NOTE 8 REAL ESTATE AND OTHER AFFILIATES

Our investments in Real Estate and Other Affiliates that are reported in accordance with the equity and cost methods are as follows:


									Share of Earnings/Dividends
	Economic/Legal Ownership				Carrying Value				Three Months Ended				Nine Months Ended
	September 30,		December 31,		September 30,		December 31,		September 30,				September 30,
($ in thousands)	2017		2016		2017		2016		2017		2016		2017		2016
Equity Method Investments
Master Planned Communities:
The Summit (a)	—	%	—	%	$	54,203	$	32,653	$	6,480	$	13,700	$	21,552	$	22,574
Operating Assets:
Las Vegas 51s, LLC (b)	100.00		50.00			—		11,062		—		2		(152)		297
Constellation (a) (c)	50.00		50.00			2,175		2,730		107		—		(215)		—
The Metropolitan Downtown Columbia (d)	50.00		50.00			—		(1,064)		82		(351)		356		(863)
Millennium Six Pines Apartments (e)	100.00		100.00			—		—		—		9		—		44
Stewart Title of Montgomery County, TX	50.00		50.00			3,834		3,611		113		221		322		477
Woodlands Sarofim #1	20.00		20.00			2,688		2,683		15		26		45		121
Strategic Developments:
Circle T Ranch and Power Center (a)	50.00		50.00			5,106		4,956		650		—		650		10,498
HHMK Development	50.00		50.00			10		10		—		—		—		—
KR Holdings	50.00		50.00			744		707		20		3		36		12
m.flats/TEN.M (a)	50.00		50.00			6,849		6,379		—		—		—		—
33 Peck Slip (a) (f)	35.00		35.00			9,139		8,243		—		(117)		(156)		(76)
						84,748		71,970		7,467		13,493		22,438		33,084
Cost method investments						4,407		4,406		—		—		3,383		2,616
Investment in Real Estate and Other Affiliates					$	89,155	$	76,376	$	7,467	$	13,493	$	25,821	$	35,700

(a)

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

(b)

On March 1, 2017, we acquired our joint venture partner’s interest and have fully consolidated the assets and liabilities of the entity.

(c)

Equity method VIE as of September 30, 2017. Constellation and Las Vegas 51s were also VIEs as of December 31, 2016.

(d)

The Metropolitan Downtown Columbia was in a deficit position of $2.0 million at September 30, 2017 and December 31, 2016 due to distributions from operating cash flows in excess of basis. This deficit balance is presented in Accounts payable and accrued expenses at September 30, 2017.

(e)

On July 20, 2016, we acquired our joint venture partner’s interest in Millennium Six Pines Apartments and fully consolidated the assets and liabilities of the entity.

(f)

The 33 Peck Slip hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment as of January 1, 2017. The prior year share of earnings for the three and nine months ended September 30, 2016 was recorded in the Operating Assets segment but is reflected here for comparative purposes.

As of September 30, 2017, we are not the primary beneficiary of the Constellation VIE listed above because we do not have the power to direct activities that most significantly impact the economic performance of the joint venture, and therefore, we report our interests in accordance with the equity method. Our maximum exposure to loss as a result of this investment 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 this VIE. The aggregate carrying value of unconsolidated VIEs (inclusive of Las Vegas 51s at December 31, 2016, prior to our acquisition) was $2.2 million and $13.8 million as of September 30, 2017 and December 31, 2016, respectively, and was classified as Investment in Real Estate and Other Affiliates in the Condensed Consolidated Balance Sheets.

As of September 30, 2017, approximately $190.1 million of indebtedness was secured by the properties owned by our Real Estate and Other Affiliates of which our share was approximately $88.0 million based upon our economic ownership. All of this indebtedness is without recourse to us.

We are the primary beneficiary of one VIE which is consolidated in the financial statements. The creditors of the consolidated VIE do not have recourse to us. As of September 30, 2017, the carrying values of the assets and liabilities associated with the operations of the consolidated VIE were $21.9 million and $1.5 million, respectively. 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. The assets of the VIE are restricted for use only by the particular VIE and are not available for our general operations.

Activity for our significant investments in Real Estate Affiliates and the related accounting considerations are described below.

The Summit

During the first quarter of 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 the second quarter of 2015. 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 Hypothetical Liquidation Book Value (“HLBV”) method. Under this method, we recognize equity in earnings from the joint venture based on the change in our underlying share of the venture’s net assets on a hypothetical liquidation basis as of the reporting date.

Relevant financial statement information for The Summit is summarized as follows:


	September 30,		December 31,
(in thousands)	2017		2016
Total Assets	$	163.6	$	151.3
Total Liabilities		107.3		116.5
Total Equity		56.3		34.8


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Revenues (a)	$	14.2	$	24.7	$	46.3	$	41.6
Net income		6.5		13.7		21.6		22.6
Gross Margin		7.7		14.6		26.4		25.1

(a)

Revenues related to land sales at the joint venture are recognized on a percentage of completion basis.

Constellation

On January 24, 2014, we entered into a joint venture with a national multi-family real estate developer, The Calida Group, 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 the first quarter of 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 the first quarter of 2015 and provided guarantees required by the lender. The project is financed by a $15.8 million construction loan which is fully drawn as of September 30, 2017. The loan is non-recourse to us. In the fourth quarter of 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 the third quarter of 2016. This venture was moved to the Operating Assets segment in the fourth quarter of 2016. As of September 30, 2017, the project is 87.9% occupied and 95.2% leased.

m.flats/TEN.M

On October 4, 2013, we entered into a joint venture agreement with a local developer, Kettler, Inc. (“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 and $7.3 million was distributed to us, of which we subsequently reinvested $6.3 million in the project in 2016. 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.

33 Peck Slip

In January 2016, we entered into a joint venture to purchase a hotel located at 33 Peck Slip in the Seaport District of New York with a capital contribution of $6.0 million. 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 the second quarter of 2016, upon completion of a refinancing of the property with a $36.0 million redevelopment loan, we made additional capital contributions of $2.3 million in 2016 and $0.7 million in 2017. The 33 Peck Slip hotel was closed in December 2016 for redevelopment and was transferred to the Strategic Developments segment. Our total investment in the joint venture is $9.1 million as of September 30, 2017.

Circle T Ranch and Power Center

On June 1, 2016, the Westlake Retail Associates venture closed on a 72-acre land sale with an affiliate of Charles Schwab Corporation. The nine months ended September 30, 2016 reflects the recognition of $10.5 million in Equity in earnings from Real Estate and Other Affiliates resulting from the land sale.