Investments in Unconsolidated Entities

We have investments in various unconsolidated joint venture entities. These joint ventures (i) develop land for the joint venture participants and, in some cases, for sale to other third-party builders (“Land Development Joint Ventures”); (ii) develop for-sale homes and condominiums (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and in one case, a hotel (“Rental Property Joint Ventures”), which includes our investment in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in distressed loans and real estate and provide financing to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).

The table below provides information as of July 31, 2016, regarding active joint ventures that we are invested in, by joint venture category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Gibraltar Joint Ventures		Total
Number of unconsolidated entities	7		3		11		4		25
Investment in unconsolidated entities	$	214,812	$	85,523	$	149,023	$	12,246	$	461,604
Number of unconsolidated entities with funding commitments by the Company	5		2		3		1		11
Company’s remaining funding commitment to unconsolidated entities	$	248,193	$	8,763	$	13,185	$	10,000	$	280,141

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at July 31, 2016, regarding the debt financing obtained by category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Total
Number of joint ventures with debt financing	4		2		9		15
Aggregate loan commitments	$	470,000	$	222,000	$	765,196	$	1,457,196
Amounts borrowed under loan commitments	$	395,518	$	160,962	$	628,278	$	1,184,758

More specific and/or recent information regarding our investments in and future commitments to these entities is provided below.

Land Development Joint Ventures

In the fourth quarter of fiscal 2015, we entered into a joint venture with an unrelated party to purchase and develop a parcel of land located in Irvine, California. The joint venture expects to develop approximately 840 home sites on this land in multiple phases. We have a 50% interest in this joint venture. The joint venture intends to develop the property and sell approximately 50% of the value of the home sites to each of the members of the joint venture. At July 31, 2016, we had an investment of $81.0 million in this joint venture and were committed to make additional contributions to this joint venture of up to $216.9 million. To finance a portion of the land purchase, the joint venture entered into a $320.0 million purchase money mortgage with the seller.

Home Building Joint Ventures

In the first quarter of fiscal 2015, we entered into a joint venture with an unrelated party to complete the development of a high-rise luxury condominium project in New York City on property that we owned. We contributed $15.9 million as our initial contribution for a 25% interest in this joint venture. We sold the property to the joint venture for $78.5 million, and we were reimbursed for development and construction costs incurred by us before the sale. The gain of $9.3 million that we realized on the sale was deferred and will be recognized in our results of operations as units are sold and delivered to the ultimate home buyer. At July 31, 2016, we had an investment of $17.4 million in this joint venture. The joint venture entered into a construction loan agreement of $124.0 million to fund the land purchase and a portion of the cost of the development of the property. At July 31, 2016, the joint venture had $95.1 million borrowed under the construction loan.

We have an investment in a joint venture in which we have a 50% interest to develop a high-rise luxury condominium project in conjunction with a luxury hotel in New York City being developed by a related joint venture, discussed below in Rental Property Joint Ventures. At July 31, 2016, we had invested $52.7 million in this joint venture and expect to make additional investments of approximately $0.5 million for the development of this project. In the first quarter of fiscal 2015, this joint venture, along with the related hotel joint venture, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and the hotel, of which we allocated $98.0 million to the condominium project. At July 31, 2016, this joint venture had $65.8 million of outstanding borrowings under the construction loan agreement.

Rental Property Joint Ventures

In the second quarter of fiscal 2016, we entered into a joint venture with an unrelated party to develop a 525-unit luxury for-rent residential apartment building near Union Station in Washington, D.C. Prior to the formation of this joint venture, we acquired the land, through a 100%-owned entity, and incurred $35.1 million of land and land development costs. Our partner acquired a 50% interest in this entity for $20.2 million and we subsequently received cash of $18.7 million to align the capital accounts of each of the partners of the joint venture. At April 30, 2016, our partner had the option, if certain events were to occur, to exit the venture and require us to repurchase its interest. Given this contingency, as of April 30, 2016, our investment, net of our partner’s contribution, was recorded in “Receivables, prepaid expenses, and other assets” on our Condensed Consolidated Balance Sheet. This option expired in our third quarter of fiscal 2016 and, accordingly, at July 31, 2016, our net investment in this property of $19.1 million was reclassified to “Investments in unconsolidated entities” on our Condensed Consolidated Balance Sheet and we recognized a gain of $2.6 million on the sale which is recorded in “Other income-net” on our Condensed Consolidated Statement of Operations and Comprehensive Income. In addition, due to our continued involvement in the joint venture through our ownership interest, we deferred $2.6 million of the gain realized on the sale. At July 31, 2016, we had an investment of $22.9 million in this joint venture and expect to make additional investments of approximately $5.9 million for the development of this project. The joint venture expects to enter into a construction loan agreement during our fourth quarter of fiscal 2016 to provide up to approximately $130.0 million of financing for the development of this property.

In the second quarter of fiscal 2015, we entered into two joint ventures with an unrelated party to develop luxury for-rent residential apartment buildings. Before the formation of these joint ventures, we acquired the properties, through two 100%-owned entities, and incurred $18.8 million of land and land development costs. Our partner acquired a 75% interest in each of these entities for $14.5 million. At July 31, 2016, we had a combined investment of $10.2 million in these ventures. In addition, in fiscal 2015, these joint ventures entered into construction loan agreements with several banks to provide up to $87.0 million of financing for the development of their respective apartment buildings. At July 31, 2016, these joint ventures had $28.0 million of borrowings under the construction loan agreements.

We have an investment in a joint venture in which we have a 50% interest to develop a luxury hotel in conjunction with a high-rise luxury condominium project in New York City being developed by a related joint venture, discussed in Home Building Joint Ventures above. At July 31, 2016, we had invested $36.2 million in this joint venture and expect to make additional investments of approximately $5.6 million for the development of the luxury hotel. In the first quarter of fiscal 2015, this joint venture, along with the related condominium joint venture, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and the hotel, of which we allocated $62.0 million to the hotel project. At July 31, 2016, this joint venture had $42.4 million of outstanding borrowings under the construction loan agreement.

In 1998, we formed the Trust to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by current and former members of our senior management; and one-third by an unrelated party. As of July 31, 2016, our investment in the Trust was zero as cumulative distributions received from the Trust have been in excess of the carrying amount of our net investment. We provide development, finance, and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $1.2 million and $1.7 million in the nine-month periods ended July 31, 2016 and 2015, respectively. In each of our first quarters of 2016 and 2015, we received a $2.0 million distribution from the Trust, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. In the second quarter of fiscal 2015, we received a distribution of $4.1 million, of which $1.5 million was recognized as income.

Gibraltar Joint Ventures

In the second quarter of fiscal 2016, we, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), entered into two ventures with an institutional investor to provide builders and developers with land banking and venture capital. We have a 25% interest in these ventures. These ventures will finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies. We may invest up to $100.0 million in these ventures. As of July 31, 2016, no amounts have been invested in these ventures.

In addition, in the second quarter of fiscal 2016, we entered into a separate venture with the same institutional investor to purchase, from Gibraltar, certain foreclosed real estate owned (“REO”) and distressed loans for $24.1 million. We have a 24% interest in this venture. In the three months ended April 30, 2016, we recognized a gain of $1.3 million from the sale of these assets to the venture. At July 31, 2016, we have a $5.4 million investment in this venture and are committed to invest an additional $10.0 million, if necessary.

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. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; 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, 2016, 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 in such entity should be sufficient to repay all or 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, 2016, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $871.5 million and had borrowed an aggregate of $600.0 million. The terms of these guarantees generally range from 4 months to 45 months. We estimate that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $871.5 million, without taking into account any recoveries from the underlying collateral or any reimbursement from our partners. Of this maximum potential exposure, $78.8 million is related to repayment and carry cost guarantees. Based on the amounts borrowed at July 31, 2016, our maximum potential exposure under all guarantees is estimated to be approximately $600.0 million, without taking into account any recoveries from the underlying collateral or any reimbursement from our partners. Of the estimated $600.0 million, $64.0 million is related to repayment and carry cost guarantees.

In addition, we have guaranteed approximately $4.4 million of ground lease payments and insurance deductibles for three joint ventures.

As of July 31, 2016, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $4.5 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, 2016 and October 31, 2015, we determined that three and one, respectively, of our joint ventures were VIEs under the guidance of ASC 810, “Consolidation.” However, we have concluded that we were not the primary beneficiary of these VIEs because the power to direct the activities of such VIEs that most significantly impact their performance was either shared by us and such VIEs’ other partners or such activities were controlled by our partner. For VIEs where the power to direct significant activities is shared, 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 the 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, 2016 and October 31, 2015, our investments in the unconsolidated joint ventures deemed to be VIEs, which is included in “Investments in unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $7.3 million and $6.7 million, respectively. At July 31, 2016, the maximum exposure of loss to our investments in the unconsolidated joint ventures that are VIEs was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $1.6 million of additional commitments to the VIEs. At October 31, 2015, the maximum exposure of loss to our investment in the unconsolidated joint venture that was a VIE was limited to our investment in the unconsolidated VIE, except with regard to $89.8 million of loan guarantees and $0.4 million of additional commitments to the VIE. Of our potential exposure for these loan guarantees at July 31, 2016 and October 31, 2015, $14.3 million is related to repayment and carry cost guarantees.

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 are included below (in thousands):

Condensed Balance Sheets:



	July 31, 2016		October 31, 2015
Cash and cash equivalents	$	109,622	$	95,263
Inventory	1,086,118		1,024,157
Non-performing loan portfolio	4,826		27,572
Rental properties	432,354		278,897
Rental properties under development	425,783		390,399
Real estate owned (“REO”)	96,307		117,758
Other assets	172,064		224,617
Total assets	$	2,327,074	$	2,158,663
Debt	$	1,190,394	$	1,127,121
Other liabilities	152,798		130,315
Members’ equity	908,374		806,327
Noncontrolling interest	75,508		94,900
Total liabilities and equity	$	2,327,074	$	2,158,663
Company’s net investment in unconsolidated entities (1)	$	461,604	$	412,860

(1)

Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities are primarily a result of the acquisition price of an investment in a Land Development Joint Venture in fiscal 2012 that was in excess of our pro rata share of the underlying equity; impairments related to our investment in unconsolidated entities; interest capitalized on our investments; the estimated fair value of the guarantees provided to the joint ventures; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations and Comprehensive Income:



	Nine months ended July 31,						Three months ended July 31,
	2016			2015			2016		2015
Revenues	$	226,772		$	170,884		$	60,755	$	84,578
Cost of revenues	145,401			116,928			42,910		53,378
Other expenses	29,723			25,598			11,347		8,762
Total expenses	175,124			142,526			54,257		62,140
Gain on disposition of loans and REO	38,102			25,094			3,413		1,507
Income from operations	89,750			53,452			9,911		23,945
Other income	4,121			6,749			1,769		906
Net income	93,871			60,201			11,680		24,851
Less: (income) loss attributable to noncontrolling interest	(11,204		)	(10,371		)	3,819		706
Net income attributable to controlling interest	82,667			49,830			15,499		25,557
Other comprehensive income (loss)	100			(6		)	—		40
Total comprehensive income	$	82,767		$	49,824		$	15,499	$	25,597
Company’s equity in earnings of unconsolidated entities (2)	$	22,754		$	17,080		$	4,998	$	5,952

(2)

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