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 by the end of 2013, subject to market conditions and our ability to negotiate sales of certain assets at prices acceptable to us. In 2011, development activities were curtailed for the majority of our real estate development projects as divestiture efforts increased. During 2011, we recorded amounts associated with the sale or other disposition of three separate projects located in California and will record amounts associated with the sale or other disposition of one project in California and one project in Oregon, subsequent to December 31, 2011. The impact of these dispositions did not have a significant impact on our results of operations.

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 year ended December 31, 2011, GLC was authorized to increase its financial support to consolidated land entities by a total of $12.0 million on three separate projects and by $13.5 million on three separate projects during 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 December 31, 2011, $7.2 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 years ended December 31, 2011 and 2010.

To determine if impairment charges should be recognized, the carrying amount of each consolidated real estate development project is reviewed on a quarterly basis in accordance with ASC Topic 360, Property, Plant, and Equipment, and each real estate development project accounted for under the equity method of accounting is reviewed in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. 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 consolidated project’s carrying amount may not be recoverable, the future undiscounted cash flows are estimated and compared to the project’s carrying amount. In the event that the project’s estimated future undiscounted cash flows or investment’s fair value are not sufficient to recover the carrying amounts, it is written down to its estimated fair value. The projects accounted for under the equity method are evaluated for impairment using the other-than-temporary impairment model, which requires an impairment charge to be recognized if the project's carrying amount exceeds its fair value, and the decline in fair value is deemed to be other than temporary. In the event that the estimated undiscounted future cash flows or fair value are not sufficient to recover the carrying amount of a project, it is written down to its estimated fair value.

During the year ended December 31, 2010, the Enterprise Improvement Plan required changes in the business plans of certain real estate projects to reduce capital expenditures, shorten development timelines, and revise marketing plans for the projects thus reducing their estimated future cash flows. Consequently, during the year ended December 31, 2010, we recorded impairment charges of $86.3 million, of which approximately $20.0 million was attributable to noncontrolling interests, on approximately one-third of our real estate investments related to the Enterprise Improvement Plan. See Note 11 below for further information. Additionally, 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 the remainder of our real estate projects, resulted in no significant impairment charges during the years ended December 31, 2010. During the years ended December 31, 2011 and 2009, we recorded no significant impairment charges related to our real estate development projects or investments.

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 consolidated balance sheets as follows (in thousands):



December 31,	2011		2010
Real estate held for development and sale	$	67,037	$	75,716
Other current assets	4,715		2,453
Total current assets	71,752		78,169
Property and equipment, net	—		3,771
Other noncurrent assets	—		1,095
Total assets	$	71,752	$	83,035

Current maturities of non-recourse debt	$	22,571	$	29,760
Other current liabilities	1,794		2,619
Total current liabilities	24,365		32,379
Long-term non-recourse debt	9,912		25,337
Other noncurrent liabilities	74		404
Total liabilities	$	34,351	$	58,120

Substantially all of the consolidated real estate entities’ 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 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 (dollars in thousands):



December 31,	2011			2010
	Amount		Number of Projects	Amount		Number of Projects
Residential	$	54,610	4	$	55,289	5
Commercial	12,427		5	20,427		5
Total	$	67,037	9	$	75,716	10

Washington	$	47,600	2	$	44,598	2
California	4,006		5	13,437		6
Texas	8,859		1	8,859		1
Oregon	6,572		1	8,822		1
Total	$	67,037	9	$	75,716	10

During the year ended December 31, 2011, two projects were reclassified from property and equipment to real estate held for development and sale and three were sold or otherwise disposed of. The reclassifications and sales/dispositions 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 (expense) income in the consolidated statements of operations and as a single line item on our consolidated balance sheets as investments in affiliates. At December 31, 2011, these entities were engaged in real estate development projects with total assets ranging from approximately $3.0 million to $49.6 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. We also have a cost method investment in the preferred stock of a corporation that designs and manufactures power generation equipment. During the year ended December 31, 2011, it was determined that the carrying amount of the cost method investment exceeded its fair value, which required us to recognize an impairment charge of $3.7 million.

Our investments in affiliates balance consists of the following (in thousands):



December 31,	2011		2010
Equity method investments in real estate affiliates	$	16,478	$	12,128
Equity method investments in other affiliates	11,841		12,882
Total equity method investments	28,319		25,010
Cost method investments	2,752		6,400
Total investments in affiliates	$	31,071	$	31,410

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



December 31,	2011			2010
	Amount		Number of Projects	Amount		Number of Projects
Residential	$	11,903	2	$	9,029	2
Commercial	4,575		3	3,099		3
Total	$	16,478	5	$	12,128	5

Texas	$	16,478	5	$	12,128	5
Total	$	16,478	5	$	12,128	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):



December 31,	2011		2010
Current assets	$	82,791	$	79,223
Long-term assets	74,980		77,645
Total assets	157,771		156,868
Current liabilities	9,321		6,108
Long-term liabilities	65,939		66,392
Total liabilities	75,260		72,500
Net assets	$	82,511	$	84,368
Granite’s share of net assets	$	28,319	$	25,010

The following table provides summarized statement of operations information for our affiliates accounted for under the equity method on a 100% combined basis (in thousands):



Years Ended December 31,	2011			2010			2009
Revenue	$	48,983		$	36,249		$	64,956
Gross profit	10,654			9,239			21,905
(Loss) income before taxes	(399		)	(5,026		)	13,508
Net (loss) income	(399		)	(5,026		)	13,508
Granite’s interest in affiliates’ net income	$	2,193		$	756		$	7,696