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 2012, we recorded amounts associated with the sale or other disposition of one project in California, one project in Oregon, and one project in Washington. These dispositions did not have a significant impact on our consolidated statements of operations.

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 year ended December 31, 2012, no authorization was provided and GLC did not increase its financial support to consolidated real estate entities. During the year ended December 31, 2011, GLC was authorized to increase its financial support to consolidated real estate entities by $12.0 million on three separate projects. During 2012, we sold or otherwise disposed of the projects associated with the previously authorized financial support; therefore, there will be no additional contributions related to the total authorized investment.

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, 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 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 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 years ended December 31, 2012 and 2011. 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. 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 year ended December 31, 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 consolidated balance sheets as follows (in thousands):



December 31,	2012		2011
Real estate held for development and sale	$	50,223	$	67,037
Other current assets	1,591		4,715
Total assets	$	51,814	$	71,752

Current maturities of non-recourse debt	$	10,707	$	22,571
Other current liabilities	386		1,794
Total current liabilities	11,093		24,365
Long-term non-recourse debt	922		9,912
Other noncurrent liabilities	—		74
Total liabilities	$	12,015	$	34,351

Substantially all of the consolidated real estate entities’ real estate held for development and sale 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,	2012			2011
	Amount		Number of Projects	Amount		Number of Projects
Residential	$	40,732	2	$	54,610	4
Commercial	9,491		4	12,427		5
Total	$	50,223	6	$	67,037	9

Washington	$	40,327	1	$	47,600	2
California	2,663		4	4,006		5
Texas	7,233		1	8,859		1
Oregon	—		—	6,572		1
Total	$	50,223	6	$	67,037	9

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, 2012, these entities were engaged in real estate development projects with total assets ranging from approximately $2.6 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, 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):



December 31,	2012		2011
Equity method investments in real estate affiliates	$	19,775	$	16,478
Equity method investments in other affiliates	11,024		11,841
Total equity method investments	30,799		28,319
Cost method investments	—		2,752
Total investments in affiliates	$	30,799	$	31,071

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



December 31,	2012			2011
	Amount		Number of Projects	Amount		Number of Projects
Residential	$	13,813	2	$	11,903	2
Commercial	5,962		3	4,575		3
Total	$	19,775	5	$	16,478	5

Texas	$	19,775	5	$	16,478	5
Total	$	19,775	5	$	16,478	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,	2012		2011
Current assets	$	85,354	$	82,791
Long-term assets	80,758		74,980
Total assets	166,112		157,771
Current liabilities	8,262		9,321
Long-term liabilities	65,744		65,939
Total liabilities	74,006		75,260
Net assets	$	92,106	$	82,511
Granite’s share of net assets	$	30,799	$	28,319

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,	2012		2011			2010
Revenue	$	52,342	$	48,983		$	36,249
Gross profit	13,254		10,654			9,239
Income (loss) before taxes	1,318		(399		)	(5,026		)
Net income (loss)	1,318		(399		)	(5,026		)
Granite’s interest in affiliates’ net income	$	1,988	$	2,193		$	756