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”). In fiscal 2018, 2017 and 2016, we recognized income from the unconsolidated entities in which we had an investment of $85.2 million, $116.1 million, and $40.7 million, respectively.

The table below provides information as of October 31, 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		15		7		33
Investment in unconsolidated entities	$	176,593	$	65,936	$	171,216	$	18,068	$	431,813
Number of unconsolidated entities with funding commitments by the Company	4		1		2		1		8
Company’s remaining funding commitment to unconsolidated entities	$	19,961	$	8,300	$	1,578	$	9,621	$	39,460

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at October 31, 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	$	138,808	$	381,411	$	972,903	$	1,493,122
Amounts borrowed under commitments	$	126,790	$	287,272	$	740,203	$	1,154,265

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

Land Development Joint Ventures

In fiscal 2018, our Land Development Joint Ventures sold approximately 986 lots and recognized revenues of $351.4 million. We acquired 259 of these lots for $153.2 million. Our share of the joint venture income from the lots we acquired of $1.7 million was deferred by reducing our basis in those lots acquired. The Company recognized charges in connection with two Land Development Joint Ventures of $6.0 million in fiscal 2018.

In fiscal 2017, our Land Development Joint Ventures sold approximately 1,132 lots and recognized revenues of $288.4 million. We acquired 364 of these lots for $166.5 million. Our share of the income from the lots we acquired of $13.5 million was deferred by reducing our basis in those lots acquired. The Company recognized charges in connection with one Land Development Joint Venture of $2.0 million in fiscal 2017.

Home Building Joint Ventures

Our Home Building Joint Ventures are delivering homes in New York City and Jupiter, Florida. In fiscal 2018 and 2017, our Home Building Joint Ventures delivered 100 homes with a sales value of $148.0 million, and 197 homes with a sales value of $475.3 million, respectively.

In fiscal 2017, we entered into two joint ventures with unrelated parties to complete the development of high-rise luxury condominium projects in New York City. Before the formation of these joint ventures, we acquired the properties and incurred approximately $319.8 million of land and land development costs. These joint ventures, in which we have interests ranging from 20% to 25%, purchased the properties from us at our cost, a portion of which was financed by $380.5 million in construction loans obtained by the joint ventures. From these sales and financings, we received proceeds of $263.9 million.

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 prior to the sale. The gain of $9.3 million that we realized on the sale in fiscal 2015 was deferred and was being recognized in our results of operations as units were delivered to the ultimate home buyer. The joint venture commenced settlement of units in fiscal 2016. We recognized $4.7 million and $1.5 million of previously deferred gains in fiscal 2017 and 2016, respectively. In the fourth quarter of fiscal 2017, we purchased our partner’s 75% interest in this joint venture for $36.8 million. Accordingly, the remaining unrecognized deferred gain of $3.0 million was used to adjust our basis in the inventory acquired from the purchase.

Rental Property Joint Ventures

As of October 31, 2018, our Rental Property Joint Ventures owned 15 for-rent apartment projects and a hotel, which are located in the metro Boston to metro Washington, D.C. corridor and in suburban Atlanta, Georgia. At October 31, 2018, these joint ventures had approximately 1,750 units that were occupied or ready for occupancy, 1,400 units in the lease-up stage, and 2,800 units under development. In addition, we either own or have under contract, approximately 9,450 units, of which 1,350 units are under active development; we intend to develop these units in joint ventures with unrelated parties in the future.

In fiscal 2018, we entered into four joint ventures with unrelated parties to develop luxury for-rent residential apartment projects located in suburban Atlanta, Georgia; Belmont, Massachusetts; and Washington, D.C. Prior to the formation of these joint ventures, we acquired the properties and incurred approximately $140.0 million of land and land development costs. Our partners acquired interests in these entities ranging from 50% to 75% for an aggregate amount of $80.3 million. In fiscal 2018, several of these joint ventures entered into construction loan agreements for an aggregate amount of $166.1 million to finance the development of these projects. At October 31, 2018, the joint ventures had $21.8 million of outstanding borrowings under the construction loan facilities.

In addition, in fiscal 2018 we entered into a joint venture with an unrelated party to develop a luxury for-rent residential apartment project in a suburb of Boston, Massachusetts. We contributed cash of $15.9 million for our initial 85% ownership interest in this joint venture. Due to our controlling financial interest, our power to direct the activities that most significantly impact the joint venture’s performance, and our obligation to absorb expected losses or receive benefits from the joint venture, we consolidated this joint venture at October 31, 2018. The carrying value of the joint venture’s assets totaling $19.7 million are reflected in “Receivables, prepaid expenses, and other assets” in our Consolidated Balance Sheet at October 31, 2018. Our partner’s 15% interest of $2.8 million in the joint venture is reflected as a component of “Noncontrolling interest” in our Consolidated Balance Sheet as of October 31, 2018. The joint venture expects to admit an additional investor and secure third-party financing at a later date.

In fiscal 2018, three of our Rental Property Joint Ventures sold their assets to unrelated parties for $477.5 million. These joint ventures had owned, developed, and operated multifamily rental properties located in suburban Washington, D.C. and Westborough, Massachusetts, and a student housing community in College Park, Maryland. In connection with these sales, the joint ventures’ aggregate outstanding loan balance of $239.6 million was repaid. From our investment in these joint ventures, we received cash of $79.1 million and recognized gains from these sales of $67.2 million in fiscal 2018, which is included in “Income from unconsolidated entities” in our Consolidated Statement of Operations and Comprehensive Income.

In the fourth quarter of fiscal 2017, we entered into a joint venture with an unrelated party to develop a 232-unit luxury for-rent residential apartment project in Princeton Junction, New Jersey. Prior to the formation of this joint venture, we acquired the property and incurred $13.6 million of land and land development costs. Our partner acquired a 75% interest for $10.2 million. The gain of $3.0 million that we realized on the sale was deferred due to our continuing involvement in the joint venture through our retained ownership interest and guarantees we provided on the joint venture’s debt. In the fourth quarter of fiscal 2017, the joint venture entered into a $41.7 million construction loan agreement with a bank to finance the development of this project. At October 31, 2018, there were $22.1 million of outstanding borrowings under the construction loan.

In the third quarter of fiscal 2017, one of our Rental Property Joint Ventures amended its existing $70.0 million construction loan agreement to finance construction of multifamily residential apartments in northern New Jersey. The terms of the amendment extended the maturity date and revised certain guarantees provided for under the loan, including the repayment guaranty for which our obligation increased from 25% to 100%. At October 31, 2018, this joint venture had $70.0 million of borrowings outstanding under the facility.

In fiscal 2017, we sold one-half of our 50% interest in two of our Rental Property Joint Ventures to an unrelated party. In connection with these sales, we, along with our partners, recapitalized the joint ventures and refinanced the existing $166.3 million in construction loans with 10-year fixed rate loans totaling $189.0 million. As a result of these transactions, we received cash of $54.9 million and recognized gains of $26.7 million in fiscal 2017, which is included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income. At October 31, 2018, we had a 25% interest in each of these joint ventures.

We have an investment in a joint venture in which we have a 50% interest that developed a luxury hotel in conjunction with a high-rise luxury condominium project in New York City being developed by a related Home Building Joint Venture. The hotel commenced operations in February 2017. At October 31, 2018, we had an investment of $35.0 million in this joint venture. In December 2016, this joint venture entered into an $80.0 million, three-year term loan agreement. The proceeds from the term loan, along with proceeds from the closing of condominium units at the Home Building Joint Venture, were used to repay an existing construction loan.

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 October 31, 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 amounts of $2.0 million, $2.0 million, and $1.6 million in fiscal 2018, 2017 and 2016, respectively. In fiscal 2018 and 2016, we received distributions of $27.7 million and $2.0 million, respectively, from the Trust, of which the full amount was recognized as income and included in “Income from unconsolidated entities” in our fiscal 2018 and 2016 Consolidated Statements of Operations and Comprehensive Income. No distributions were received from the Trust in fiscal 2017.

Subsequent events

In December 2018, we entered into a joint venture with an unrelated party to develop a 293-unit student housing community in Miami, Florida. We contributed cash of $13.2 million for our initial 71% ownership interest in this joint venture. Due to our controlling financial interest, our power to direct the activities that most significantly impact the joint venture’s performance, and our obligation to absorb expected losses or receive benefits from the joint venture, we expect to consolidate this joint venture. The joint venture expects to admit an additional investor and secure third-party financing at a later date.

In November 2018, we entered into a joint venture with an unrelated party to develop a 421-unit for-rent residential apartment project in Harrison, New York. Prior to the formation of this joint venture, we acquired the property and incurred approximately $36.1 million of land and land development costs. Our partner acquired a 75% interest in this entity for approximately $35.0 million, of which $34.6 million was distributed to us. We have a 25% interest in this venture and our initial investment is $12.7 million. As a result of the sale of 75% of our interest to our partner, we expect to recognize a gain of approximately $8.5 million in our first quarter of fiscal 2019. Concurrent with its formation, the joint venture entered into a $101.9 million construction loan agreement to finance the development of this project. We and an affiliate of our partner provided certain guarantees under the construction loan agreement. We estimate that the maximum exposure under these guarantees, if the full amount of the loan commitment was borrowed, would be $101.9 million without taking into account any recoveries from the underlying collateral or any reimbursement from our partner.

In November 2018, we entered into a joint venture with an unrelated party to develop a 426-unit for-rent residential apartment project in Boston, Massachusetts. We contributed cash of $26.5 million for our initial 50% ownership interest in this joint venture. The joint venture expects to admit an additional investor and secure third-party financing at a later date.

Gibraltar Joint Ventures

We, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), have entered into five ventures with an institutional investor to provide builders and developers with land banking and venture capital, two of which were formed in fiscal 2018. We have approximately a 25% interest in each of 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 October 31, 2018, we had an investment of $12.6 million 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 and distressed loans for $24.1 million. We have a 24% interest in this venture. In fiscal 2016, we recognized a gain of $1.3 million from the sale of these assets to the venture. At October 31, 2018, we had a $3.7 million investment in this venture and are committed to invest an additional $9.6 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 the 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 October 31, 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 October 31, 2018, certain unconsolidated entities have loan commitments aggregating $1.34 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $294.7 million to be our maximum exposure related to repayment and carry cost guarantees. At October 31, 2018, the unconsolidated entities had borrowed an aggregate of $1.06 billion, of which we estimate $254.7 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 8 months to 48 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.

As of October 31, 2018, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $5.6 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At October 31, 2018 and 2017, we determined that eleven and eight, respectively, of our joint ventures were VIEs under the guidance within ASC 810. For ten and eight of these VIEs as of October 31, 2018 and 2017, respectively, we 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 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.

As discussed under “Rental Property Joint Ventures” above, we consolidated one joint venture as of October 31, 2018. The joint venture was determined to be a VIE due to its current inability to finance its activities without additional subordinated financial support as well as our partner’s inability to participate in the significant decisions of the joint venture in addition to its lack of substantive kick-out rights. We further concluded that we were the primary beneficiary of this VIE due to our controlling financial interest in such venture as we have the power to direct the activities that most significantly impact the joint venture’s performance and the obligation to absorb expected losses or receive benefits from the joint venture. The assets of this VIE can only be used to settle the obligations of the VIE. In addition, in the event additional contributions are required to be funded to the joint venture prior to the admission of an additional investor at a future date, we expect that we would fund 100% of such contributions, including our partner’s pro rata share, which we expect would be funded through an interest-bearing loan.

At October 31, 2018 and 2017, our investments in our unconsolidated entities deemed to be VIEs, which are included in “Investments in unconsolidated entities” in our Consolidated Balance Sheets, totaled $33.8 million and $35.9 million, respectively. At October 31, 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 $10.8 million of additional commitments to fund the VIEs. Of our potential exposure for these loan guarantees, $70.0 million is related to repayment and carry cost guarantees, of which $70.0 million was borrowed at October 31, 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 fund the VIEs. Of our potential exposure for these loan guarantees, $70.0 million is 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 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).

Condensed Balance Sheets:



	October 31, 2018
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Gibraltar Joint Ventures		Total
Cash and cash equivalents	$	47,409	$	22,834	$	23,750	$	8,469	$	102,462
Inventory	403,670		557,157				13,163		973,990
Loan receivables, net							40,065		40,065
Rental properties					808,785				808,785
Rental properties under development					437,586				437,586
Real estate owned							14,838		14,838
Other assets	93,322		49,723		21,917		1,067		166,029
Total assets	$	544,401	$	629,714	$	1,292,038	$	77,602	$	2,543,755
Debt, net of deferred financing costs	$	125,557	$	284,959	$	735,482	$	—	$	1,145,998
Other liabilities	29,096		72,897		51,992		4,585		158,570
Members’ equity	389,748		271,858		504,564		69,804		1,235,974
Noncontrolling interest							3,213		3,213
Total liabilities and equity	$	544,401	$	629,714	$	1,292,038	$	77,602	$	2,543,755
Company’s net investment in unconsolidated entities (1)	$	176,593	$	65,936	$	171,216	$	18,068	$	431,813



	October 31, 2017
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Gibraltar Joint Ventures		Total
Cash and cash equivalents	$	77,667	$	38,600	$	24,367	$	13,194	$	153,828
Inventory	629,159		503,131				15,919		1,148,209
Loan receivables, net							22,495		22,495
Rental properties					970,497				970,497
Rental properties under development					190,541				190,541
Real estate owned							53,902		53,902
Other assets	96,725		31,794		26,637		1,462		156,618
Total assets	$	803,551	$	573,525	$	1,212,042	$	106,972	$	2,696,090
Debt	$	223,035	$	173,285	$	803,263	$	—	$	1,199,583
Other liabilities	37,832		51,017		40,610		5,833		135,292
Members’ equity	542,684		349,223		368,169		72,209		1,332,285
Noncontrolling interest							28,930		28,930
Total liabilities and equity	$	803,551	$	573,525	$	1,212,042	$	106,972	$	2,696,090
Company’s net investment in unconsolidated entities (1)	$	236,062	$	102,191	$	127,439	$	16,066	$	481,758

(1)

Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities were 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 and Comprehensive Income:



	For the year ended October 31, 2018
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures			Gibraltar Joint Ventures			Total
Revenues	$	351,397	$	148,002	$	121,276		$	19,592		$	640,267
Cost of revenues	317,363		112,469		74,946			17,817			522,595
Other expenses	9,125		8,630		61,502			3,201			82,458
Total expenses	326,488		121,099		136,448			21,018			605,053
Gain on disposition of loans and REO								53,192			53,192
Income (loss) from operations	24,909		26,903		(15,172		)	51,766			88,406
Other income	5,939		2,134		222,744			1,937			232,754
Income before income taxes	30,848		29,037		207,572			53,703			321,160
Income tax provision	86		767								853
Net income including earnings from noncontrolling interests	30,762		28,270		207,572			53,703			320,307
Less: income attributable to noncontrolling interest								(28,297		)	(28,297		)
Net income attributable to controlling interest	$	30,762	$	28,270	$	207,572		$	25,406		$	292,010
Company’s equity in earnings of unconsolidated entities (2)	$	3,392	$	14,069	$	62,204		$	5,575		$	85,240



	For the year ended October 31, 2017
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures			Gibraltar Joint Ventures			Total
Revenues	$	288,440	$	475,260	$	115,519		$	10,090		$	889,309
Cost of revenues	191,965		286,446		70,108			14,428			562,947
Other expenses	6,508		13,102		59,503			3,942			83,055
Total expenses	198,473		299,548		129,611			18,370			646,002
Gain on disposition of loans and REO								48,079			48,079
Income (loss) from operations	89,967		175,712		(14,092		)	39,799			291,386
Other income	4,723		7,317		1,556			432			14,028
Income (loss) before income taxes	94,690		183,029		(12,536		)	40,231			305,414
Income tax provision	94		7,473		95						7,662
Net income (loss) including earnings from noncontrolling interests	94,596		175,556		(12,631		)	40,231			297,752
Less: income attributable to noncontrolling interest								(20,439		)	(20,439		)
Net income (loss) attributable to controlling interest	$	94,596	$	175,556	$	(12,631	)	$	19,792		$	277,313
Company’s equity in earnings of unconsolidated entities (2)	$	13,007	$	77,339	$	21,458		$	4,262		$	116,066



	For the year ended October 31, 2016
	Land Develop- ment Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Gibraltar Joint Ventures			Total
Revenues	$	142,015	$	168,164		$	58,707		$	5,929		$	374,815
Cost of revenues	63,429		118,621			29,791			24,684			236,525
Other expenses	3,904		8,124			30,779			2,043			44,850
Total expenses	67,333		126,745			60,570			26,727			281,375
Gain on disposition of loans and REO									49,579			49,579
Income (loss) from operations	74,682		41,419			(1,863		)	28,781			143,019
Other income (expense)	3,464		(486		)	1,144			1,172			5,294
Net income (loss)	78,146		40,933			(719		)	29,953			148,313
Less: income attributable to noncontrolling interest									(18,218		)	(18,218		)
Net income (loss) attributable to controlling interest	78,146		40,933			(719		)	11,735			130,095
Other comprehensive income						100						100
Total comprehensive income (loss)	$	78,146	$	40,933		$	(619	)	$	11,735		$	130,195
Company’s equity in earnings of unconsolidated entities (2)	$	15,772	$	16,945		$	5,721		$	2,310		$	40,748

(2)

Differences between our equity in earnings of unconsolidated entities and the underlying net income (loss) of the entities were 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.