8. Investments in Affiliates

The Company has a 51% ownership interest in Kapalua Bay Holdings, LLC (Bay Holdings), which is the sole member of Kapalua Bay LLC (Kapalua Bay). The other members of Bay Holdings are MH Kapalua Venture, LLC, 34%, and ER Kapalua Investors Fund, LLC, 15%. Bay Holdings is not a variable interest entity, as defined in GAAP. The Company accounts for its investment in Bay Holdings using the equity method of accounting because, although it has the ability to exercise significant influence over operating and financial policies, it does not control Bay Holdings through a majority voting interest or other means. Under the LLC agreement, major decisions require the approval of either 75% or 100% of the membership interests. The Company has been designated as the managing member of Bay Holdings. Profits and losses of Bay Holdings were allocated in proportion to the members’ ownership interests, which approximated the estimated cash distributions to the members.

Kapalua Bay constructed a residential and timeshare development on land that it owns at the site of the former Kapalua Bay Hotel, and a spa on an adjacent parcel of land that is owned by the Company and leased to Kapalua Bay. As a result of the 2009 losses incurred by Bay Holdings, the Company’s carrying value of its investment in Bay Holdings was written down to zero in 2009. The Company does not expect to recover any amounts from its investment in Bay Holdings. The Company will not recognize any additional equity in the earnings (losses) of Bay Holdings until the Company’s income attributable to Bay Holdings exceeds its accumulated losses. The Company had made cash contributions to Bay Holdings of $53.2 million and non-monetary contributions of land valued at $25 million.

Kapalua Bay has a construction loan agreement that matured on August 1, 2011. The loan was collateralized by the project assets including the land that is owned by Kapalua Bay that underlies the project. The Company and the other members of Bay Holdings have guaranteed to the lenders completion of the project and recourse with regard to certain acts, but have not guaranteed repayment of the loan. On March 13, 2012, the lenders notified Kapalua Bay that the loan was in default and on June 13, 2012, the lenders filed for foreclosure against Kapalua Bay. The foreclosure was completed on June 13, 2013 and the loan collateral including the unsold inventory, leasehold spa improvements, and the Amenities purchase and sale agreements between the Company and Kapalua Bay, were transferred to a firm affiliated with one of the two remaining lenders.

Pursuant to previous agreements, the Company agreed to purchase from Kapalua Bay certain Amenities that were completed in 2009 at the actual construction cost of approximately $35 million. These purchase and sale agreements were part of the lenders’ loan collateral and were foreclosed upon in June 2013. In 2010, Bay Holdings recorded impairment charges in its consolidated financial statements of approximately $23 million related to the Amenities. The Company does not have sufficient liquidity to purchase the Amenities at the actual construction cost of approximately $35 million and is in active negotiations with the new owners of the project to resolve its purchase commitment for the Amenities. If the Amenities are subsequently acquired, they will be evaluated for impairment and could result in a loss.

The Company has recorded $4.1 million in accrued contract terminations in the condensed consolidated balance sheets representing its remaining expected exposure to certain purchase commitments, contingencies and other legal matters associated with the project. These matters are further described in Note 13.

Summarized operating information for Bay Holdings for the three and six months ended June 30, 2013 and 2012 were as follows:

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)

Revenues	$	44		$	(2,068	)	$	14		$	(418	)
Expenses	(151,114		)	11,703			(138,825		)	20,145
Net Income (Loss)	$	151,158		$	(13,771	)	$	138,839		$	(20,563	)

The three and six months periods ended June 30, 2013 information above includes the recognition of Kapalua Bay’s gain on foreclosure of approximately $165 million resulting from $228 million of debt forgiveness. As discussed above, the Company’s carrying value of its investment in Bay Holdings was written down to zero in the past, and the Company will not recognize any additional equity in the earnings (losses) of Bay Holdings until the Company’s income attributable to Bay Holdings exceeds its accumulated losses.