NOTE 5 REAL ESTATE AND OTHER AFFILIATES

Our investment in real estate and other affiliates which are reported on the equity and cost methods are as follows:


	Economic/Legal Ownership				Carrying Value					Share of Earnings/Dividends
	December 31,		December 31,		December 31,		December 31,			Year Ended December 31,
($ in thousands)	2016		2015		2016		2015			2016		2015		2014
Equity Method Investments
Master Planned Communities:
The Summit (a)	—	%	—	%	$	32,653	$	12,052	$	43,501	$	—	$	—
Operating Assets:
Las Vegas 51s, LLC (b) (c)	50.00		50.00			11,062		11,050		12		152		(88)
Constellation (a) (b)	50.00		50.00			2,730		2,685		(54)		—		—
33 Peck Slip (Grandview SHG, LLC) (a)	35.00		—			8,243		—		106		—		—
The Metropolitan Downtown Columbia (d)	50.00		50.00			(1,064)		4,872		(800)		(13)		—
Millennium Six Pines Apartments (e)	100.00		81.43			—		—		44		(1,165)		(1,291)
Stewart Title of Montgomery County, TX	50.00		50.00			3,611		3,715		696		996		1,301
Woodlands Sarofim #1	20.00		20.00			2,683		2,588		182		166		175
Strategic Developments:
Circle T Ranch and Power Center (a)	50.00		50.00			4,956		9,128		10,497		—		—
HHMK Development	50.00		50.00			10		10		—		549		2,120
KR Holdings	50.00		50.00			707		689		18		1,289		19,470
m.flats/TEN.M (a)	50.00		50.00			6,379		7,070		—		—		—
						71,970		53,859		54,202		1,974		21,687
Cost method investments						4,406		3,952		2,616		1,747		1,649
Investment in Real Estate and Other Affiliates					$	76,376	$	57,811	$	56,818	$	3,721	$	23,336

(a)

Please refer to the discussion below for a description of the joint venture ownership structure.

(b)

Equity method variable interest entity (“VIE”) as of December 31, 2016.

(c)

Formerly known as Summerlin Baseball Club, part of the Clark County Las Vegas Stadium LLC joint venture.

(d)

The Metropolitan Downtown Columbia was placed into service in first quarter 2015.

(e)

As of July 20, 2016, we acquired our joint venture partner’s interest in Millennium Six Pines Apartments (formerly known as Millennium Woodlands Phase II, LLC) and have fully consolidated the assets and liabilities of the entity. See Note 4 – Acquisitions and Dispositions for additional information regarding this transaction. The investment balance was in a $1.8 million deficit position and reported in Accounts payable and accrued expenses as of December 31, 2015.

We are not the primary beneficiary of any of the VIEs listed above because we do not have the power to direct activities that most significantly impact the economic performance of such joint ventures and, therefore, we report our interests on the equity method. Our maximum exposure to loss as a result of these investments is limited to the aggregate carrying value of the investment as we have not provided any guarantees or otherwise made firm commitments to fund amounts on behalf of these VIEs. The aggregate carrying value of the unconsolidated VIEs was $13.8 million and $21.5 million as of December 31, 2016 and 2015, respectively, and was classified as Investment in Real Estate and Other Affiliates, in the Consolidated Balance Sheets. As of December 31, 2016 and 2015, approximately $125.1 million and $109.6 million, respectively, of indebtedness was secured by the properties owned by our Real Estate and Other Affiliates of which our proportionate share was approximately $55.5 million and $64.8 million as of December 31, 2016 and 2015, respectively, based upon our economic ownership. All of this indebtedness is without recourse to us.

The Company is the primary beneficiary of one VIE which is consolidated in the financial statements. The creditors of the consolidated VIE do not have recourse to the Company. As of December 31, 2016, the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $21.7 million and $1.4 million, respectively. As of December 31, 2015, the carrying values of the assets and liabilities associated with operations of the consolidated VIE were $21.5 million and $1.1 million, respectively. The assets of the VIE are restricted for use only by the particular VIE and are not available for our general operations.

Our recent significant investments in Real Estate Affiliates and the related accounting considerations are described below.

The Summit

During the first quarter 2015, we formed DLV/HHPI Summerlin, LLC (“The Summit”) in a joint venture with Discovery Land Company (“Discovery”), and we contributed land with a book basis of $13.4 million and transferred Special Improvement District (“SID”) bonds related to such land with a carrying value of $1.3 million to the joint venture at the agreed upon capital contribution value of $125.4 million (“Our Capital Contribution”), or $226,000 per acre. Discovery is required to fund up to a maximum of $30.0 million of cash as their capital contribution and we have no further capital obligations. The gains on the contributed land will be recognized in Equity in earnings from Real Estate and Other Affiliates as the joint venture sells lots.

After receipt of Our Capital Contribution and a 5.0% preferred return, Discovery is entitled to cash distributions by the joint venture until it has received two times its equity contribution. Any further cash distributions are shared 50/50. Discovery is the manager on the project, and development began in second quarter 2015. As of December 31, 2016, the project has contracted for approximately $226.4 million in land sales, of which $184.9 million in lot closings were completed, resulting in Equity in earnings to us of $43.5 million. Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, our share of the venture’s income-producing activities will be recognized based on the HLBV method. Please refer to Note 1 – Summary of Significant Accounting Policies in our Consolidated Financial Statements for a description of the HLBV method.

The Summit had $151.3 million of assets, $116.5 million in liabilities and $34.8 million of equity as of December 31, 2016. For the year ended December 31, 2016, the Summit had revenues of $80.0 million (recognized on a percentage of completion basis), gross margin of $47.2 million and net income of $43.5 million.

33 Peck Slip

In January 2016, we entered into a joint venture, which purchased a hotel located at 33 Peck Slip in the Seaport District of New York. We advanced a bridge loan of $25.0 million at a 5.0% interest rate to the joint venture at closing to expedite the acquisition, which was repaid in full in June 2016. In second quarter 2016, upon completion of a refinancing of the property with a $36.0 million redevelopment loan, we made an additional capital contribution of $2.3 million. Our total investment in the joint venture is $8.2 million as of December 31, 2016. The 33 Peck Slip hotel was closed at the end of December 2016 for redevelopment.

Circle T Ranch and Power Center

On June 1, 2016, the Circle T Ranch and Power Center joint venture sold approximately 72 acres to a subsidiary of Charles Schwab Corporation. See Note 4 – Acquisitions and Dispositions for additional information regarding this transaction.

m.flats/TEN.M

On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, to construct an apartment complex with ground floor retail in Downtown Columbia, Maryland. We contributed approximately five acres of land having a book value of $4.0 million to the joint venture and subsequently incurred an additional $3.1 million in capitalized development costs for a total book value contribution of $7.1 million. Our land was valued at $23.4 million, or $53,500 per constructed unit. In January 2016, the venture closed on an $88.0 million construction loan which is non-recourse to us and bears interest at one-month LIBOR plus 2.40% with an initial maturity date of February 2020, with three, one-year extension options. At loan closing, Kettler contributed $16.1 million in cash, of which $7.3 million was distributed to us. We accounted for this transaction as a partial sale of the land for which we recognized a net profit of $0.2 million at December 31, 2016. As of December 31, 2016, we contributed $6.3 million into this joint venture.

Constellation

On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group (“Calida”), to construct, own and operate a 124-unit gated luxury apartment development in Summerlin. We and our partner each own 50% of the venture, and unanimous consent of the partners is required for all major decisions. This project represents the first residential development in Summerlin’s 400-acre downtown. In first quarter 2015, we contributed a 4.5-acre parcel of land with an agreed value of $3.2 million in exchange for a 50% interest in the venture. Our partner contributed $3.2 million of cash for their 50% interest. Additionally, our partner is the development manager, funded all pre-development activities, obtained construction financing in first quarter 2015 and provided guarantees required by the lender. The project is financed by a $15.8 million construction loan with an outstanding balance of $13.5 million as of December 31, 2016. The loan is non-recourse to us. In the fourth quarter 2015, we each contributed an additional $1.0 million to the joint venture to fund development costs. Upon a sale of the property, we are entitled to 50% of the proceeds up to, and 100% of the proceeds in excess of, an amount determined by applying a 7.0% capitalization rate to net operating income. The venture commenced construction in February 2015 and is being completed in phases. New tenants began to take occupancy in third quarter 2016. As of December 31, 2016, the project is 51.6% occupied and 66.1% leased.