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. 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 the nine months ended September 30, 2012, we recorded amounts associated with the sale or other disposition of two real estate projects, the impact of which was not significant to our results of operations. Subsequent to the sale or other disposition of these projects, GLC had no significant continuing involvement with the associated entities.

GLC receives authorization to provide additional financial support for certain of its real estate entities in increments to address changes in business plans. During the nine months ended September 30, 2012, GLC was not authorized to increase its financial support to consolidated real estate entities and during the nine months ended September 30, 2011, GLC was authorized to increase its financial support to consolidated real estate entities by $12.0 million on three separate projects. As of September 30, 2012, $3.1 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 nine months ended September 30, 2012 and 2011.

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 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 fair value is 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, we recorded no significant impairment charges to our real estate development projects or investments during the three and nine months ended September 30, 2012 and 2011.

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 balance sheets as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Real estate held for development and sale	$	57,964	$	67,037	$	79,173
Other current assets	1,946		4,715		2,801
Total assets	$	59,910	$	71,752	$	81,974

Current maturities of non-recourse debt	$	16,712	$	22,571	$	16,190
Other current liabilities	404		1,794		1,901
Total current liabilities	17,116		24,365		18,091
Long-term non-recourse debt	4,375		9,912		27,755
Other noncurrent liabilities	—		74		278
Total liabilities	$	21,491	$	34,351	$	46,124

Substantially all of the consolidated real estate entities’ real estate held for development and sale is 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:



	September 30, 2012			December 31, 2011			September 30, 2011
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	48,527	3	$	54,610	4	$	55,672	5
Commercial	9,437		4	12,427		5	23,501		7
Total	$	57,964	7	$	67,037	9	$	79,173	12

Washington	$	48,122	2	$	47,600	2	$	47,109	2
California	2,609		4	4,006		5	16,382		8
Texas	7,233		1	8,859		1	8,859		1
Oregon	—		—	6,572		1	6,823		1
Total	$	57,964	7	$	67,037	9	$	79,173	12

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 income and as a single line item on our condensed consolidated balance sheets as investments in affiliates. At September 30, 2012, these entities were engaged in real estate development projects with total assets ranging from approximately $2.7 million to $45.8 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 three months ended June 30, 2012, it was determined that the carrying amount of our cost method investment in a power generation equipment manufacturer exceeded its fair value, which required us to recognize a non-cash impairment charge of $2.8 million.

Our investments in affiliates balance consists of the following:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Equity method investments in real estate affiliates	$	18,873	$	16,478	$	15,856
Equity method investments in other affiliates	11,384		11,841		11,129
Total equity method investments	30,257		28,319		26,985
Cost method investments	—		2,752		6,450
Total investments in affiliates	$	30,257	$	31,071	$	33,435

The breakdown by type and location of our interests in real estate affiliates accounted for under the equity method is summarized below:



	September 30, 2012			December 31, 2011			September 30, 2011
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	12,805	2	$	11,903	2	$	11,511	2
Commercial	6,068		3	4,575		3	4,345		3
Total	$	18,873	5	$	16,478	5	$	15,856	5

Texas	$	18,873	5	$	16,478	5	$	15,856	5
Total	$	18,873	5	$	16,478	5	$	15,856	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)	September 30, 2012		December 31, 2011		September 30, 2011
Total assets	$	156,992	$	157,771	$	157,054
Net assets	85,162		82,511		80,306
Granite’s share of net assets	30,257		28,319		26,985