Investments in Unconsolidated Entities

We have investments in various unconsolidated entities. These entities, which are structured as joint ventures (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and 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 and land banking 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 April 30, 2018, 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		4		14		5		30
Investment in unconsolidated entities	$	222,099	$	86,220	$	134,252	$	14,191	$	456,762
Number of unconsolidated entities with funding commitments by the Company	4		1		1		1		7
Company’s remaining funding commitment to unconsolidated entities	$	22,081	$	8,300	$	530	$	9,621	$	40,532

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at April 30, 2018, 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		3		13		20
Aggregate loan commitments	$	198,500	$	381,441	$	1,062,138	$	1,642,079
Amounts borrowed under loan commitments	$	184,834	$	217,273	$	768,254	$	1,170,361

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

Land Development Joint Ventures

During the six months ended April 30, 2018, our Land Development Joint Ventures sold approximately 449 lots and recognized revenues of $102.8 million. We acquired 55 of these lots for $7.3 million. Our share of the joint venture income from the lots we acquired of $0.9 million was deferred by reducing our basis in those lots. During the six months ended April 30, 2017, our Land Development Joint Ventures sold approximately 509 lots and recognized revenues of $100.8 million. We acquired 162 of these lots for $46.2 million. Our share of the income from the lots we acquired of $7.0 million was deferred by reducing our basis in those lots. The Company recognized other than temporary impairment charges in connection with one Land Development Joint Venture of $2.0 million for the six months ended April 30, 2017. There were no other than temporary impairment charges recognized for the six months ended April 30, 2018.

During the three months ended April 30, 2018, our Land Development Joint Ventures sold approximately 200 lots and recognized revenues of $62.6 million. We acquired 25 of these lots for $4.2 million. Our share of the joint venture income of $0.4 million from the lots we acquired was deferred by reducing our basis in those lots. During the three months ended April 30, 2017, our Land Development Joint Ventures sold approximately 206 lots and recognized revenues of $44.6 million. We acquired 60 of these lots for $21.2 million. Our share of the income of $3.3 million from the lots we acquired was deferred by reducing our basis in those lots. The Company recognized other than temporary impairment charges in connection with one Land Development Joint Venture of $2.0 million for the three months ended April 30, 2017. There were no other than temporary impairment charges recognized for the three months ended April 30, 2018.

Home Building Joint Ventures

Our Home Building Joint Ventures are delivering homes in New York City, New York, and Jupiter, Florida. During the six months ended April 30, 2018 and 2017, our Home Building Joint Ventures delivered 54 homes with a sales value of $67.9 million, and 143 homes with a sales value of $370.6 million, respectively. During the three months ended April 30, 2018 and 2017, our Home Building Joint Ventures delivered 26 homes with a sales value of $35.4 million, and 56 homes with a sales value of $153.2 million, respectively.

Rental Property Joint Ventures

As of April 30, 2018, our Rental Property Joint Ventures owned 14 for-rent apartment projects and a hotel, which are located in the metro Boston, Massachusetts to metro Washington, D.C. corridor. At April 30, 2018, our joint ventures had approximately 2,800 units that were occupied or ready for occupancy, 750 units in the lease-up stage, and 1,550 units under active development. In addition, we either own, have under contract, or under a letter of intent approximately 10,300 units, of which 750 units are under active development. We intend to develop these units in joint ventures with unrelated parties in the future.

In the second quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 308-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C. Prior to the formation of this joint venture, we acquired the property and incurred approximately $27.4 million of land and land development costs. Our partner acquired a 50% interest in this entity for $17.8 million, including subsequent reimbursement by our partner for development and construction costs incurred by us prior to the sale. As a result of the sale of 50% of our interest to our partner, we recognized a gain of $1.0 million in the second quarter of fiscal 2018. In addition, due to our continued involvement in the joint venture primarily through guarantees provided on the joint venture’s debt, we deferred $3.8 million of gain from the sale. Concurrent with its formation, the joint venture entered into a $72.7 million construction loan agreement to finance the development of this project. At April 30, 2018, we had an investment of $11.0 million in this joint venture. At April 30, 2018, there were no outstanding borrowings under the construction loan facility.

In the first quarter of fiscal 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $219.0 million. The joint venture had owned, developed, and operated a student housing community in College Park, Maryland. In connection with the sale, the joint venture’s existing $110.0 million loan was repaid. We received cash of $39.3 million and recognized a gain of $30.8 million in the six months ended April 30, 2018, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.

In the first quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 112-unit luxury for-rent residential apartment project in Belmont, Massachusetts. Prior to the formation of this joint venture, we acquired the property and incurred approximately $22.1 million of land and land development costs. Our partner acquired a 50% interest in this entity for $11.0 million and we subsequently received cash of $10.8 million from our partner. At January 31, 2018, our partner had the right, if certain events did not occur, to exit the venture and require us to repurchase their interest. Given this contingency, as of January 31, 2018, our investment, net of our partner’s contribution, was recorded in “Receivables, prepaid expenses, and other assets” on our Condensed Consolidated Balance Sheet. This right of our partner expired in the second quarter of fiscal 2018 and, accordingly, during the second quarter of fiscal 2018, our net investment in this property of $11.3 million was reclassified to “Investments in unconsolidated entities” on our Condensed Consolidated Balance Sheet. In March 2018, the joint venture entered into a $42.4 million construction loan agreement to provide financing for the development of this property. At April 30, 2018, this joint venture had no outstanding borrowings under the construction loan facility. At April 30, 2018, we had an investment of $15.6 million in this joint venture.

In the second quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated third party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $112.2 million construction loan with a $133.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $42.9 million and recognized a gain of $20.5 million in the six months and three months ended April 30, 2017 which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At April 30, 2018, we had a 25% interest and a $6.5 million investment in this joint venture.

In the first quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $54.1 million construction loan with a $56.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $12.0 million and recognized a gain of $6.2 million in the six months ended April 30, 2017, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At April 30, 2018, we had a 25% interest and a $2.7 million investment in this joint venture.

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 April 30, 2018, 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 amount of $1.2 million and $0.8 million in the six-month periods ended April 30, 2018 and 2017, respectively. We recognized fees of $0.6 million and $0.4 million in the three-month periods ended April 30, 2018 and 2017, respectively.

Subsequent Event

In May 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $65.5 million. The joint venture had owned, developed, and operated a multifamily rental property located in Westborough, Massachusetts. In connection with the sale, the joint venture’s outstanding loan balance of $30.1 million was repaid and we were released from our guarantees. We received cash of $12.1 million and expect to recognize a gain from the sale of approximately $8.6 million in the third quarter of fiscal 2018.

Gibraltar Joint Ventures

We, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), are a member in several ventures with an institutional investor to provide builders and developers with land banking and venture capital. These ventures finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies. We also are a member in a separate venture with the same institutional investor, which purchased, from Gibraltar, certain foreclosed real estate owned and distressed loans in fiscal 2016. Our ownership interest in these ventures is approximately 25%. As of April 30, 2018, we had an investment of $14.2 million in these ventures.

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 April 30, 2018, in the event we become legally obligated to perform under a guarantee of an obligation of an unconsolidated entity due to a triggering event, the collateral in such entity 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 April 30, 2018, certain unconsolidated entities have loan commitments aggregating $1.19 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $301.4 million to be our maximum exposure related to repayment and carry cost guarantees. At April 30, 2018, the unconsolidated entities had borrowed an aggregate of $721.8 million, of which we estimate $228.7 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 4 months to 47 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.

As of April 30, 2018, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $5.5 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At April 30, 2018 and October 31, 2017, we determined that eight 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 April 30, 2018 and October 31, 2017, our investments in the unconsolidated entities deemed to be VIEs, which are included in “Investments in unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $34.2 million and $35.9 million, respectively. At April 30, 2018, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.2 million of additional commitments to the VIEs. Of our potential exposure for these loan guarantees, $70.0 million is related to repayment and carry cost guarantees, of which $67.1 million was borrowed at April 30, 2018. At October 31, 2017, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.5 million of additional commitments to the VIEs. At October 31, 2017, $70.0 million of our potential exposure for these loan guarantees was related to repayment and carry cost guarantees, of which $61.3 million was borrowed at October 31, 2017.

Joint Venture Condensed Financial Information

The Condensed Balance Sheets, as of the dates indicated, and the Condensed Statements of Operations, for the periods indicated, for the unconsolidated entities in which we have an investment are included below (in thousands):

Condensed Balance Sheets:



	April 30, 2018		October 31, 2017
Cash and cash equivalents	$	117,419	$	153,828
Inventory	1,064,578		1,148,209
Loans receivable, net	13,605		22,495
Rental properties	837,381		970,497
Rental properties under development	322,958		190,541
Real estate owned	34,329		53,902
Other assets	156,690		156,618
Total assets	$	2,546,960	$	2,696,090
Debt, net of deferred financing costs	$	1,156,927	$	1,199,583
Other liabilities	156,538		135,292
Members’ equity	1,201,558		1,332,285
Noncontrolling interest	31,937		28,930
Total liabilities and equity	$	2,546,960	$	2,696,090
Company’s net investment in unconsolidated entities (1)	$	456,762	$	481,758

(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 investments in unconsolidated entities; interest capitalized on our investments; the estimated fair value of the guarantees provided to the joint ventures; gains recognized from the sale of our ownership interests; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations:



	Six months ended April 30,						Three months ended April 30,
	2018			2017			2018			2017
Revenues	$	276,284		$	500,727		$	82,663		$	205,024
Cost of revenues	209,410			290,894			60,660			125,188
Other expenses	44,584			39,722			20,297			18,588
Total expenses	253,994			330,616			80,957			143,776
Gain on disposition of loans and real estate owned	26,480			31,639			11,809			22,753
Income from operations	48,770			201,750			13,515			84,001
Other income	80,866			9,497			1,502			6,912
Income before income taxes	129,636			211,247			15,017			90,913
Income tax provision	349			6,314			151			2,487
Net income including earnings from noncontrolling interests	129,287			204,933			14,866			88,426
Less: income attributable to noncontrolling interest	(11,937		)	(13,089		)	(5,855		)	(11,009		)
Net income attributable to controlling interest	$	117,350		$	191,844		$	9,011		$	77,417
Company’s equity in earnings of unconsolidated entities (2)	$	41,444		$	92,349		$	2,564		$	45,904

(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; unrealized gains on our retained joint venture interests; and our share of the entities’ profits related to home sites purchased by us which reduces our cost basis of the home sites acquired.