CORRESP 1 filename1.txt PATRIOT TRANSPORTATION HOLDING, INC. 501 Riverside Ave., Ste 500 Jacksonville, Florida 32202 April 14, 2010 Ms. Linda Cvrkel Division of Corporation Finance Securities and Exchange Commission 100 F. Street, N.E. Washington, D.C. 20549 Re: Patriot Transportation Holding, Inc. (the "Company") Form 10-K for the Year Ended September 30, 2009 Filed December 3, 2009 Filer No. 0-17554 Dear Ms. Cvrkel: This letter responds to the Staff's comment letter dated April 2, 2010 and received by the Company on April 2, 2010 (the "Comment Letter") regarding the above-referenced filing. For your convenience, each of the comments has been duplicated below, followed by our responses. Annual Report on Form 10-K for the year ended September 30, 2009 ---------------------------------------------------------------- Note 1. Notes to Consolidated Statements-Accounting Policies ------------------------------------------------------------- Property, Plant and Equipment ----------------------------- 1. We note your response to prior comment numbers 2 and 3. As requested in our prior comment, supplementally provide us with the significant assumptions that were used in your impairment analysis to derive the $253 million of undiscounted cash flows for the expected book life of the buildings, and provide us with a detailed summary of the results of your impairment analysis for your various properties. As part of your response, please provide us with your basis or rationale for establishing when the various buildings are expected to be occupied and related expected occupancy levels, and your basis for establishing the estimated rental revenues and expenses, including property taxes and insurance. In addition, even though we understand that you intend to hold these properties for the foreseeable future, supplementally advise us whether you have performed any market appraisals for these properties, or alternatively, if you are aware of market values of comparable properties in the respective areas and how those values compare to the carrying values. We may further comment upon reviewing your response. Company Response: As explained in the Company's prior response detailed cash flow estimates were prepared for the remaining useful life of each of the properties identified for further review based upon our recently completed business plan. The business plan considers anticipated delays in leasing, lower market rates, and any future capital expenditures. Although our twenty-year historical experience is approximately 12 months to lease up empty space, the leasing timeframe in our business plan was based on 10-36 months due to the weak economic climate. We have assumed a 39 year life for the purpose for cash flow projection with no residual value. While these buildings are of various ages from 1 to 13 years old, we believe the actual life of these buildings to generate cash for the company under leasing arrangements, with proper maintenance, will be well beyond the 39 year time frame, however we have used 39 years as a conservative and consistent policy estimate. Detailed assumptions by property for Interchange and the three recently completed buildings are: Property A (2 Buildings): ------------------------- 1. Leasing assumptions based on projected market in this area: No new leases for 1 year for any portion of building. Beginning in first quarter 2011, a gradual lease up of the building begins with approximately 1/4th of the building. The remaining 3/4ths (or 3 suites) are assumed to be leased one suite every 8 months after that, and will not be assumed fully occupied until 2013. Any existing leases that expire in the 5 year timeframe will assume a 6 month re-let program. 2. The rental rates assumed to be approximately 10% lower than rates on existing lease in this building and equates to a low $4.00 per sq foot range ($4.05-$4.19 exclusive of any market driven tenant improvement amortization) with a 3% escalation for the first five years. 3. Operating expenses are detailed for first 5 years and assumed fixed based upon actual historical results and include a 3-4% per year inflationary factor. Real estate taxes based upon actual assessed rates per taxing authority with 3% inflation factor. NOI subsequent to the first 5 years assumed at 1.5% growth, based upon a conservative historical review. 4. Our cash flow analysis also anticipates approximately $2.7 million in additional capital expenditures for the 2 buildings over the next 3 years. Property B2: ------------ 1. Leasing assumption: Estimated 11 month vacancy in 2010 with approximately 1/4th of the building (16,000 sq ft) coming on board in last month of the year. The remaining 3/4ths (or 3 suites) of the building is assumed to be leased in 18 months, 24 months and 30 months, consecutively, with full occupancy expected by 2013. 2. Rental rates were projected based upon current LOI activity and proposals received from a Federal Government Agency for the entire building as well consideration from a private sector company for half of the building. The NNN rate used in these assumptions was $20.19, net electric. This approximates a 20% decline of market rates a year earlier. 3. Operating expenses are detailed for first 5 years and assumed fixed based upon actual historical results and include a 3-4% per year inflationary factor. Real estate taxes based upon actual assessed rates per taxing authority with 3% inflation factor. NOI subsequent to the first 5 years assumed at 1.5% growth, based upon a conservative historical review. 4. Our cash flow analysis also anticipates approximately $2.6 million in additional capital expenditures over the next 3 years. 5. Other factors: Our projections anticipate higher demand and lease up in the out years due to the favorable impact of BRAC on the Fort Meade and surrounding areas. Property C: ----------- 1. Leasing assumption: Estimated 10 months vacancy in 2010 with approximately 1/3rd of the building being occupied the last 2 months of 2010. This assumption was based on the on-going negotiations with a prospective tenant for over half of the building. The 1/3rd assumption took into account the possibility of deal not closing. The remaining 2 suites assume a leasing timeframe of 18 months and 24 months, respectively. 2. Rental rate projected based upon management's understanding of the market as represented by outside brokers as well as current, on-going negotiation with potential prospects. The rental rate used in our analysis was $5.65 sq ft (exclusive of any market driven tenant improvement amortization. 3. Operating expenses are detailed for first 5 years and assumed fixed based upon actual historical results and include a 3-4% per year inflationary factor. Real estate taxes based upon actual assessed rates per taxing authority with 3% inflation factor. NOI subsequent to the first 5 years assumed at 1.5% growth, based upon a conservative historical review. 4. Our cash flow analysis also anticipates approximately $1.2 million in additional capital expenditures over the next 3 years. 5. Other factors: Our projections anticipate higher demand and lease up in the out years due to the favorable impact of BRAC on the Aberdeen Proving Ground and surrounding areas as well as the location being ideally situated from I-95 in a brand new commercial area with access to a large and growing population. Property D: ----------- 1. Leasing assumption: Estimated 10 months vacancy in 2010 with approximately 1/4th of the building being occupied the last 2 months of 2010. This assumption was based on the on-going negotiations with prospective tenants. The remaining 3 suites assume a leasing timeframe of 18 months, 24 months and 30 months, respectively. 2. Rental rate projected based upon management's understanding of the market as represented by outside brokers as well as current, on-going negotiation with potential prospects. The rental rate used in our analysis was $5.55 sq ft (exclusive of any market driven tenant improvement amortization. 3. Operating expenses are detailed for first 5 years and assumed fixed based upon actual historical results and include a 3-4% per year inflationary factor. Real estate taxes based upon actual assessed rates per taxing authority with 3% inflation factor. NOI subsequent to the first 5 years assumed at 1.5% growth, based upon a conservative historical review. 4. Other factors: Our projections anticipate higher demand and lease up in the out years due to the favorable impact of BRAC on the Aberdeen Proving Ground (within 3 miles) and surrounding areas as well as the location being ideally situated on I-95. The following table details the net book value at September 30, 2009 (NBV) and the undiscounted net cash flows by year and in total for the 39 years by property for the properties selected for further review. Property B1 is a building that was 82% leased. Property C2/C3 are prepared construction pads and the net cash flow assumes construction of buildings in fiscal 2012 and 2013. 000's A1 A2 B1 B2 C C2/C3 D Totals NBV 5,043 4,919 5,337 7,201 4,855 3,394 7,322 38,070 Cash Flow 37,223 35,495 24,806 41,723 22,097 49,946 42,213 253,504 2010 (201) (356) 446 (880) (368) (4) (232) (1,594) 2011 (286) (5) 455 (611) (49) (450) (137) (1,083) 2012 (300) (534) 557 (388) 205 (6,575) 772 (6,262) 2013 830 833 550 972 499 (6,832) 931 (2,217) 2014 867 472 544 1,006 515 (547) 961 3,818 2015 876 848 549 1,017 520 1,583 971 6,365 2016 886 858 554 1,027 526 1,599 981 6,432 2017 896 867 560 1,038 531 1,615 992 6,500 2018 906 877 565 1,049 537 1,632 1,003 6,570 2019 917 887 571 1,060 543 1,648 1,014 6,640 2020 927 897 577 1,072 548 1,665 1,025 6,711 2021 938 907 583 1,083 554 1,682 1,036 6,783 2022 948 917 589 1,095 560 1,700 1,047 6,857 2023 959 928 595 1,107 566 1,717 1,059 6,931 2024 970 939 601 1,119 572 1,735 1,071 7,007 2025 982 949 607 1,131 579 1,753 1,083 7,083 2026 993 960 613 1,143 585 1,772 1,095 7,161 2027 1,005 971 620 1,156 591 1,791 1,107 7,240 2028 1,016 983 626 1,168 598 1,810 1,119 7,320 2029 1,028 994 633 1,181 604 1,829 1,132 7,402 2030 1,041 1,006 639 1,194 611 1,848 1,145 7,484 2031 1,053 1,017 646 1,208 618 1,868 1,158 7,568 2032 1,065 1,029 653 1,221 625 1,888 1,171 7,653 2033 1,078 1,041 660 1,235 632 1,909 1,185 7,740 2034 1,091 1,054 667 1,249 639 1,930 1,198 7,827 2035 1,104 1,066 674 1,263 646 1,951 1,212 7,916 2036 1,117 1,079 682 1,277 653 1,972 1,226 8,007 2037 1,131 1,092 689 1,292 661 1,994 1,240 8,098 2038 1,144 1,105 697 1,307 668 2,016 1,255 8,192 2039 1,158 1,118 704 1,322 676 2,038 1,270 8,286 2040 1,172 1,132 712 1,337 684 2,061 1,284 8,382 2041 1,186 1,145 720 1,352 692 2,084 1,300 8,479 2042 1,201 1,159 728 1,368 700 2,107 1,315 8,578 2043 1,216 1,173 736 1,384 708 2,131 1,330 8,678 2044 1,231 1,188 744 1,400 716 2,155 1,346 8,780 2045 1,246 1,202 753 1,417 725 2,180 1,362 8,883 2046 1,261 1,217 761 1,433 733 2,204 1,379 8,988 2047 1,277 1,232 770 1,450 742 2,230 1,395 9,095 2048 1,293 1,247 778 1,467 751 2,255 1,412 9,203 The Company does not have market appraisals on these properties, and there has been little or no sales activity in the Newark market, Baltimore-South sub-market, or Baltimore-North sub-market to provide adequate comparables. 2. We note that your response to previous comment under number 4. In light of the declines in revenue and gross profits experienced in the three months ended December 31, 2009, as shown in your Form 10-Q, please expand your disclosures in MD&A with respect to your impairment analysis in future filings to include specific assumptions used in the Company's impairment analysis such as expected changes in revenue and cost levels used in the analysis. Also, please revise future filings to include a discussion of how the impact of your declining revenue and gross profit levels, including any lost business or customers, was considered in determining that an updated impairment analysis was not required pursuant to ASC 360-10-35. As part of your response, please provide us with your proposed disclosures. Company Response: The Company's response to prior comment number 4 included a financial analysis, not an impairment analysis. The Company does not believe that this loss of revenue is significant to the long-term value of the transportation group due to the Company's operating history and current expectations. Based on the financial analysis performed the Company determined that a formal impairment analysis was not required. This loss of revenue is not considered a significant adverse change in the extent or manner of use of the long-lived assets for these reasons. The Company does not believe there is any circumstance or requirement to disclose an impairment analysis or why no impairment analysis was required when no impairment analysis is required. In future filings the Company will provide appropriate context regarding the impact of the loss of significant customers. Note 10-Business Segments ------------------------- 3. We note your response to previous comment number 5. In light of the information presented in your response to our prior comment in addition to the matters noted in our prior comment, we continue to believe that aggregation of the Royalties and Rents reporting unit and the Developed Properties reporting unit into a single segment may not be appropriate based on the criteria for aggregation outlined in ASC 280-10-50-11 (paragraph 17 of SFAS No. 131). In this regard it appears that the Royalties and Rent division included a different and significantly more diverse portfolio of real estate assets and related revenue streams than the Developed Properties unit with these including royalties from construction aggregates, land rents and timber sales in addition to office building rents. This would indicate that the reporting units do not have the same types or classes of customers for their products and services and that the methods used to distribute their products or services would be significantly different. Also, it appears that each of these reporting units has significantly different economic characteristics. For example, as noted in your response, depreciation/depletion for the Royalties and Rent division is approximately 7% of revenue while it is 28% to 30% of revenue for the Developed Property division. Also, management company and indirect expenses were 3% to 4% for the Royalties and Rent division while they were 9% to 12% of revenue for the Developed Property division. These factors contribute to different profitability and operating performance levels and are indicative that the divisions operations are not economically similar. In addition, as noted in your response, the CODM reviews the two division financial statements and assesses performance on that basis indicating that they are reviewed and analyzed by the CODM on an individual basis as separate operating segments. Given these factors, we continue to believe that it may not be appropriate to aggregate the two divisions into a single segment for purposes of your disclosures pursuant to SFAS No.131. Please confirm that you will revise your financial statements in future filings to present the operations of each of divisions as separate operating segments or alternatively, explain in detail why you do not believe this is required. Company Response: The Company will present revised financial statements in future filings to present the operations of each of the divisions as separate operating segments. Note 13-Commitments ------------------- 4. We note your response to our prior comment number 6. Please confirm that you will add disclosure in future filings to include the information provided in your response letter with respect to the reasons the property is not classified as "held for sale" at September 30, 2009 and the reasons why management does not believe the property's recorded carrying value is impaired. Company Response: The Company will disclose in future filings the reasons the property is not classified as held for sale in future filings. The Company discloses in its filings the value of the contract for sale of the property is $25 million and the carry value of the property is $5.7 million. The Company does not believe there is any circumstance or requirement to disclose why management does not believe the property's recorded carrying value is impaired. The Company hereby acknowledges that: * the Company is responsible for the adequacy and accuracy of the disclosure in the filings; * staff comments or changes to disclsoure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and * the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. The Company further acknowledges that the Division of Enforcement has access to all information that it provides to the staff of the Division of Corporation Finance in your review of its filings or in response to your comments on its filings. Please contact the undersigned if you have any additional comments or questions. Very truly yours, /s/ John D. Milton, Jr. __________________________________ John D. Milton, Jr. Vice President and Chief Financial Officer