Investments in and Advances to Unconsolidated Entities

We have investments in and advances to various unconsolidated entities. These entities include land development joint ventures, home building joint ventures, rental property joint ventures, Toll Brothers Realty Trust and Trust II, and a structured asset joint venture. At July 31, 2014, we had investments in and advances to these unconsolidated entities of $443.3 million and were committed to invest or advance up to an additional $83.0 million to these entities if they require additional funding. Our investments in these entities are accounted for using the equity method of accounting.

More specific information regarding our investments in, advances to, and future commitments to these entities is provided below.

Land Development Joint Ventures

We have investments in and advances to a number of joint ventures with unrelated parties to develop land (“Land Development Joint Ventures”). Some of these Land Development Joint Ventures develop land for the sole use of the venture participants, including us, and others develop land for sale to the joint venture participants and to unrelated builders. We recognize our share of earnings from the sale of home sites and other land by the Land Development Joint Ventures to other builders. With regard to home sites we purchase from the Land Development Joint Ventures, we adjust our cost basis in those home sites by our share of the earnings/losses of the joint venture on the home sites we purchase. At July 31, 2014, we had approximately $158.6 million invested in or advanced to the Land Development Joint Ventures and a funding commitment of $35.0 million to four of the Land Development Joint Ventures which would be funded if additional investment in the ventures is required. At July 31, 2014, three of these joint ventures had aggregate loan commitments of $145.0 million and outstanding borrowings against these commitments of $41.3 million.

At July 31, 2014, we had a purchase commitment to acquire 153 home sites from two of these Land Development Joint Ventures for an aggregate purchase price of $16.3 million. In addition, we expect to purchase approximately 3,750 additional lots from several Land Development Joint Ventures in which we have interests. The purchase price of the lots will be determined at a future date.

Set forth below is additional information regarding activity in certain Land Development Joint Ventures; such activity is included in the summary information provided above.

In the third quarter of fiscal 2014, we received approximately 515 home sites from a Land Development Joint Venture in consideration of our previous investment in the joint venture. We have a commitment to this joint venture to fund approximately $19.3 million which represents our share of the major infrastructure improvements related to this community. Contributions to this joint venture related to the improvements will be included in “Inventory” in our Condensed Consolidated Balance Sheets when made.

In the first quarter of fiscal 2014, we entered into a joint venture with an unrelated party to develop a parcel of land in Texas. The joint venture expects to develop a master planned community consisting of up to 6,500 home sites and retail and commercial property. We have a 50% interest in this joint venture. Prior to the formation of the joint venture, we had entered into a land purchase agreement to acquire the land for approximately $79.3 million. We contributed our rights under the purchase agreement to the joint venture and were reimbursed by our joint venture partner for 50% of the costs we incurred prior to the formation of the joint venture. At July 31, 2014, we had an investment of $40.8 million in this joint venture. In May 2014, the joint venture obtained outside financing of $40.0 million to help fund the future development of the property. At July 31, 2014, this joint venture had $1.8 million of borrowings under the loan facility.

In the fourth quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a parcel of land in Maryland. The property consists of 945 acres which the joint venture expects to develop into approximately 1,300 home sites. We have a 50% interest in this joint venture. The current plan is to develop the property and sell approximately 50% of the home sites to each of the members of the joint venture. We made an initial investment of $11.8 million of cash to the joint venture. At July 31, 2014, we had an investment of $11.9 million in this joint venture.

In the second quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a parcel of land in Texas as a master planned community consisting of approximately 2,900 lots. We have a 50% interest in this joint venture. The joint venture expects to develop the property in multiple phases and sell groups of lots to the members of the joint venture and to other home builders. At July 31, 2014, the joint venture owned approximately 2,850 home sites. We made an initial investment of $15.5 million of cash to the joint venture. The joint venture entered into a $25.0 million line of credit with a bank, secured by a deed of trust on the property which can be expanded up to $40.0 million under certain conditions. At July 31, 2014, the joint venture had $23.7 million of borrowings under this line of credit. At July 31, 2014, we had an investment of $26.8 million in this joint venture and were committed to make additional contributions to this joint venture of up to $2.2 million.

We have a 50% interest in a joint venture that owns and is developing a master planned community in Orange County, California, consisting of over 2,000 home sites. At July 31, 2014, the joint venture owned approximately 1,150 home sites. At July 31, 2014, we had an investment of $77.3 million in this joint venture and were committed to make additional contributions to this joint venture of up to $10.0 million, if needed. The joint venture has an $80.0 million credit facility from a bank to fund the development of the property. At July 31, 2014, the venture had $15.9 million borrowed under the facility.

Home Building Joint Ventures

At July 31, 2014, we had an aggregate of $186.1 million of investments in and advances to various joint ventures with unrelated parties to develop approximately 580 luxury for-sale homes. At July 31, 2014, we had $28.0 million of funding commitments to two of these joint ventures.

Rental Property Joint Ventures

At July 31, 2014, we had an aggregate of $77.0 million of investments in and advances to several joint ventures with unrelated parties to develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”). At July 31, 2014, we had $20.0 million of funding commitments to these joint ventures. At July 31, 2014, five of these joint ventures had aggregate loan commitments of $319.8 million and outstanding borrowings against these commitments of $62.3 million. Set forth below is additional information regarding activity in certain Rental Property Joint Ventures; such activity is included in the summary information provided above.

In the first quarter of 2014, two of our Rental Property Joint Ventures entered into $126.0 million of construction loan agreements to finance construction of multi-family residential apartments in suburban Philadelphia and northern New Jersey. At July 31, 2014, these ventures had $25.8 million borrowings under the new facilities.

In the fourth quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a 287-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C. on land that we owned and conveyed to the joint venture. We have a 50% interest in this joint venture. As part of our initial capital contribution, we contributed land and improvements with a fair value of $27.1 million to the joint venture and subsequently received a cash distribution of $12.5 million to align the capital accounts of each of the members of the joint venture. The joint venture entered into a $54.0 million construction loan agreement with a bank to finance the development of this project. At July 31, 2014, the joint venture had $18.1 million borrowed under the construction loan agreement. At July 31, 2014, we had an investment of $14.3 million in this joint venture.

In the second quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a luxury, 38-story for-rent residential apartment building and retail space in Jersey City, New Jersey on land that we owned and conveyed to the joint venture. We have a 50% interest in this joint venture. As part of our initial capital contribution, we contributed land and improvements with a fair value of $28.8 million to the joint venture and subsequently received distributions of $10.2 million and a $1.2 million payment by the joint venture on our behalf to align the capital accounts of each of the members of the joint venture. The joint venture entered into a $120.0 million construction loan agreement with a bank to finance the development of this project. At July 31, 2014, the joint venture had $12.7 million borrowed under the construction loan agreement. At July 31, 2014, we had an investment of $29.5 million in this joint venture.

Subsequent Event

In the fourth quarter of fiscal 2014, we entered into a joint venture with an unrelated party to develop a 418-unit for-rent student housing project in College Park, Maryland on land that we were under contract to purchase. We have a 25% interest in this joint venture. We made an initial investment of $11.9 million to the joint venture, which included $3.5 million of land deposits previously funded by us, and our partner made an initial capital contribution of $35.7 million. In addition, we expect to be reimbursed for certain costs incurred prior to the closing of the joint venture. The joint venture obtained construction loan financing of $104.5 million to fund a portion of the cost of the development of the property. We and an affiliate of our partner provided certain guarantees under the construction loan agreement. Each partner has an obligation to fund 50% of any payments made as a result of performing under these guarantees.

Toll Brothers Realty Trust and Trust II

In fiscal 2005, we, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust II (“Trust II”) to invest in commercial real estate opportunities. Trust II is owned 50% by us and 50% by an affiliate of PASERS. In December 2013, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, we realized income of approximately $23.5 million in the first quarter of fiscal 2014 representing our share of the gain on the sale. In the three-month period ended April 30, 2014, we recognized an additional gain of $0.6 million from the sale of a property by Trust II. The gain on sale of assets is included in “Income from unconsolidated entities” on our Condensed Consolidated Statement of Operations. In December 2013, we received a $20.0 million cash distribution from Trust II. At July 31, 2014, we had an investment of $1.2 million in Trust II. In addition, in the first quarter of fiscal 2014, we recognized $2.9 million in previously deferred gains on our initial sales of the properties to Trust II. This gain is included in “Other income - net” in our Condensed Consolidated Statements of Operations in this Form 10-Q.

In 1998, prior to the formation of Trust II, we formed Toll Brothers Realty Trust (“Trust”) to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr. and former members of our senior management; and one-third by an affiliate of PASERS. As of July 31, 2014, we had a negative investment in the Trust of $0.9 million resulting primarily from a loss recognized by the Trust in the fourth quarter of fiscal 2013. We provide development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $1.7 million and $1.7 million in the nine-month periods ended July 31, 2014 and 2013, respectively, and $0.6 million and $0.6 million in the three-month periods ended July 31, 2014 and 2013, respectively. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. We received $12.0 million as our share of the proceeds and recognized this distribution as income in the second quarter of fiscal 2014. This income is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations.

Structured Asset Joint Venture

Through our wholly-owned subsidiary, Gibraltar Capital and Asset Management LLC (“Gibraltar”), we are a 20% participant with two unrelated parties that purchased a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At July 31, 2014, we had an investment of $21.3 million in this Structured Asset Joint Venture.

Guarantees

The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities which may include any, or all, of the following: (i) project completion including any cost overruns, in whole or in part; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) indemnification of the lender as to environmental matters affecting the unconsolidated entity; (iv) a hazardous material indemnity that holds the lender harmless against any obligations for which the lender may incur liability resulting from the threat or presence of any hazardous or toxic substances at or near the property covered by a loan; and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.

In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed-upon share of the guarantee; however, if a joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share.

We believe that, as of July 31, 2014, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral should be sufficient to repay a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the venture. At July 31, 2014, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $464.8 million and had borrowed an aggregate of $103.6 million. The term of these guarantees generally range from 16 months to 41 months. We estimate that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $464.8 million before any reimbursement from our partners. Based on the amounts borrowed at July 31, 2014, our maximum potential exposure under these guarantees is estimated to be approximately $103.6 million before any reimbursement from our partners.

In addition, we have guaranteed approximately $11.2 million of ground lease payments and insurance deductibles for three joint ventures.

As of July 31, 2014, the estimated aggregate fair value of the guarantees was approximately $2.2 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At July 31, 2014, we determined that three of our joint ventures were VIEs under the guidance within ASC 810, “Consolidation.” We have, however, concluded that we were not the primary beneficiary of the VIEs because the power to direct the activities of these VIEs that most significantly impact their performance was shared by us and the VIEs’ other members. Business plans, budgets and other major decisions are required to be unanimously approved by all members. Management and other fees earned by us are nominal and believed to be at market rates, and there is no significant economic disproportionality between us and other members. The information presented below regarding the investments, commitments, and guarantees in unconsolidated entities deemed to be VIEs is also included in the information provided above.

At July 31, 2014 and October 31, 2013, our investment in our unconsolidated joint ventures deemed to be VIEs, which are included in “Investments in and advances to unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $37.9 million and $22.9 million, respectively. At July 31, 2014, the maximum exposure of loss to our investment in unconsolidated joint ventures that are VIEs is limited to our investment in the unconsolidated VIEs, except with regard to $39.7 million of additional commitments to the VIEs and $9.2 million of guarantees under ground lease agreements. At October 31, 2013, the maximum exposure of loss to our investment in unconsolidated joint ventures that are VIEs is limited to our investment in the unconsolidated VIEs, except with regard to $41.7 million of additional commitments to fund the joint ventures and a $9.6 million guaranty of ground lease payments.

Joint Venture Condensed Financial Information

The condensed balance sheets, as of the dates indicated, and the condensed statements of operations and comprehensive income for the periods indicated, for the unconsolidated entities in which we have an investment, aggregated by type of business, are included below (in thousands). The column titled “Rental Property Joint Ventures” includes the Rental Property Joint Ventures and Toll Brothers Realty Trust and Trust II described above.

Condensed Balance Sheets:



	July 31, 2014
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	34,775	$	26,492	$	36,578	$	15,657	$	113,502
Inventory	257,370		439,174		388				696,932
Non-performing loan portfolio							64,236		64,236
Rental properties					139,395				139,395
Rental properties under development					211,196				211,196
Real estate owned (“REO”)							194,272		194,272
Other assets (1)	25,755		73,053		14,936		155,933		269,677
Total assets	$	317,900	$	538,719	$	402,493	$	430,098	$	1,689,210
Debt (1)	$	47,231	$	9,435	$	283,038	$	155,900	$	495,604
Other liabilities	24,301		43,849		28,340		236		96,726
Members’ equity	246,368		485,435		91,115		109,585		932,503
Noncontrolling interest							164,377		164,377
Total liabilities and equity	$	317,900	$	538,719	$	402,493	$	430,098	$	1,689,210
Company’s net investment in unconsolidated entities (2)	$	158,622	$	186,105	$	77,281	$	21,277	$	443,285



	October 31, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	30,826	$	31,164	$	35,014	$	40,097	$	137,101
Inventory	350,150		338,814		4,998				693,962
Non-performing loan portfolio							107,411		107,411
Rental properties					164,325				164,325
Rental properties under development					133,081				133,081
Real estate owned (“REO”)							202,259		202,259
Other assets (1)	12,700		70,180		18,526		155,921		257,327
Total assets	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Debt (1)	$	135,200	$	11,977	$	235,226	$	155,900	$	538,303
Other liabilities	21,015		19,636		9,461		379		50,491
Members’ equity	237,461		408,545		111,257		139,764		897,027
Noncontrolling interest							209,645		209,645
Total liabilities and equity	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Company’s net investment in unconsolidated entities (2)	$	142,448	$	166,271	$	68,711	$	25,703	$	403,133


(1)	Included in other assets of the Structured Asset Joint Venture at July 31, 2014 and October 31, 2013 is $155.9 million of restricted cash held in a defeasance account which will be used to repay debt of the Structured Asset Joint Venture.

(2)

Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities is primarily a result of the acquisition price of an investment in a land development joint venture in fiscal 2012 which was in excess of our pro-rata share of the underlying equity; impairments related to our investment in unconsolidated entities; a loan made to one of the entities by us; interest capitalized on our investment; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations and Comprehensive Income:



	For the nine months ended July 31, 2014
	Land Development Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	129,792	$	39,585		$	24,961		$	6,990		$	201,328
Cost of revenues	68,820		36,264			10,802			10,607			126,493
Other expenses	580		3,727			25,777			1,239			31,323
Total expenses	69,400		39,991			36,579			11,846			157,816
Gain on disposition of loans and REO									14,534			14,534
Income (loss) from operations	60,392		(406		)	(11,618		)	9,678			58,046
Other income	60		91			44,735			2,286			47,172
Net income (loss)	60,452		(315		)	33,117			11,964			105,218
Less: income attributable to noncontrolling interest									(7,178		)	(7,178		)
Net income (loss) attributable to controlling interest	60,452		(315		)	33,117			4,786			98,040
Other comprehensive income						647						647
Total comprehensive income (loss)	$	60,452	$	(315	)	$	33,764		$	4,786		$	98,687
Company’s equity in earnings of unconsolidated entities (3)	$	456	$	266		$	36,678		$	792		$	38,192



	For the three months ended July 31, 2014
	Land Development Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	17,842	$	16,357		$	7,955		$	3,201		$	45,355
Cost of revenues	6,650		14,438			3,411			4,125			28,624
Other expenses	115		1,680			4,219			365			6,379
Total expenses	6,765		16,118			7,630			4,490			35,003
Gain on disposition of loans and REO									8,076			8,076
Income from operations	11,077		239			325			6,787			18,428
Other income (loss)	54		(110		)	1,535			753			2,232
Net income	11,131		129			1,860			7,540			20,660
Less: income attributable to noncontrolling interest									(4,524		)	(4,524		)
Net income attributable to controlling interest	11,131		129			1,860			3,016			16,136
Other comprehensive loss						(82		)				(82		)
Total comprehensive income	$	11,131	$	129		$	1,778		$	3,016		$	16,054
Company’s equity in earnings (losses) of unconsolidated entities (3)	$	353	$	(60	)	$	55		$	602		$	950



	For the nine months ended July 31, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture			Total
Revenues	$	36,813	$	31,574	$	29,241	$	27,114		$	124,742
Cost of revenues	17,992		28,017		12,677		25,632			84,318
Other expenses	936		1,866		15,673		2,812			21,287
Total expenses	18,928		29,883		28,350		28,444			105,605
Gain on disposition of loans and REO							47,583			47,583
Income from operations	17,885		1,691		891		46,253			66,720
Other income	8		554		17		235			814
Net income	17,893		2,245		908		46,488			67,534
Less: income attributable to noncontrolling interest							(27,893		)	(27,893		)
Net income attributable to controlling interest	17,893		2,245		908		18,595			39,641
Other comprehensive income					1,162					1,162
Total comprehensive income	$	17,893	$	2,245	$	2,070	$	18,595		$	40,803
Company’s equity in earnings of unconsolidated entities (3)	$	2,853	$	1,466	$	917	$	3,608		$	8,844



	For the three months ended July 31, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	1,791	$	8,817	$	8,937		$	5,400		$	24,945
Cost of revenues	186		8,043		3,667			6,139			18,035
Other expenses	179		712		5,108			494			6,493
Total expenses	365		8,755		8,775			6,633			24,528
Gain on disposition of loans and REO								7,878			7,878
Income from operations	1,426		62		162			6,645			8,295
Other income	3		119		9			80			211
Net income	1,429		181		171			6,725			8,506
Less: income attributable to noncontrolling interest								(4,035		)	(4,035		)
Net income attributable to controlling interest	1,429		181		171			2,690			4,471
Other comprehensive income					1,064						1,064
Total comprehensive income	$	1,429	$	181	$	1,235		$	2,690		$	5,535
Company’s equity in earnings (losses) of unconsolidated entities (3)	$	57	$	387	$	(213	)	$	537		$	768

(3)

Differences between our equity in earnings (losses) of unconsolidated entities and the underlying net income of the entities is primarily a result of prior impairments related to our investment in unconsolidated entities, a basis difference of an acquired joint venture interest, distributions from entities in excess of the carrying amount of our net investment, and our share of the entities’ profits related to home sites purchased by us which reduces our cost basis of the home sites acquired.