Real Estate Entities and Investments in Affiliates

The operations of our Real Estate segment are conducted through our wholly owned subsidiary, Granite Land Company (“GLC”). Generally, GLC participates with third-party partners in entities that are formed to accomplish specific real estate development projects. The agreements with GLC’s partners in these real estate entities define each partner’s management role and financial responsibility in the project. If one of GLC’s partners is unable to fulfill its management role or make its required financial contribution, GLC may assume full management or financial responsibility for the project. This may result in the consolidation of entities that are accounted for under the equity method in our consolidated financial statements. The amount of GLC’s exposure is limited to GLC’s equity investment in the real estate joint venture.

Substantially all the assets of these real estate entities in which we are participants through our GLC subsidiary are classified as real estate held for development and sale or real estate held for use. All outstanding debt of these entities is non-recourse to Granite. However, there is recourse to our real estate affiliates that incurred the debt. Our real estate affiliates include limited partnerships or limited liability companies of which we are a limited partner or member. In the fourth quarter of 2010, we publicly announced our work in progress on our Enterprise Improvement Plan which includes business plans to orderly divest of our real estate investment business over the next three years subject to market conditions.

GLC receives authorization to provide additional financial support for certain of its real estate entities in increments as they achieve entitlement or development milestones, or to address changes in business plans. During the six months ended June 30, 2011, GLC was authorized to increase its financial support to consolidated land entities by a total of $12.0 million on three separate projects. This compares to an increase of $9.7 million on one project for the same period in 2010. The authorization will allow GLC entities to refinance debt and complete entitlements necessary to sell these projects in keeping with the Company’s plans to orderly divest its real estate investment business. As of June 30, 2011, $8.5 million of the total authorized investment had yet to be contributed to the consolidated entities.

We have determined that certain of the real estate joint ventures are VIEs as defined by ASC Topic 810, Consolidation, and related standards. To ascertain if we are required to consolidate the VIE, we continually evaluate whether we are the VIE’s primary beneficiary. The factors we consider in determining whether we are a VIE’s primary beneficiary include the decision authority of each partner, which partner manages the day-to-day operations of the project and the amount of our equity investment in relation to that of our partners. Based on our ongoing primary beneficiary assessments, there were no changes to our determinations of whether we are the VIE’s primary beneficiary for existing real estate entities during the six months ended June 30, 2011 and 2010.

On a quarterly basis the carrying amount of each real estate development project is reviewed in accordance with ASC Topic 360, Property, Plant, and Equipment, to determine if impairment charges should be recognized. The review of each project includes an evaluation of entitlement status, market conditions, existing offers to purchase, cost of construction, debt load, development schedule, status of joint venture partners and other factors specific to each project to determine if events or changes in circumstances indicate that a project’s carrying amount may not be recoverable. If events or changes in circumstances indicate that a project’s carrying amount may not be recoverable, the undiscounted future cash flows are estimated and compared to the project’s carrying amount. In the event that the estimated undiscounted future cash flows are not sufficient to recover the carrying amount of a project, it is written down to its estimated fair value.

Based on our quarterly evaluations of each project’s business plan and our review of each project in accordance with ASC Topic 360, we recorded no significant impairment charges during the three and six months ended June 30, 2011 and 2010.

Consolidated Real Estate Entities

The carrying amounts and classification of assets and liabilities of real estate entities we are required to consolidate are included in our condensed consolidated financial statements as follows:



(in thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Real estate held for development and sale	$	78,725	$	75,716	$	148,897
Other current assets	3,011		2,453		3,893
Total current assets	81,736		78,169		152,790
Property and equipment, net	203		3,771		7,894
Other noncurrent assets	—		1,095		2,081
Total assets	$	81,939	$	83,035	$	162,765

Current maturities of non-recourse debt	$	15,954	$	29,760	$	39,657
Other current liabilities	2,045		2,619		4,189
Total current liabilities	17,999		32,379		43,846
Long-term non-recourse debt	28,907		25,337		16,615
Other noncurrent liabilities	313		404		451
Total liabilities	$	47,219	$	58,120	$	60,912

For our consolidated real estate entities, substantially all of the real estate held for development and sale as well as property and equipment are pledged as collateral for the debt of the real estate entities. All outstanding debt of the real estate entities is recourse only to the real estate affiliate that incurred the debt (i.e. the limited partnership or limited liability company of which we are a limited partner or member). Our proportionate share of the profits and losses of these entities depends on the ultimate operating results of the entities.

Included in current assets on our condensed consolidated balance sheets is real estate held for development and sale. The breakdown by type and location of our real estate held for development and sale is summarized below:



	June 30, 2011			December 31, 2010			June 30, 2010
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	55,433	5	$	55,289	5	$	127,111	6
Commercial¹	23,292		7	20,427		5	21,786		5
Total	$	78,725	12	$	75,716	10	$	148,897	11

Washington	$	46,184	2	$	44,598	2	$	85,500	2
California¹	16,335		8	13,437		6	24,901		7
Texas	8,859		1	8,859		1	8,916		1
Oregon	7,347		1	8,822		1	29,580		1
Total	$	78,725	12	$	75,716	10	$	148,897	11

¹The increase in the number of projects from December 31, 2010 to June 30, 2011 is due to the reclassification of two projects from property and equipment to real estate held for development and sale. The reclassifications were due to a change in business plans for the projects in connection with our Enterprise Improvement Plan.

Investments in Affiliates

We account for our share of unconsolidated real estate entities in which we have determined we are not the primary beneficiary in other income in the condensed consolidated statements of operations and as a single line item on our condensed consolidated balance sheets as investments in affiliates. At June 30, 2011, these entities were engaged in real estate development projects with total assets ranging from approximately $3.1 million to $49.0 million. Our proportionate share of the profits and losses of these entities depends on the ultimate operating results of the entities.

Additionally, we have investments in non-real estate affiliates that are accounted for using the equity method. The most significant of these investments is a 50% interest in a limited liability company which owns and operates an asphalt terminal in Nevada.

During the year ended December 31, 2010, we entered into an agreement with a corporation that designs and manufactures power generation equipment to create a limited liability company whose purpose is to develop and construct power generation facilities in the western United States. Our investment as of June 30, 2011 was $1.5 million. Our share of profits and losses depends on the operating results of the company. Although the company is a VIE, we are not the primary beneficiary and, accordingly, we account for it as an equity method investment in other affiliates.

We also have a cost method investment of $6.5 million as of June 30, 2011 in the preferred stock of a corporation that designs and manufactures power generation equipment.

Our investments in affiliates balance consists of the following:



(in thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Equity method investments in real estate affiliates¹	$	15,865	$	12,128	$	13,798
Equity method investments in other affiliates¹	10,617		12,882		11,012
Total equity method investments	26,482		25,010		24,810
Cost method investments	6,450		6,400		6,400
Total investments in affiliates	$	32,932	$	31,410	$	31,210

¹A reclassification of an investment between these categories has been made to the June 30, 2010 amounts to conform to current year presentation. This reclassification did not have a significant impact on our previously reported footnote disclosure.

The breakdown by type and location of our interests in real estate ventures is summarized below:



	June 30, 2011			December 31, 2010			June 30, 2010
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	11,391	2	$	9,029	2	$	8,894	2
Commercial	4,474		3	3,099		3	4,904		3
Total	$	15,865	5	$	12,128	5	$	13,798	5

Texas	$	15,865	5	$	12,128	5	$	13,798	5
Total	$	15,865	5	$	12,128	5	$	13,798	5

The following table provides summarized balance sheet information for our affiliates accounted for under the equity method on a 100% combined basis:



(in thousands)	June 30, 2011		December 31, 2010		June 30, 2010
Total assets	$	152,358	$	156,868	$	163,720
Net assets	79,666		84,368		87,027
Granite’s share of net assets	26,482		25,010		24,810