30.0 million to its lender and a distribution of $75.0 million to its members, of which approximately $56.3 million was distributed to the Company.
The Company and a subsidiary of Lennar Corporation separately lease portions of the fourth building, which remains under the ownership of the Gateway Commercial Venture, and during the years ended December 31, 2021, 2020 and 2019, the Gateway Commercial Venture recognized $8.5 million, $8.4 million and $8.3 million, respectively, in rental revenues from those leasing arrangements.
The following table summarizes the statements of operations of the Gateway Commercial Venture for the years ended December 31, 2021, 2020 and 2019 (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Rental revenues | $ | 8,475 | | | $ | 24,241 | | | $ | 34,157 | |
Rental operating and other expenses | (2,424) | | | (6,387) | | | (7,304) | |
Depreciation and amortization | (3,938) | | | (9,412) | | | (15,101) | |
Gain on asset sales, net | — | | | 112,260 | | | — | |
Interest expense | (1,235) | | | (8,857) | | | (16,892) | |
Net income (loss) of Gateway Commercial Venture | $ | 878 | | | $ | 111,845 | | | $ | (5,140) | |
Equity in earnings (loss) from Gateway Commercial Venture | $ | 659 | | | $ | 83,884 | | | $ | (3,855) | |
The following table summarizes the balance sheet data of the Gateway Commercial Venture and the Company’s investment balance as of December 31, 2021 and 2020 (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
Real estate and related intangible assets, net | $ | 86,601 | | | $ | 90,276 | |
Other assets | 17,765 | | | 14,446 | |
Total assets | $ | 104,366 | | | $ | 104,722 | |
Notes payable, net | $ | 29,369 | | | $ | 29,381 | |
Other liabilities, net | 9,067 | | | 10,290 | |
Members’ capital | 65,930 | | | 65,051 | |
Total liabilities and capital | $ | 104,366 | | | $ | 104,722 | |
The Company’s investment in the Gateway Commercial Venture | $ | 49,447 | | | $ | 48,788 | |
The debt of the Gateway Commercial Venture is non-recourse to the Company other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
Valencia Landbank Venture
As of December 31, 2021, the Company owned a 10% interest in the Valencia Landbank Venture, an entity organized in December 2020 for the purpose of taking assignment from homebuilders of purchase and sale agreements for the purchase of residential lots within the Company’s Valencia community. The Valencia Landbank Venture concurrently enters into option and development agreements with homebuilders pursuant to which the homebuilders retain the option to purchase the land to construct and sell homes. The Company does not have a controlling financial interest in the Valencia Landbank Venture, however, the Company has the ability to significantly influence the Valencia Landbank Venture’s operating and financial policies, and most major decisions require the Company’s approval in addition to the approval of the Valencia Landbank Venture’s other unaffiliated member, and therefore the Company accounts for its investment in the Valencia Landbank Venture using the equity method.
During the years ended December 31, 2021 and 2020, the Valencia Landbank Venture took assignment of certain purchase and sale agreements and purchased land from the Company for $42.0 million and $51.6 million, respectively, (see Note 9) while concurrently entering into option and development agreements with third-party homebuilders. When the Company sells land to the Valencia Landbank Venture, it eliminates its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Valencia Landbank Venture to third-party homebuilders. At December 31, 2021 and 2020, the Company’s investment in the Valencia Landbank Venture was $3.8 million and $2.6 million, respectively. During the years ended December 31, 2021 and 2020, the Company recognized equity in loss of $0.9 million and $1.6 million from the Valencia Landbank Venture, respectively.
5. NONCONTROLLING INTERESTS
The Operating Company
The Holding Company’s wholly owned subsidiary is the managing general partner of the Operating Company, and at December 31, 2021, the Holding Company and its wholly owned subsidiary owned approximately 62.9% of the outstanding Class A Common Units and 100% of the outstanding Class B Common Units of the Operating Company. The Holding Company consolidates the financial results of the Operating Company and its subsidiaries and records a noncontrolling interest for the remaining 37.1% of the outstanding Class A Common Units of the Operating Company that are owned separately by affiliates of Lennar Corporation (“Lennar”), affiliates of Castlelake, LP (“Castlelake”) and an entity controlled by Emile Haddad, the Company’s Chairman Emeritus of the Board of Directors and former Chief Executive Officer (the “Management Partner”).
After a 12 month holding period, holders of Class A Common Units of the Operating Company may exchange their units for, at the Company’s option, either (i) Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (ii) cash in an amount equal to the market value of such shares at the time of exchange. In either situation, an equal number of that holder’s Class B common shares will automatically convert into Class A common shares, at a ratio of 0.0003 Class A common shares for each Class B common share. This exchange right is currently exercisable by all holders of outstanding Class A Common Units of the Operating Company.
With each exchange of Class A Common Units of the Operating Company for Class A common shares, the Holding Company’s percentage ownership interest in the Operating Company and its share of the Operating Company’s cash distributions and profits and losses will increase. Additionally, other issuances of common shares of the Holding Company or common units of the Operating Company result in changes to the noncontrolling interest percentage. Such equity transactions result in an adjustment between members’ capital and the noncontrolling interest in the Company’s consolidated balance sheet and statement of capital to account for the changes in the noncontrolling interest ownership percentage as well as any change in total net assets of the Company.
During the years ended December 31, 2021, 2020 and 2019, the Holding Company increased its ownership interest in the Operating Company as a result of net equity transactions related to the Company’s share-based compensation plan and exchanges of Class A Common Units of the Operating Company for Class A common shares.
The terms of the Operating Company's Limited Partnership Agreement (“LPA”) provide for the payment of tax distributions to the Operating Company's partners in an amount equal to the estimated income tax liabilities resulting from taxable income or gain allocated to those parties. The tax distribution provisions in the LPA were included in the Operating Company's governing documents adopted prior to the Company’s initial public offering and were designed to provide funds necessary to pay tax liabilities for income that might be allocated, but not paid, to the partners.
Tax distributions to the partners of the Operating Company for the years ended December 31, 2021 and 2020, were as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Management Partner | $ | 2,932 | | | $ | 4,568 | |
Other partners (excluding the Holding Company) | 1,497 | | | — | |
Total tax distributions | $ | 4,429 | | | $ | 4,568 | |
Generally, tax distributions are treated as advance distributions under the LPA and are taken into account when determining the amounts otherwise distributable under the LPA.
The San Francisco Venture
The San Francisco Venture, the entity developing the Candlestick and The San Francisco Shipyard communities, has three classes of units—Class A units, Class B units and Class C units. The Operating Company acquired a controlling interest in the San Francisco Venture in the May 2016 Formation Transactions by acquiring all of the outstanding Class B units of the San Francisco Venture. All of the outstanding Class A units are owned by Lennar and Castlelake. The Class A units of the San Francisco Venture are intended to be substantially economically equivalent to the Class A Common Units of the Operating Company. The Class A units of the San Francisco Venture represent noncontrolling interests to the Operating Company.
Holders of Class A units of the San Francisco Venture can redeem their units at any time and receive Class A Common Units of the Operating Company on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events). If a holder requests a redemption of Class A units of the San Francisco Venture that would result in the Holding Company’s ownership of the Operating Company falling below 50.1%, the Holding Company has the option of satisfying the redemption with Class A common shares instead. The Company also has the option, at any time, to acquire outstanding Class A units of the San Francisco Venture in exchange for Class A Common Units of the Operating Company. The 12 month holding period for any Class A Common Units of the Operating Company issued in exchange for Class A units of the San Francisco Venture is calculated by including the period that such Class A units of the San Francisco Venture were owned. This exchange right is currently exercisable by all holders of outstanding Class A units of the San Francisco Venture.
Redeemable Noncontrolling Interest
In 2019, the San Francisco Venture issued 25.0 million new Class C units to an affiliate of Lennar in exchange for a contribution of $25.0 million to the San Francisco Venture. Provided that Lennar completes the construction of a certain number of new homes in Candlestick as contemplated under purchase and sale agreements with the Company, the San Francisco Venture is required to redeem the Class C units if and when the Company receives reimbursements from the Mello-Roos communities facilities district formed for the development, in an aggregate amount equal to 50% of any reimbursements received up to a maximum amount of $25.0 million. The San Francisco Venture also maintains the ability to redeem the then outstanding balance of Class C units for
cash at any time. Upon a liquidation of the San Francisco Venture, the holders of Class C Units are entitled to a liquidation preference. The maximum amount payable by the San Francisco Venture pursuant to redemptions or liquidation of the Class C units is $25.0 million. The holders of Class C units are not entitled to receive any other forms of distributions and are not entitled to any voting rights. In connection with the issuance of the Class C units, the San Francisco Venture agreed to spend $25.0 million on the development of infrastructure and/or parking facilities at the Company’s Candlestick development. At December 31, 2021 and 2020, $25.0 million of Class C units were outstanding and included in redeemable noncontrolling interest on the consolidated balance sheets.
6. CONSOLIDATED VARIABLE INTEREST ENTITY
The Holding Company conducts all of its operations through the Operating Company, a consolidated VIE, and as a result, substantially all of the Company’s assets and liabilities represent the assets and liabilities of the Operating Company, other than items attributed to income taxes and the payable pursuant to tax receivable agreement (“TRA”). The Operating Company has investments in and consolidates the assets and liabilities of the San Francisco Venture, FP LP and Five Point Land, LLC (“FPL”), the entity developing Valencia (formerly known as Newhall Ranch), all of which have also been determined to be VIEs.
The San Francisco Venture is a VIE as the other members of the venture, individually or as a group, are not able to exercise kick-out rights or substantive participating rights. The Company applied the variable interest model and determined that it is the primary beneficiary of the San Francisco Venture and, accordingly, the San Francisco Venture is consolidated in the Company’s results. In making that determination, the Company evaluated that the Operating Company has unilateral and unconditional power to make decisions in regards to the activities that significantly impact the economics of the VIE, which are the development of properties, marketing and sale of properties, acquisition of land and other real estate properties and obtaining land ownership or ground lease for the underlying properties to be developed. The Company is determined to have more-than-insignificant economic benefit from the San Francisco Venture because, excluding Class C units, the Operating Company can prevent or cause the San Francisco Venture from making distributions on its units, and the Operating Company would receive 99% of any such distributions made (assuming no distributions had been paid on the Class A Common Units of the Operating Company). In addition, the San Francisco Venture is only allowed to make a capital call on the Operating Company and not any other interest holders, which could be a significant financial risk to the Operating Company.
As of December 31, 2021, the San Francisco Venture had total combined assets of $1.3 billion, primarily comprised of $1.27 billion of inventories and $1.1 million in related party assets and total combined liabilities of $76.9 million, including $69.5 million in related party liabilities.
As of December 31, 2020, the San Francisco Venture had total combined assets of $1.2 billion, primarily comprised of $1.22 billion of inventories, $2.8 million in related party assets and total combined liabilities of $97.9 million, including $89.0 million in related party liabilities.
Those assets are owned by, and those liabilities are obligations of, the San Francisco Venture, not the Company. The San Francisco Venture’s operating subsidiaries are not guarantors of the Company’s obligations, and the assets held by the San Francisco Venture may only be used as collateral for the San Francisco Venture’s obligations. The creditors of the San Francisco Venture do not have recourse to the assets of the Operating Company, as the VIE’s primary beneficiary, or of the Holding Company.
The Company and the other members do not generally have an obligation to make capital contributions to the San Francisco Venture. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the San Francisco Venture. The Company does not guarantee any debt of the San Francisco Venture. However, the Operating Company has guaranteed the performance of payment by the San Francisco Venture in accordance with the redemption terms of the Class C units of the San Francisco Venture (see Note 5).
FP LP and FPL are VIEs because the other partners or members have disproportionately fewer voting rights and substantially all of the activities of the entities are conducted on behalf of the other partners or members and their related parties. The Operating Company, or a wholly owned subsidiary of the Operating Company, is the primary beneficiary of FP LP and FPL.
As of December 31, 2021, FP LP and FPL had combined assets of $1.0 billion, primarily comprised of $826.4 million of inventories, $51.4 million of intangibles, $82.0 million in related party assets and total combined liabilities of $94.0 million, including $85.6 million in accounts payable and other liabilities and $8.4 million in related party liabilities.
As of December 31, 2020, FP LP and FPL had combined assets of $1.0 billion, primarily comprised of $767.3 million of inventories, $71.7 million of intangibles, $80.0 million in related party assets and total combined liabilities of $108.9 million, including $99.9 million in accounts payable and other liabilities and $9.0 million in related party liabilities.
The Company evaluates its primary beneficiary designation on an ongoing basis and assesses the appropriateness of the VIE’s status when events have occurred that would trigger such an analysis. During the years ended December 31, 2021, 2020 and 2019, respectively, there were no VIEs that were deconsolidated.
7. PROPERTIES AND EQUIPMENT, NET
Properties and equipment as of December 31, 2021 and 2020 consisted of the following (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
Agriculture operating properties and equipment | $ | 30,125 | | | $ | 30,117 | |
| | | |
Furniture, fixtures, and other | 10,933 | | | 10,890 | |
Total properties and equipment | 41,058 | | | 41,007 | |
Accumulated depreciation | (9,592) | | | (8,238) | |
Properties and equipment, net | $ | 31,466 | | | $ | 32,769 | |
Depreciation expense was $1.2 million, $1.3 million and $1.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
8. INTANGIBLE ASSET, NET—RELATED PARTY
The intangible asset relates to the contract value of the incentive compensation provisions of the A&R DMA with the Great Park Venture acquired in the Formation Transactions (see Note 9). The intangible asset will be amortized over the expected contract period based on the pattern in which the economic benefits are expected to be received.
The carrying amount and accumulated amortization of the intangible asset as of December 31, 2021 and 2020 were as follows (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
Gross carrying amount | $ | 129,705 | | | $ | 129,705 | |
Accumulated amortization | (78,300) | | | (57,958) | |
Net book value | $ | 51,405 | | | $ | 71,747 | |
Intangible asset amortization expense, as a result of revenue recognition attributable to incentive compensation, was $20.3 million, $8.6 million and $15.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Amortization expense is included in the cost of management services in the accompanying consolidated statements of operations and is included in the Great Park segment.
9. RELATED PARTY TRANSACTIONS
Related party assets and liabilities included in the Company’s consolidated balance sheets as of December 31, 2021 and 2020 consisted of the following (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
Related Party Assets: | | | |
Contract assets (see Note 3) | $ | 79,082 | | | $ | 78,055 | |
| | | |
| | | |
| | | |
Operating lease right-of-use asset (see Note 12) | 18,715 | | | 20,919 | |
Other | 4,021 | | | 4,707 | |
| $ | 101,818 | | | $ | 103,681 | |
Related Party Liabilities: | | | |
Reimbursement obligation | $ | 69,536 | | | $ | 88,951 | |
| | | |
Payable to holders of Management Company’s Class B interests | 8,365 | | | 9,000 | |
Operating lease liability (see Note 12) | 13,931 | | | 15,176 | |
Other | 4,086 | | | 22 | |
| $ | 95,918 | | | $ | 113,149 | |
Development Management Agreement with the Great Park Venture (Incentive Compensation Contract Asset)
In 2010, the Great Park Venture, the Company’s equity method investee, engaged the Management Company under a development management agreement to provide management services to the Great Park Venture. The initial term of the development management agreement with the Great Park Venture expired on December 31, 2021 but has been extended by mutual agreement of the parties through April 30, 2022 while the terms of a renewal are discussed. The compensation structure in place as per the A&R DMA’s Initial Term consists of a base fee and incentive compensation. The base fee consists of a fixed annual fee and a variable fee equal to general and administrative costs incurred by the Management Company on behalf of the Great Park Venture. Incentive compensation is characterized as “Legacy Incentive Compensation” and “Non-Legacy Incentive Compensation.” Legacy Incentive
Compensation consists of a maximum of $9.0 million of incentive compensation payments attributed to contingent payments made under a cash flow participation agreement to which the Great Park Venture is a party. Holders of the Management Company’s Class B interests are entitled to receive all distributions from the Management Company that are attributable to any Legacy Incentive Compensation received by the Management Company. Non-Legacy Incentive Compensation is 9% of distributions available to be made by the Great Park Venture to holders of Percentage Interests of the Great Park Venture (see Note 4). During the year ended December 31, 2021, the Great Park Venture made a Legacy Incentive Compensation payment to the Company of $0.6 million and a Non-Legacy Incentive Compensation payment of $20.7 million. Upon receiving the Legacy Incentive Compensation payment, the Company distributed the $0.6 million in proceeds to the holders of the Management Company's Class B interests.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized revenue from management services of $38.7 million, $26.9 million and $36.9 million, respectively, related to all management fees under the A&R DMA, and such revenues are included in management services—related party in the accompanying consolidated statements of operations and are included in the Great Park segment. At December 31, 2021 and 2020, included in contract assets in the table above is $74.3 million and $74.8 million, respectively, attributed to Legacy and Non-Legacy Incentive Compensation revenue recognized but not yet due (see Note 3). At December 31, 2021 and 2020, the Company had a receivable from the Great Park Venture of $2.9 million and $3.1 million, respectively, related to cost reimbursements under the A&R DMA. The receivable amounts are included in other related party assets in the table above.
Operating Lease Right-of-Use Asset and Operating Lease Liability
The Company leases corporate office space in the building owned by the Gateway Commercial Venture at the Five Point Gateway Campus (See note 12).
Indirect Legacy Interest in Great Park Venture
In 2018, the Company purchased an indirect interest in rights to certain Legacy Interests in the Great Park Venture through an equity method investment. At December 31, 2020, the carrying value of the purchased interests was $0.1 million and is included in other related party assets in the table above. During the year ended December 31, 2021, the Company received a cash distribution of $1.0 million which was in excess of the carrying value of the interests resulting in a miscellaneous other—related party gain of $978 thousand. After receiving the distribution, the Company’s indirect Legacy Interest had no carrying value and has no additional distribution rights in the Great Park Venture.
Reimbursement Obligation
Prior to the Company’s acquisition of the San Francisco Venture, the San Francisco Venture completed a separation transaction (the “Separation Transaction”) pursuant to an Amended and Restated Separation and Distribution Agreement (“Separation Agreement”) in which the equity interests in a subsidiary of the San Francisco Venture known as CPHP Development, LLC (“CPHP”) were distributed directly to the Class A members of the San Francisco Venture: (i) an affiliate of Lennar and (ii) an affiliate of Castlelake.
The San Francisco Venture has entered into reimbursement agreements for which it has agreed to reimburse CPHP or its subsidiaries for a portion of the EB-5 loan liabilities and related interest that were assumed by CPHP or its subsidiaries pursuant to the Separation Agreement. At December 31, 2021 and 2020, the balance of the reimbursement obligation to CPHP or its subsidiaries was $69.5 million and $89.0 million, respectively. Interest paid monthly totaled $3.4 million, $4.1 million and $4.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. All of the incurred interest for the years ended December 31, 2021, 2020 and 2019 was capitalized into inventories. The weighted average interest rate as of December 31, 2021 was 4.5%.
Throughout 2021, the Company was notified by CPHP or its affiliates that certain reimbursements that were previously expected to be paid in 2021 had been deferred to subsequent years. These deferred amounts continue to incur interest at the original interest rate. Principal payments of $56.3 million, $0.6 million and $12.6 million are expected to be paid in 2022, 2023, and 2025, respectively, however, additional deferral notices may further extend the expected payment dates.
Employment Transition Agreement and Advisory Agreement with Emile Haddad
On August 23, 2021, the Company and the Company’s then Chairman, Chief Executive Officer and President, Emile Haddad, entered into an employment transition agreement and an advisory agreement pursuant to which, effective as of September 30, 2021 (the “Transition Date”), Mr. Haddad stepped down from his roles as Chairman, Chief Executive Officer and President and transitioned to a senior advisor to the Company. Mr. Haddad will remain a member of the Board of Directors, and as the Company’s founder, the Board elected him as Chairman Emeritus. Under the terms of the employment transition agreement, Mr. Haddad received his regular compensation through the Transition Date. The employment transition agreement also provides that Mr. Haddad will be paid a pro-rated 2021 annual cash bonus of $3.8 million for services he provided as an employee of the Company through September 30, 2021. The bonus was paid in early 2022. Additionally, Mr. Haddad was granted 396,825 restricted share awards that vest in three equal amounts on January 15, 2022, January 15, 2023 and January 15, 2024, subject to his continued service to the Company as a senior advisor. All compensation expense to Mr. Haddad for the year ended December 31, 2021 is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations. At December 31, 2021, included in other related party liabilities in the table above is the $3.8 million cash bonus due to Mr. Haddad.
The advisory agreement has an initial term of three years. Mr. Haddad will receive an annual retainer of $5.0 million, and his existing unvested equity awards will continue to vest in accordance with their terms, subject to continued service as an advisor and/or member of the Board. In the event of an involuntary termination of the advisory agreement by the Company other than for cause, by Mr. Haddad for good reason, following Mr. Haddad’s death or disability, or upon a change in control of the Company, Mr. Haddad will remain eligible to receive the remaining payments under the advisory agreement for its then-current term (or, in the case of death or disability, for a period of 12 months (but in no event beyond the then-current term)), and his equity awards will accelerate (or remain eligible to vest, in the case of his performance-based equity awards).
Valencia Purchase and Sale Agreements
In 2021, the Company sold 123 homesites on approximately 13 acres to the Valencia Landbank Venture (see Note 4). Initial gross proceeds were $42.0 million, representing the base purchase price. The Company also recognized $1.2 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that the Company expects to be entitled to receive. In 2020, the Company sold 210 homesites on approximately 26 acres to the Valencia Landbank Venture. Initial gross proceeds were $51.6 million, representing the base purchase price. The Company also recognized $1.6 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that the Company expects to be entitled to receive. The Valencia Landbank Venture has entered into option and development agreements with homebuilders in which unaffiliated homebuilders will purchase lots from the Valencia Landbank Venture and construct and sell homes to the homebuying public.
In 2021, the Company entered into a purchase and sale agreement with an unaffiliated land banking entity for the sale of 328 homesites on approximately 26 acres. Initial gross proceeds were $74.0 million, representing the base purchase price, and the Company also recognized $2.5 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that the Company expects to be entitled to receive. A related party of the Company retained the option to acquire these homesites in the future from the unaffiliated land banking entity. In 2019, the Company entered into a purchase and sale agreement with an unaffiliated land banking entity for the sale of 711 homesites on approximately 59 acres. Initial gross proceeds were $135.2 million, representing the base purchase price, and the Company also recognized $4.7 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that the Company expects to be entitled to receive. A related party of the Company retained the option to acquire these homesites in the future from the unaffiliated land banking entity.
Gateway Commercial Venture Property Management Agreement
The Company has entered into a property management agreement with Gateway Commercial Venture in which the Company will provide certain property management services to the Five Point Gateway Campus. For the years ended December 31, 2021, 2020, and 2019, the Company recognized revenue from these management services of $0.4 million, $0.4 million and $0.3 million, respectively, which is included in management services—related party in the accompanying consolidated statements of operations.
San Francisco Bay Area Development Management Agreements
The Company previously entered into development management agreements with affiliates of Lennar and Castlelake in which the Company provided certain development management services to various real estate development projects located in the San Francisco Bay Area. For the years ended December 31, 2020 and 2019, the Company recognized revenue from these management services of $0.8 million and $2.4 million, respectively. Revenues related to management fees under the San Francisco Bay Area development management agreements are included in management services—related party in the accompanying consolidated statements of operations. As of December 31, 2020, all development management agreements had been terminated.
Retail Project and Contingent Consideration to Class A Members of the San Francisco Venture
In early 2019, the Company and the members of a joint venture, formed between affiliates of The Macerich Company, Lennar and Castlelake (“Mall Venture”), that intended to construct a retail outlet shopping district at Candlestick (“Retail Project”) decided not to proceed with the project. As part of the termination of the Retail Project, the San Francisco Venture was released from its obligation to convey parcels of property (the “Retail Project Property”) on which the Retail Project was intended to be developed and from certain development obligations. As a result of terminating the project and agreements related thereto, the San Francisco Venture recognized a gain of $64.9 million for the year ended December 31, 2019, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels.
Concurrent with the termination of the Retail Project, the San Francisco Venture issued 436,498 Class A units (and the Holding Company issued 436,498 of its Class B common shares) to, and received a contribution of $5.5 million from, the holders of Class A units of the San Francisco Venture.
10. NOTES PAYABLE, NET
At December 31, 2021 and 2020, notes payable consisted of the following (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
7.875% Senior Notes due 2025 | $ | 625,000 | | | $ | 625,000 | |
| | | |
Unamortized debt issuance costs and discount | (5,884) | | | (7,419) | |
| $ | 619,116 | | | $ | 617,581 | |
Senior Notes
In November 2017, the Operating Company and Five Point Capital Corp., a directly wholly owned subsidiary of the Operating Company (the “Co-Issuer” and, together with the Operating Company, the “Issuers”), offered, sold and issued $500.0 million aggregate principal amount of 7.875% unsecured senior notes due November 15, 2025 at 100% of par (the “Original Notes”). Proceeds from the offering, after underwriting fees and offering expenses were $490.7 million. In July 2019, the Issuers offered, sold and issued $125.0 million aggregate principal amount of 7.875% unsecured senior notes as a further issuance of the Original Notes (the “Add-On Notes”). The terms of the Add-On Notes are identical to the Original Notes (the Add-On Notes and, together with the Original Notes, the “Senior Notes”). The Add-On Notes were issued at par plus pre-issuance interest that had accrued from May 15, 2019 to the issuance date. Proceeds from the offering of the Add-On Notes, after underwriting fees and offering expenses and excluding pre-issuance accrued interest was $122.8 million.
Interest on the Senior Notes is payable on May 15 and November 15 of each year. Interest incurred, including amortization of debt issuance costs, on the Senior Notes during the years ended December 31, 2021, 2020 and 2019 totaled $50.8 million, $50.8 million, and $45.0 million, respectively. All interest incurred was capitalized to inventories for all three years.
The Senior Notes are guaranteed, jointly and severally, by certain direct and indirect subsidiaries of the Operating Company and are redeemable at the option of the Issuers, in whole or in part, at a declining call premium as set forth in the indenture governing the Senior Notes, plus accrued and unpaid interest.
Revolving Credit Facility
In April 2021, the Operating Company entered into the third amendment to its $125.0 million unsecured revolving credit facility which, among other things, (i) extended the maturity date of the revolving credit facility from April 2022 to April 2024, with one option to extend the maturity date by an additional year, subject to the satisfaction of certain conditions including the approval of the administrative agent and lenders and (ii) amended the revolving credit facility to include customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate. Any borrowings under the revolving credit facility continue to bear interest at LIBOR plus a margin ranging from 1.75% to 2.00% based on the Company’s leverage ratio. The aggregate commitment remains at $125.0 million, with an accordion feature that allows the Operating Company to request to increase the maximum aggregate amount by up to $50.0 million to $175.0 million, subject to certain conditions, including receipt of commitments. As of December 31, 2021, no funds have been drawn on the revolving credit facility. However, letters of credit of $0.3 million were issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.7 million.
11. TAX RECEIVABLE AGREEMENT
The Company is a party to a TRA with all of the holders of Class A Common Units of the Operating Company, all the holders of Class A units of the San Francisco Venture, and prior holders of Class A Common Units of the Operating Company and prior holders of Class A units of the San Francisco Venture that have exchanged their holdings for Class A common shares (as parties
to the TRA, the “TRA Parties”). The TRA provides for payment by the Company to the TRA Parties or their successors of 85% of the amount of cash savings, if any, in income tax the Company realizes as a result of:
(a) Increases in the Company’s tax basis attributable to exchanges of Class A Common Units of the Operating Company for Class A common shares of the Company or cash or certain other taxable acquisitions of equity interests by the Operating Company.
The Company expects that basis adjustments resulting from these transactions, if they occur, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(b) Allocations that result from the application of the principles of Section 704(c) of the Internal Revenue Code of 1986, as amended (the “Code”).
Section 704(c) of the Code, and the U.S. Treasury regulations promulgated thereunder, require that items of income, gain, loss and deduction that are attributable to the Operating Company’s directly and indirectly held property, including property contributed to the Operating Company pursuant to the Formation Transactions and the property held by the Operating Company prior to the Formation Transactions, must be allocated among the members of the Operating Company to take into account the difference between the fair market value and the adjusted tax basis of such assets on May 2, 2016. As a result, the Operating Company will be required to make certain special allocations of its items of income, gain, loss and deduction that are attributable to such assets.
The Company expects these allocations, like the increases in tax basis described above, are likely to reduce the amount of income tax the Company would otherwise be required to pay in the future.
(c) Tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by the Company as a result of the TRA.
At December 31, 2021 and 2020, the Company’s consolidated balance sheets include liabilities of $174.1 million and $173.2 million, respectively, for payments expected to be made under certain components of the TRA which the Company deems to be probable and estimable. Management deems a TRA payment related to the benefits expected to be received by the Company under the application of Section 704(c) of the Code to be probable and estimable when an event occurs that results in the Company measuring the Operating Company’s direct or indirectly held property at fair value in the Company’s consolidated balance sheet or the sale of such property at fair value. Either of these activities are indicators that the difference between the fair market value of the property and the adjusted tax basis has been or will be realized, resulting in special allocations of income, gain, loss or deduction that are likely to reduce the amount of income taxes that the Company would otherwise pay. The Company may record additional TRA liabilities related to properties not currently held at fair value when those properties are recognized or realized at fair value. Changes in the Company’s estimates of the utilization of its deferred tax attributes and tax rates in effect may also result in subsequent changes to the amount of TRA liabilities recorded.
The term of the TRA will continue until all such tax benefits under the agreement have been utilized or expired, unless the Company exercises its right, subject to certain conditions of the agreement, to terminate the TRA for an amount based on an agreed value of payments remaining to be made under the agreement. No TRA payments were made during the years ended December 31, 2021, 2020 and 2019.
12. LEASES
The Company’s lessee arrangements consist of agreements to lease certain office facilities and equipment and the Company’s lessor arrangements consist of leases of portions of land to third parties for agriculture or other miscellaneous uses. The Company’s agricultural land lease agreements are generally short-term in nature. As of December 31, 2021, all leasing arrangements are classified as operating leases and do not contain residual value guarantees or material restrictions.
The Company’s office leases have remaining lease terms of approximately two years to seven years and include one or more extension options to renew, some of which include options to extend the leases for up to ten years. The Company only includes renewal options in the lease term when it is reasonably certain that it will exercise such options.
The components of lease costs were as follows for the years ended December 31, 2021, 2020 and 2019 (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | 2021 | | 2020 | | 2019 |
Operating lease cost | | $ | 2,371 | | | $ | 2,146 | | | $ | 2,498 | |
Related party operating lease cost | | 3,154 | | | 3,154 | | | 3,144 | |
Short-term lease cost | | 501 | | | 551 | | | 527 | |
Supplemental balance sheet information related to leases as of December 31, 2021 and 2020 were as follows (in thousands, except lease term in years and discount rate): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Operating lease right-of-use assets ($18,715 and $20,919 related party, respectively) | | $ | 23,779 | | | $ | 28,276 | |
Operating lease liabilities ($13,931 and $15,176 related party, respectively) | | $ | 20,034 | | | $ | 23,831 | |
Weighted average remaining lease term (operating lease) | | 5.5 | | 6.2 |
Weighted average discount rate (operating lease) | | 6.0% | | 5.9% |
Operating lease right-of-use assets are included in other assets or related party assets and operating lease liabilities are included in accounts payable and other liabilities or related party liabilities on the consolidated balance sheets.
The table below reconciles the undiscounted cash flows to operating lease liabilities recorded on the consolidated balance sheet as of December 31, 2021 (in thousands): | | | | | | | | |
Years Ending December 31, | | Rental Payments |
2022 | | $ | 5,331 | |
2023 | | 5,583 | |
2024 | | 2,495 | |
2025 | | 2,474 | |
2026 | | 2,545 | |
Thereafter | | 5,551 | |
Total lease payments | | $ | 23,979 | |
Discount | | $ | 3,945 | |
Total operating lease liabilities | | $ | 20,034 | |
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to the usual obligations associated with entering into contracts for the purchase, development, and sale of real estate, which the Company does in the routine conduct of its business. The operations of the Company are conducted through the Operating Company and its subsidiaries, and in some cases, the Holding Company will guarantee the performance of the Operating Company or its subsidiaries.
Valencia Project Approval Settlement
In September 2017, the Company reached a settlement with key national and state environmental and Native American organizations that were petitioners (the “Settling Petitioners”) in various legal challenges to Valencia’s regulatory approvals and permits. The Holding Company has provided a guaranty to the Settling Petitioners for monetary payments due from the Company as required under the settlement. As of December 31, 2021, the remaining estimated maximum potential amount of monetary payments subject to the guaranty was $18.5 million with the final payment due in 2026.
Water Purchase Agreement
The Company is subject to a water purchase agreement requiring annual payments in exchange for the delivery of water for the Company’s exclusive use. The agreement has an initial 35-year term, which expires in 2039 with an option for a second 35-year term. During the year ended December 31, 2021, the Company made payments totaling $1.3 million under the agreement. The annual minimum payments for years 2022 to 2026 are $1.4 million, $1.4 million, $1.4 million, $1.5 million and $1.5 million, respectively. At December 31, 2021, the aggregate of all annual minimum payments remaining under the initial term total $32.5 million.
Valencia Infrastructure Project
In January 2012, the Company entered into an agreement with Los Angeles County, in which the Company would finance up to a maximum of $45.8 million for the construction costs of an interchange project that Los Angeles County is managing. The interchange project is a critical infrastructure project that will benefit Valencia. As of December 31, 2021, the Company has made aggregate payments of $37.0 million and the interchange project was completed in 2019. At both December 31, 2021 and 2020, the Company had $8.9 million included in accounts payable and other liabilities in the accompanying consolidated balance sheets, representing unreimbursed construction costs payable to Los Angeles County.
Performance and Completion Bonding Agreements
In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations. The Company had outstanding performance bonds of $279.6 million and $229.6 million as of December 31, 2021 and 2020, respectively.
Candlestick and The San Francisco Shipyard Disposition and Development Agreement
The San Francisco Venture is a party to a disposition and development agreement with the Successor to the Redevelopment Agency of the City and County of San Francisco (the “San Francisco Agency”) in which the San Francisco Agency has agreed to convey portions of Candlestick and The San Francisco Shipyard to the San Francisco Venture for development. The San Francisco Venture has agreed to reimburse the San Francisco Agency for reasonable costs and expenses actually incurred and paid by the San Francisco Agency in performing its obligations under the disposition and development agreement. The San Francisco Agency can also earn a return of certain profits generated from the development and sale of Candlestick and The San Francisco Shipyard if certain thresholds are met.
At both December 31, 2021 and 2020, the San Francisco Venture had outstanding guarantees benefiting the San Francisco Agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3 million.
Letters of Credit
At both December 31, 2021 and 2020, the Company had outstanding letters of credit totaling $1.3 million. These letters of credit were issued to secure various development and financial obligations. At both December 31, 2021 and 2020, the Company had restricted cash and certificates of deposit of $1.0 million pledged as collateral under certain of the letters of credit agreements.
Legal Proceedings
Hunters Point Litigation
In May 2018, residents of the Bayview Hunters Point neighborhood in San Francisco filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc. and Tetra Tech EC, Inc., an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard (“Tetra Tech”), Lennar and the Company as defendants. The plaintiffs allege that, among other things, Tetra Tech fraudulently misrepresented its test results and remediation efforts. The plaintiffs are seeking damages against Tetra Tech and the Company and have requested an injunction to prevent the Company and Lennar from undertaking any development activities at The San Francisco Shipyard.
Since July 2018, a number of lawsuits have been filed in San Francisco Superior Court on behalf of homeowners in The San Francisco Shipyard, which name Tetra Tech, Lennar and the Company, among others, as defendants. The plaintiffs allege that environmental contamination issues at The San Francisco Shipyard were not properly disclosed to them before they purchased their homes. They also allege that Tetra Tech and other defendants (not including the Company) have created a nuisance at The San Francisco Shipyard under California law. They seek damages as well as certain declaratory relief.
All of these cases have been removed to the U.S. District Court for the Northern District of California. The Company believes that it has meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. Given the preliminary nature of these claims, the Company cannot predict the outcome of these matters.
Other
Other than the actions outlined above, the Company is also a party to various other claims, legal actions, and complaints arising in the ordinary course of business, the disposition of which, in the Company’s opinion, will not have a material adverse effect on the Company’s consolidated financial statements.
As a significant land owner and developer of unimproved land it is possible that environmental contamination conditions could exist that would require the Company to take corrective action. In the opinion of the Company, such corrective actions, if any, would not have a material adverse effect on the Company’s consolidated financial statements.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 2021, 2020 and 2019 is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
Cash paid for interest, all of which was capitalized to inventories | $ | 52,584 | | | $ | 53,325 | | | $ | 57,654 | |
| | | | | |
NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | |
| | | | | |
Class A common shares issued for redemption of noncontrolling interests | $ | — | | | $ | — | | | $ | 458 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Purchase of properties and equipment in accounts payable and other liabilities | $ | — | | | $ | 103 | | | $ | 381 | |
Adjustment to liability recognized under TRA | $ | 878 | | | $ | 615 | | | $ | 3,124 | |
Supplemental cash flow information related to leases for the years ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 5,021 | | | $ | 4,831 | | | $ | 6,306 | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the years ended December 31, 2021, 2020 and 2019 (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Cash and cash equivalents | $ | 265,462 | | | $ | 298,144 | | | $ | 346,833 | |
Restricted cash and certificates of deposit | 1,330 | | | 1,330 | | | 1,741 | |
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 266,792 | | | $ | 299,474 | | | $ | 348,574 | |
Amounts included in restricted cash and certificates of deposit represent amounts held as collateral on open letters of credit related to development obligations or because of other contractual obligations of the Company that require the restriction.
15. SEGMENT REPORTING
The Company’s reportable segments consist of:
• Valencia (formerly Newhall)—includes the community of Valencia (formerly known as Newhall Ranch) being developed in northern Los Angeles County, California. The Valencia segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers. The Company’s investment in the Valencia Landbank Venture is also reported in the Valencia segment.
• San Francisco—includes the Candlestick and The San Francisco Shipyard communities located on bayfront property in the City of San Francisco, California. The San Francisco segment derives revenues from the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers.
• Great Park—includes Great Park Neighborhoods being developed adjacent to and around the Orange County Great Park, a metropolitan park under construction in Orange County, California. This segment also includes management services provided by the Management Company to the Great Park Venture, the owner of the Great Park Neighborhoods. As of December 31, 2021, the Company had a 37.5% Percentage Interest in the Great Park Venture and accounted for the investment under the equity method. The reported segment information for the Great Park segment includes the results of 100% of the Great Park Venture at the historical basis of the venture, which did not apply push down accounting at acquisition date. The Great Park segment derives revenues at the Great Park Neighborhoods from sales of residential and
commercial land sites to homebuilders, commercial developers and commercial buyers, sales of homes constructed and marketed under a fee build arrangement, and management services provided by the Company to the Great Park Venture.
• Commercial—includes the operations of the Gateway Commercial Venture, which owns an approximately 189,000 square foot office building at the Five Point Gateway Campus. The Five Point Gateway Campus is an office, medical and research and development campus located within the Great Park Neighborhoods and consists of four buildings and surrounding land. The Company and a subsidiary of Lennar lease portions of the building owned by the Gateway Commercial Venture. The Gateway Commercial Venture also owns approximately 50 acres of the surrounding commercial land with additional development rights at the campus. This segment also includes property management services provided by the Management Company to the Gateway Commercial Venture. As of December 31, 2021, the Company had a 75% interest in the Gateway Commercial Venture and accounted for the investment under the equity method. The reported segment information for the Commercial segment includes the results of 100% of the Gateway Commercial Venture at the historical basis of the venture.
Segment operating results and reconciliations to the Company’s consolidated balances are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2021 |
| (in thousands) |
| Valencia | | San Francisco | | Great Park | | Commercial | | Total reportable segments | | Removal of Great Park Venture(1) | | Removal of Gateway Commercial Venture(1) | | Add investment in Great Park Venture | | Add investment in Gateway Commercial Venture | | Other eliminations(2) | | Corporate and unallocated(3) | | Total Consolidated |
Revenues | $ | 184,765 | | | $ | 548 | | | $ | 474,402 | | | $ | 8,881 | | | $ | 668,596 | | | $ | (435,727) | | | $ | (8,475) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 224,394 | |
Depreciation and amortization | 82 | | | 114 | | | 21,604 | | | 3,938 | | | 25,738 | | | (1,262) | | | (3,938) | | | — | | | — | | | — | | | 1,028 | | | 21,566 | |
Interest income | — | | | — | | | 496 | | | — | | | 496 | | | (496) | | | — | | | — | | | — | | | — | | | 94 | | | 94 | |
Interest expense | — | | | — | | | — | | | 1,235 | | | 1,235 | | | — | | | (1,235) | | | — | | | — | | | — | | | — | | | — | |
Segment profit (loss)/net profit (loss) | 54,360 | | | (3,572) | | | 64,134 | | | 1,284 | | | 116,206 | | | (56,918) | | | (878) | | | 6,432 | | | 659 | | | — | | | (52,191) | | | 13,310 | |
Other significant items: | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | 878,399 | | | 1,275,510 | | | 988,444 | | | 104,400 | | | 3,246,753 | | | (859,789) | | | (104,366) | | | 321,274 | | | 49,447 | | | (2,500) | | | 292,091 | | | 2,942,910 | |
Inventory assets and real estate related assets, net | 826,369 | | | 1,270,455 | | | 687,234 | | | 86,601 | | | 2,870,659 | | | (687,234) | | | (86,601) | | | — | | | — | | | — | | | — | | | 2,096,824 | |
Expenditures for long-lived assets(4) | 175,447 | | | 46,919 | | | 92,442 | | | 263 | | | 315,071 | | | (92,442) | | | (263) | | | — | | | — | | | — | | | 43 | | | 222,409 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2020 |
| (in thousands) |
| Valencia | | San Francisco | | Great Park | | Commercial | | Total reportable segments | | Removal of Great Park Venture(1) | | Removal of Gateway Commercial Venture(1) | | Add investment in Great Park Venture | | Add investment in Gateway Commercial Venture | | Other eliminations(2) | | Corporate and unallocated(3) | | Total Consolidated |
Revenues | $ | 124,892 | | | $ | 1,430 | | | $ | 51,727 | | | $ | 24,638 | | | $ | 202,687 | | | $ | (24,827) | | | $ | (24,241) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 153,619 | |
Depreciation and amortization | 123 | | | 247 | | | 8,603 | | | 9,412 | | | 18,385 | | | — | | | (9,412) | | | — | | | — | | | — | | | 915 | | | 9,888 | |
Interest income | 23 | | | — | | | 1,272 | | | — | | | 1,295 | | | (1,272) | | | — | | | — | | | — | | | — | | | 1,346 | | | 1,369 | |
Interest expense | — | | | — | | | — | | | 8,857 | | | 8,857 | | | — | | | (8,857) | | | — | | | — | | | — | | | — | | | — | |
Segment profit (loss)/net profit (loss) | 21,193 | | | (10,355) | | | (22,504) | | | 112,242 | | | 100,576 | | | 29,406 | | | (111,845) | | | (39,951) | | | 83,884 | | | — | | | (60,976) | | | 1,094 | |
Other significant items: | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | 814,913 | | | 1,231,586 | | | 1,236,217 | | | 104,722 | | | 3,387,438 | | | (1,069,426) | | | (104,722) | | | 391,465 | | | 48,788 | | | (22,121) | | | 330,563 | | | 2,961,985 | |
Inventory assets and real estate related assets, net | 767,322 | | | 1,223,537 | | | 916,127 | | | 90,276 | | | 2,997,262 | | | (916,127) | | | (90,276) | | | — | | | — | | | — | | | — | | | 1,990,859 | |
Expenditures for long-lived assets(4) | 149,789 | | | 37,406 | | | 60,529 | | | 1,139 | | | 248,863 | | | (60,529) | | | (1,139) | | | — | | | — | | | — | | | 1,629 | | | 188,824 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2019 |
| (in thousands) |
| Valencia | | San Francisco | | Great Park | | Commercial | | Total reportable segments | | Removal of Great Park Venture(1) | | Removal of Gateway Commercial Venture(1) | | Add investment in Great Park Venture | | Add investment in Gateway Commercial Venture | | Other eliminations(2) | | Corporate and unallocated(3) | | Total Consolidated |
Revenues | $ | 143,190 | | | $ | 3,995 | | | $ | 307,843 | | | $ | 34,479 | | | $ | 489,507 | | | $ | (270,970) | | | $ | (34,157) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 184,380 | |
Depreciation and amortization | 286 | | | 215 | | | 15,567 | | | 15,100 | | | 31,168 | | | — | | | (15,100) | | | — | | | — | | | — | | | 740 | | | 16,808 | |
Interest income | 1 | | | — | | | 3,489 | | | — | | | 3,490 | | | (3,489) | | | — | | | — | | | — | | | — | | | 7,843 | | | 7,844 | |
Interest expense | — | | | — | | | — | | | 16,892 | | | 16,892 | | | — | | | (16,892) | | | — | | | — | | | — | | | — | | | — | |
Segment profit (loss)/net profit (loss) | 25,780 | | | 49,890 | | | 44,369 | | | (4,818) | | | 115,221 | | | (34,886) | | | 5,140 | | | 6,182 | | | (3,855) | | | — | | | (65,534) | | | 22,268 | |
Other significant items: | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | 748,082 | | | 1,197,081 | | | 1,356,417 | | | 473,409 | | | 3,774,989 | | | (1,196,258) | | | (473,398) | | | 431,835 | | | 101,404 | | | (8,310) | | | 374,438 | | | 3,004,700 | |
Inventory assets | 703,587 | | | 1,186,174 | | | 870,861 | | | 451,988 | | | 3,212,610 | | | (870,861) | | | (451,988) | | | — | | | — | | | — | | | — | | | 1,889,761 | |
Expenditures for long-lived assets(4) | 241,410 | | | 49,421 | | | (9,487) | | | 2,924 | | | 284,268 | | | 9,487 | | | (2,924) | | | — | | | — | | | — | | | 1,808 | | | 292,639 | |
(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results and balances which are included in the Great Park segment and Commercial segment operating results and balances at 100% of each venture’s historical basis, respectively, but are not included in the Company’s consolidated results and balances as the Company accounts for its investment in each venture using the equity method of accounting.
(2) Represents intersegment balances that eliminate in consolidation.
(3) Corporate and unallocated activity is primarily comprised of corporate general and administrative expenses and income taxes. Corporate and unallocated assets consist of cash and cash equivalents, receivables, ROU assets, prepaid expenses and deferred financing costs.
(4) Expenditures for long-lived assets are net of inventory cost reimbursements and include noncash project accruals and capitalized interest. For the year ended December 31, 2021, Valencia’s net expenditures include $4.5 million in inventory cost reimbursements received. For the years ended December 31, 2021 and 2020, San Francisco’s net expenditures include $0.7 million and $2.2 million, respectively, and Great Park Venture’s net expenditures include $52.1 million and $9.3 million, respectively, in inventory cost reimbursements received.
The Valencia Landbank Venture represented one of the Company’s major customers during the years ended December 31, 2021 and 2020, accounting for approximately $43.2 million, or 19%, and $53.2 million, or 35%, of total consolidated revenues, respectively. Two third-party home builders represented majors customer of the Company during the year ended December 31, 2021, accounting for approximately $30.3 million, or 14%, and $22.5 million, or 10%, of total consolidated revenues, respectively. A third-party home builder represented another major customer of the Company during the year ended December 31, 2020, accounting for approximately $59.1 million, or 38%, of total consolidated revenues. Revenues generated from these customers were from the sale of homesites in Valencia. An unaffiliated land banking entity that acquired homesites in Valencia in 2021 and 2019 represented one of the Company’s major customers during the years ended December 31, 2021 and 2019 and accounted for approximately $76.5 million, or 34%, and $139.9 million, or 76%, of total consolidated revenues, respectively. A related party of the Company retained the option to acquire these homesites in the future from the unaffiliated land banking entity. The Great Park Venture represented another of the Company’s major customers for the years ended December 31, 2021, 2020 and 2019, and accounted for approximately $38.7 million, or 17%, $26.9 million, or 18%, and $36.9 million, or 20%, of total consolidated revenues, respectively. These revenues represented management services revenues and were reported in the Great Park segment.
16. SHARE-BASED COMPENSATION
The Company has an incentive award plan that provides for the grant of share options, restricted shares, restricted share units, performance awards (which include, but are not limited to, cash bonuses), distribution equivalent awards, deferred share awards, share payment awards, share appreciation rights, other incentive awards (which include, but are not limited to, LTIP Unit awards (as defined in the incentive award plan) and performance share awards. Employees and consultants of the Company and its subsidiaries and affiliates, as well as non-employee members of the Company’s Board of Directors, are eligible to receive awards under the incentive award plan. The incentive award plan authorized the issuance of up to 11,710,148 Class A common shares of the Holding Company. As of December 31, 2021, there were 3,324,488 remaining Class A common shares available for future issuance under the incentive award plan.
Under the incentive award plan, the Company has granted restricted share units (“RSUs”) and restricted share awards either fully vested, with service conditions or with service and market performance conditions based on the market price of the Company’s Class A common shares. Awards with a service condition generally vest over a three-year period or in the case of non-employee directors over one year. Awards with a service and market performance condition generally vest at the end of a three-year period. Restricted share awards entitle the holders to non-forfeitable distributions and to vote the underlying Class A common share during the restricted period.
The Company estimates the fair value of restricted share awards with a service condition based on the closing market price of the Company’s Class A common shares on the award’s grant date. Prior to the Company’s shares being publicly traded, the Company measured the fair value of RSUs and restricted share awards based on the estimated fair value of the Company’s underlying Class A common shares determined using a discounted cash flow analysis. The inputs utilized in the Company’s estimate were selected by the Company based on information available to the Company, including relevant information obtained after the measurement date, as to the assumptions that market participants would make at the measurement date. The grant date fair value of awards with a market condition are determined using a Monte-Carlo approach.
During the years ended December 31, 2021, 2020 and 2019, the Company reacquired vested RSUs and restricted share awards from employees for $2.0 million, $5.5 million and $4.1 million, respectively, for the purpose of settling tax withholding obligations. The reacquisition cost is based on the fair value of the Company’s Class A common shares on the date the tax obligation is incurred.
The following table summarizes share-based equity compensation activity for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | |
| Share-Based Awards (in thousands) | | Weighted- Average Grant Date Fair Value |
Nonvested at January 1, 2019 | 1,893 | | | $ | 15.27 | |
Granted | 1,899 | | | $ | 5.09 | |
Forfeited | (4) | | | $ | 14.83 | |
Vested | (777) | | | $ | 14.62 | |
Nonvested at December 31, 2019 | 3,011 | | | $ | 9.02 | |
Granted | 677 | | | $ | 8.09 | |
Forfeited | (313) | | | $ | 6.93 | |
Vested | (1,100) | | | $ | 12.51 | |
Nonvested at December 31, 2020 | 2,275 | | | $ | 7.35 | |
Granted | 1,425 | | | $ | 7.93 | |
Forfeited | (44) | | | $ | 3.00 | |
Vested | (1,016) | | | $ | 10.85 | |
Nonvested at December 31, 2021 | 2,640 | | | $ | 6.38 | |
On January 15, 2022, 644,734 restricted share awards with a service and market condition included in the table above were forfeited for no consideration as the threshold levels had not been attained. The shares had a grant date fair value of $1.47.
Share-based compensation expense was $7.9 million, $11.6 million and $13.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the accompanying consolidated statements of operations. Approximately $9.2 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted-average period of 1.6 years from December 31, 2021. The estimated fair value at vesting of share-based awards that vested during the years ended December 31, 2021, 2020 and 2019 was $6.5 million, $8.7 million, and $5.9 million, respectively.
17. EMPLOYEE BENEFIT PLANS
Retirement Plan—The Newhall Land and Farming Company Retirement Plan (the “Retirement Plan”) is a defined benefit plan that is funded by the Company and qualified under the Employee Retirement Income Security Act. The Retirement Plan was frozen in 2004.
The Retirement Plan’s funded status and amounts recognized in the Company’s consolidated financial statements for the Retirement Plan as of and for the years ended December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Change in benefit obligation: | | | |
Projected benefit obligation—beginning of year | $ | 22,372 | | | $ | 22,017 | |
Interest cost | 512 | | | 656 | |
Benefits paid | (2,029) | | | (2,089) | |
Actuarial (gain) loss | (242) | | | 1,788 | |
Projected benefit obligation—end of year | $ | 20,613 | | | $ | 22,372 | |
Change in plan assets: | | | |
Fair value of plan assets—beginning of year | $ | 20,507 | | | $ | 19,683 | |
Actual gain on plan assets | 1,985 | | | 2,565 | |
Employer contributions | — | | | 347 | |
Benefits paid | (2,029) | | | (2,088) | |
Fair value of plan assets—end of year | $ | 20,463 | | | $ | 20,507 | |
Funded status | $ | (150) | | | $ | (1,865) | |
Amounts recognized in the consolidated balance sheet—liability | $ | (150) | | | $ | (1,865) | |
Amounts recognized in accumulated other comprehensive loss—net actuarial loss | $ | (3,176) | | | $ | (4,602) | |
The accumulated benefit obligation for the Retirement Plan was $20.6 million and $22.4 million at December 31, 2021 and 2020, respectively.
The components of net periodic benefit and other amounts recognized in accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019, are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Net periodic benefit: | | | | | |
Interest cost | $ | 512 | | | $ | 656 | | | $ | 828 | |
Expected return on plan assets | (1,161) | | | (1,109) | | | (1,006) | |
Amortization of net actuarial loss | 359 | | | 97 | | | 143 | |
Net periodic benefit | (290) | | | (356) | | | (35) | |
Adjustment to accumulated other comprehensive loss: | | | | | |
Net actuarial (gain) loss | (1,067) | | | 332 | | | (917) | |
Amortization of net actuarial loss | (359) | | | (97) | | | (143) | |
Total adjustment to accumulated other comprehensive loss | (1,426) | | | 235 | | | (1,060) | |
Total recognized in net periodic benefit and accumulated other comprehensive loss | $ | (1,716) | | | $ | (121) | | | $ | (1,095) | |
The weighted-average assumptions used to determine benefit obligations as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
Discount rate | 2.75% | | 2.35% |
Rate of compensation increase | N/A | | N/A |
The weighted-average assumptions used to determine net periodic expense for the years ended December 31, 2021, 2020 and 2019, were as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Discount rate | 2.35% | | 3.15% | | 4.20% |
Rate of compensation increase | N/A | | N/A | | N/A |
Expected long-term return on plan assets | 5.86% | | 5.96% | | 6.17% |
To develop the long-term rate of return on assets assumption, the Company considered the current level of expected return on risk-free investments (primarily U.S. government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class.
Plan Assets—The Company’s investment policy and strategy for the Retirement Plan is to ensure the appropriate level of diversification and risk. The asset allocation targets were approximately 50% in equity investments (Standard & Poor’s Large Cap Index Funds, Small Cap Equity, Mid Cap Equity, and International Equity) and approximately 50% in fixed-income investments (U.S. bond funds and domestic fixed income). In accordance with the policy, the Retirement Plan assets are monitored and the investments may be rebalanced quarterly. The Retirement Plan’s assets consist of pooled or collective investment funds that have more than one investor. The Retirement Plan estimates the fair value of its interest in such funds at a net asset value (“NAV”) per unit reported by the trustee. The NAV per unit is the result of accumulated values of the underlying investments held by the fund, which are valued daily. NAV is utilized by the Company to determine fair value of the plan assets as a practical expedient as of the consolidated balance sheet date. Plan assets for which fair value is measured using NAV shall not be categorized within the fair value hierarchy. The Retirement Plan’s assets may be redeemed at the NAV per unit with no restrictions.
The Retirement Plan’s assets at fair value as of December 31, 2021 and 2020, are as follows (in thousands):
| | | | | | | | | | | |
Asset Category | 2021 | | 2020 |
Pooled and/or collective funds: | | | |
Equity funds: | | | |
Large cap | $ | 5,471 | | | $ | 5,767 | |
Mid cap | 2,346 | | | 2,555 | |
Small cap | 971 | | | 1,080 | |
International | 1,885 | | | 2,152 | |
Fixed-income funds—U.S. bonds and short term | 9,790 | | | 8,953 | |
Total | $ | 20,463 | | | $ | 20,507 | |
The Company’s funding policy is to contribute amounts sufficient to meet minimum requirements but not more than the maximum tax-deductible amount. The Company does not expect to have a minimum required contribution in 2022 and expects future benefit payments to be paid as follows (in thousands):
| | | | | |
2022 | $ | 1,575 | |
2023 | 1,395 | |
2024 | 2,516 | |
2025 | 2,037 | |
2026 | 2,613 | |
2027-2031 | 6,398 | |
| $ | 16,534 | |
Employee Savings Plan—The Company has an employee savings plan under Section 401(k) of the Internal Revenue Code, which is available to all eligible associates. Certain associate contributions may be supplemented by the Company. The Company’s contributions were $0.6 million, $0.7 million and $0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
18. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
Upon formation, the Holding Company elected to be treated as a corporation for U.S. federal, state, and local tax purposes. All operations are carried on through the Holding Company’s subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to the partners. The Holding Company is responsible for income taxes on its allocable share of the Operating Company’s income or gain.
The benefit (expense) for income taxes for the years ended December 31, 2021, 2020 and 2019 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Current income tax benefit (expense): | | | | | |
Federal | $ | (17) | | | $ | (24) | | | $ | — | |
State | 762 | | | (770) | | | — | |
Total current income tax benefit (expense) | 745 | | | (794) | | | — | |
Deferred income tax (expense) benefit: | | | | | |
Federal | $ | (2,655) | | | $ | (379) | | | $ | (3,750) | |
State | (1,977) | | | 530 | | | (1,732) | |
Total deferred income tax (expense) benefit | (4,632) | | | 151 | | | (5,482) | |
Decrease (increase) in valuation allowance | 4,243 | | | (1,101) | | | 3,062 | |
Expiration of unused loss carryforwards | (31) | | | — | | | (25) | |
Benefit (expense) for income taxes | $ | 325 | | | $ | (1,744) | | | $ | (2,445) | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences are as follows (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
Deferred tax assets | | | |
Net operating loss carryforward | $ | 140,817 | | | $ | 117,968 | |
Tax receivable agreement | 48,727 | | | 48,481 | |
Other | 1,255 | | | 1,715 | |
Valuation allowance | (16,468) | | | (18,160) | |
Total deferred tax assets | 174,331 | | | 150,004 | |
Deferred tax liabilities-investments in subsidiaries | (187,329) | | | (162,582) | |
Deferred tax liability, net | $ | (12,998) | | | $ | (12,578) | |
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence; it is more likely than not that such assets will not be realized. In the continual assessment of the requirement for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses; forecasts of future profitability; the duration of statutory carryforward periods; the Holding Company’s experience with loss carryforwards not expiring unused; and tax-planning alternatives. The amount of the valuation allowance recorded against the deferred tax asset could be adjusted if there are changes to the positive and negative factors discussed above.
At December 31, 2021, the Holding Company had federal tax effected net operating loss (“NOL”) carryforwards totaling $107.6 million, and state tax effected NOL carryforwards, net of federal income tax benefit, totaling $33.2 million. Federal NOLs incurred prior to 2018 and California NOLs may be carried forward up to 20 years to offset future taxable income and begin to expire in 2029. Federal NOLs incurred in 2018 and forward do not expire.
The Internal Revenue Code generally limits the availability of NOLs if an ownership change occurs within any three-year period under Section 382. If the Holding Company were to experience an ownership change of more than 50%, the use of all NOLs (and potentially other built-in losses) would generally be subject to a limitation equal to the value of the Holding Company’s equity before the ownership change, multiplied by the long-term tax-exempt rate. The Holding Company estimates that after giving effect to
various transactions by members who hold a 5% or greater interest in the Holding Company, it has not experienced an ownership change as computed in accordance with Section 382. In the event of an ownership change, the Holding Company’s use of the NOLs may be limited and not fully available for realization.
With regard to the TRA (see Note 11), the Holding Company has established a liability for the payments considered probable and estimable that would be required under the TRA based upon, among other things, the book value of its assets. This liability is not currently recognized for tax purposes and will give rise to tax deductions as payments are made. Accordingly, a deferred tax asset has been reflected for the net effect of this temporary difference.
A reconciliation of the statutory rate and the effective tax rate for 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Statutory rate | 21.00 | % | | 21.00 | % | | 21.00 | % |
State income taxes-net of federal income tax benefit | 6.98 | | | 6.98 | | | 6.98 | |
| | | | | |
Pass-through to noncontrolling interests | (14.55) | | | (15.00) | | | (14.98) | |
Executive compensation limitation and other permanent items | 14.35 | | | 5.94 | | | 8.34 | |
| | | | | |
Deferred tax asset valuation allowance | (30.51) | | | 42.54 | | | (11.54) | |
Expiration of unused loss carryforwards | 0.22 | | | — | | | 0.09 | |
Effective rate | (2.51) | % | | 61.46 | % | | 9.89 | % |
At December 31, 2021 and 2020, the Holding Company did not have any gross unrecognized tax benefits, and did not require an accrual for interest or penalties.
The Holding Company files income tax returns in the U.S. federal jurisdiction and in the state of California. As a result of tax net operating losses incurred by the Holding Company for the years ended December 31, 2009 through December 31, 2020, the Holding Company is subject to U.S. federal, state, and local examinations by tax authorities for the years beginning 2009 through 2020. The Company is not currently under examination by any tax authority. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
19. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS AND DISCLOSURES
At each reporting period, the Company evaluates the fair value of its financial instruments compared to carrying values. Other than the Company’s notes payable, net, the carrying amount of the Company’s financial instruments, which includes cash and cash equivalents, restricted cash and certificates of deposit, certain related party assets and liabilities, and accounts payable and other liabilities, approximated the Company’s estimates of fair value at both December 31, 2021 and 2020.
The fair value of the Company’s notes payable, net, are estimated based on quoted market prices or discounting the expected cash flows based on rates available to the Company (level 2). At December 31, 2021, the estimated fair value of notes payable, net was $655.6 million compared to a carrying value of $619.1 million. At December 31, 2020, the estimated fair value of notes payable, net was $663.9 million compared to a carrying value of $617.6 million. During the years ended December 31, 2021, 2020 and 2019, the Company had no assets that were measured at fair value on a nonrecurring basis, other than a valuation adjustment to the Company's investment in the Great Park Venture during 2020 (see Note 4).
20. EARNINGS PER SHARE
The Company uses the two-class method in its computation of earnings per share. The Company’s Class A common shares and Class B common shares are entitled to receive distributions at different rates, with each Class B common share receiving 0.03% of the distributions paid on each Class A common share. Under the two-class method, the Company’s net income available to common shareholders is allocated between the two classes of common shares on a fully-distributed basis and reflects residual net income after amounts attributed to noncontrolling interests. In the event of a net loss, the Company determined that both classes share in the Company’s losses, and they share in the losses using the same mechanism as the distributions. The Company also has restricted share awards and performance restricted share awards (see Note 16) that have a right to non-forfeitable dividends while unvested and are contemplated as participating when the Company is in a net income position. These awards participate in distributions on a basis equivalent to other Class A common shares but do not participate in losses.
No distributions to common shares were declared for the years ended December 31, 2021, 2020 and 2019.
Diluted income (loss) per share calculations for both Class A common shares and Class B common shares contemplate adjustments to the numerator and the denominator under the if-converted method for the convertible Class B common shares, the exchangeable Class A units of the San Francisco Venture and the exchangeable Class A Common Units of the Operating Company.
The Company uses the treasury stock method or the two-class method when evaluating dilution for RSUs, restricted shares, and performance restricted shares. The more dilutive of the two methods is included in the calculation for diluted income (loss) per share.
The following table summarizes the basic and diluted earnings (loss) per share calculations for the years ended December 31, 2021, 2020 and 2019 (in thousands, except shares and per share amounts):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net income (loss) attributable to the Company | $ | 6,568 | | | $ | (428) | | | $ | 9,033 | |
Adjustments to net income (loss) attributable to the Company | (176) | | | 20 | | | 50 | |
Net income (loss) attributable to common shareholders | $ | 6,392 | | | $ | (408) | | | $ | 9,083 | |
Numerator—basic common shares: | | | | | |
Net income (loss) attributable to common shareholders | $ | 6,392 | | | $ | (408) | | | $ | 9,083 | |
Less: net income allocated to participating securities | $ | 164 | | | $ | — | | | $ | 390 | |
Allocation of basic net income (loss) among common shareholders | $ | 6,228 | | | $ | (408) | | | $ | 8,693 | |
Numerator for basic net income (loss) available to Class A common shareholders | $ | 6,226 | | | $ | (408) | | | $ | 8,690 | |
Numerator for basic net income (loss) available to Class B common shareholders | $ | 2 | | | $ | — | | | $ | 3 | |
Numerator—diluted common shares: | | | | | |
Net income (loss) attributable to common shareholders | $ | 6,392 | | | $ | (408) | | | $ | 9,083 | |
Reallocation of income (loss) upon assumed exchange of dilutive potential securities | $ | 6,645 | | | $ | (16) | | | $ | 9,501 | |
Less: net income allocated to participating securities | $ | 159 | | | $ | — | | | $ | 372 | |
Allocation of diluted net income (loss) among common shareholders | $ | 12,878 | | | $ | (424) | | | $ | 18,212 | |
Numerator for diluted net income (loss) available to Class A common shareholders | $ | 12,876 | | | $ | (424) | | | $ | 18,209 | |
Numerator for diluted net income (loss) available to Class B common shareholders | $ | 2 | | | $ | — | | | $ | 3 | |
Denominator: | | | | | |
Basic weighted average Class A common shares outstanding | 67,394,794 | | | 66,722,187 | | | 66,261,968 | |
Diluted weighted average Class A common shares outstanding | 143,491,204 | | | 69,000,096 | | | 145,491,898 | |
Basic and diluted weighted average Class B common shares outstanding | 79,233,544 | | | 79,233,544 | | | 79,221,176 | |
Basic earnings (loss) per share: | | | | | |
Class A common shares | $ | 0.09 | | | $ | (0.01) | | | $ | 0.13 | |
Class B common shares | $ | 0.00 | | | $ | (0.00) | | | $ | 0.00 | |
Diluted earnings (loss) per share: | | | | | |
Class A common shares | $ | 0.09 | | | $ | (0.01) | | | $ | 0.13 | |
Class B common shares | $ | 0.00 | | | $ | (0.00) | | | $ | 0.00 | |
| | | | | |
| | | | | |
Anti-dilutive potential Performance RSUs | 322,366 | | | 338,813 | | | 388,155 | |
Anti-dilutive potential Restricted Shares (weighted average) | — | | | 1,690,773 | | | — | |
Anti-dilutive potential Performance Restricted Shares (weighted average) | — | | | 695,154 | | | — | |
Anti-dilutive potential Class A common shares from exchanges (weighted average) | 3,160,904 | | | 76,120,180 | | | — | |
| | | | | |
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss attributable to the Company consists of unamortized net actuarial losses for the Retirement Plan that totaled $2.0 million and $2.8 million at December 31, 2021 and 2020, net of tax benefits of $0.5 million and $0.7 million, respectively. At December 31, 2021 and 2020, the Company held a full valuation allowance related to the accumulated tax benefits, respectively. Accumulated other comprehensive loss of $1.2 million and $1.8 million is included in noncontrolling interests at December 31, 2021 and 2020, respectively. Net actuarial gains or losses are re-determined annually or upon remeasurement events and principally arise from changes in the rate used to discount benefit obligations and differences between expected and actual returns on plan assets. Reclassifications from accumulated other comprehensive loss to net income (loss) attributable to the Company related to amortization of net actuarial losses were approximately $225,000, $61,000 and $89,000, net of taxes, and are included in miscellaneous other income on the accompanying consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019, respectively.