REAL ESTATE AND OTHER AFFILIATES

The Company's investments in real estate and other affiliates that are reported in accordance with the equity and cost methods are as follows:



	Economic/Legal Ownership				Carrying Value				Share of Earnings/Dividends
	September 30,		December 31,		September 30,		December 31,		Three Months Ended September 30,					Nine Months Ended September 30,
($ in thousands)	2018		2017		2018		2017		2018			2017		2018			2017
Equity Method Investments
Master Planned Communities:
The Summit (a)	—		—		$	76,899	$	45,886	$	9,454		$	6,480	$	34,682		$	21,552
Operating Assets:
Las Vegas 51s, LLC (b)	100	%	100	%	—		—		—			—		—			(152		)
Constellation (b)	100	%	100	%	—		—		—			107		—			(215		)
The Metropolitan Downtown Columbia (c)	50	%	50	%	—		—		87			82		371			356
Stewart Title of Montgomery County, TX	50	%	50	%	3,740		3,673		165			113		393			322
Woodlands Sarofim #1	20	%	20	%	2,732		2,696		30			15		66			45
m.flats/TEN.M (d)	50	%	50	%	4,168		6,521		(357		)	—		(2,661		)	—
33 Peck Slip (e)	35	%	35	%	8,734		—		(452		)	—		(452		)	—
Strategic Developments:
Circle T Ranch and Power Center	50	%	50	%	7,574		4,455		(318		)	650		3,118			650
HHMK Development	50	%	50	%	10		10		—			—		—			—
KR Holdings	50	%	50	%	7		749		3			20		679			36
33 Peck Slip (e)	35	%	35	%	—		8,651		—			—		(240		)	(156		)
					103,864		72,641		8,612			7,467		35,956			22,438
Cost method investments					3,856		3,952		—			—		3,341			3,383
Investment in real estate and other affiliates					$	107,720	$	76,593	$	8,612		$	7,467	$	39,297		$	25,821


(a)	Please refer to the schedules below for relevant financial statement information.


(b)	HHC acquired this joint venture partner’s interest in 2017 and has consolidated the assets and liabilities of the entity in its financial results.


(c)	The Metropolitan Downtown Columbia was in a deficit position of $3.2 million and $2.6 million at September 30, 2018 and December 31, 2017, respectively, 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, 2018 and December 31, 2017.


(d)	Property was transferred from Strategic Developments to Operating Assets during the three months ended March 31, 2018.


(e)	Property was transferred from Strategic Developments to Operating Assets during the three months ended September 30, 2018.

As of September 30, 2018, HHC is not the primary beneficiary of any of the joint ventures listed above because it does not have the power to direct activities that most significantly impact the economic performance of the joint ventures; therefore, the Company reports its interests in accordance with the equity method. As of September 30, 2018, approximately $199.8 million of indebtedness was secured by the properties owned by HHC's real estate and other affiliates of which HHC's share was approximately $94.9 million based upon economic ownership. All of this indebtedness is without recourse to HHC.

As of September 30, 2018, HHC is the primary beneficiary of four variable interest entities ("VIEs") which are consolidated in its financial statements. HHC began consolidating 110 North Wacker and its underlying entities in the second quarter of 2018 as further discussed below. As of December 31, 2017, HHC was the primary beneficiary of three VIEs which are consolidated in its financial statements. The creditors of the other three consolidated VIEs do not have recourse to the Company. As of September 30, 2018, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $154.2 million and $90.5 million, respectively. As of December 31, 2017, the carrying values of the assets and liabilities associated with the operations of the consolidated VIEs were $24.8 million and $2.7 million, respectively. The assets of the VIEs are restricted for use only by the particular VIEs and are not available for the Company's general operations.

During the second quarter of 2018, HHC executed a joint venture agreement with USAA related to 110 North Wacker. At execution, HHC contributed land with a book basis of $33.6 million and an agreed upon fair value of $85.0 million, and USAA contributed $64.0 million in cash. The Company has subsequent capital obligations of $42.7 million, and USAA is required to fund up to $105.6 million in addition to its initial contribution. The Company and its joint venture partners have also entered into a construction loan agreement further described in Note 7 - Mortgages, Notes and Loans Payable. The Company has concluded that it is the primary beneficiary of the VIE because it has the power to direct activities that most significantly impact the joint venture’s economic performance during the development phase of the project.

Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, the Company's share of the venture’s income-producing activities is recognized based on the Hypothetical Liquidation Book Value method, which represents an economic interest of approximately 33% for HHC. Under this method, HHC recognizes income or loss in Equity in earnings from real estate and other affiliates based on the change in its underlying share of the venture's net assets on a hypothetical liquidation basis as of the reporting date. After USAA receives a 9.0% preferred return on its capital contribution, HHC is entitled to cash distributions from the venture until it receives a 9.0% return. Subsequently, USAA is entitled to cash distributions equal to 11.11% of the amount distributed to HHC that resulted in a 9.0% return. Thereafter, HHC and USAA are entitled to distributions pari passu to their profit ownership interests of 90% and 10%, respectively.

During the first quarter of 2015, HHC formed DLV/HHPI Summerlin, LLC (“The Summit”), a joint venture with Discovery Land Company (“Discovery”), 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, or $226,000 per acre. Discovery is required to fund up to a maximum of $30.0 million of cash as its capital contribution, and the Company has no further capital obligations. The gains on the contributed land are recognized in Equity in earnings from real estate and other affiliates as the joint venture sells lots.

After the Company receives its capital contribution of $125.4 million and a 5.0% preferred return on such capital contribution, 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 equally. Given the nature of the venture’s capital structure and the provisions for the liquidation of assets, the Company's share of the venture’s income-producing activities is recognized based on the Hypothetical Liquidation Book Value method. Under this method, HHC recognizes income or loss based on the change in its 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 millions)	2018		2017
Total Assets	$	216.9	$	166.9
Total Liabilities	137.8		118.9
Total Equity	79.1		48.0



	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2018		2017		2018		2017
Revenues (a)	$	27.7	$	14.2	$	88.6	$	46.3
Net income	9.5		6.5		34.7		21.6
Gross Margin	10.8		7.7		38.3		26.4


(a)	Revenues related to land sales at the joint venture are recognized on a percentage of completion basis as The Summit following the private company timeline for implementation of the New Revenue Standard of January 1, 2019. The Company has evaluated this impact and concluded that at this time it is not material to HHC's Condensed Consolidated Financial Statements.