FIVE POINT HOLDINGS, LLC Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated audited financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the "Item 1A. Risk Factors" section of this report. Actual results could differ materially from those set forth in any forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."
Overview
Our Company
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the "operating company"). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as ofDecember 31, 2021 , approximately 62.9% of the operating company. The operating company directly or indirectly owns equity interests in:
•Five Point Land, LLC, which owns
•The Shipyard Communities, LLC (the "San Francisco Venture"), which is
developing Candlestick and
•Heritage Fields LLC (the "Great
•Five Point Office Venture Holdings I, LLC (the "Gateway Commercial Venture"), which owns portions of the Five Point Gateway Campus, a commercial office and medical campus located within the Great Park Neighborhoods; and •Five Point Communities, LP andFive Point Communities Management, Inc. (together, the "management company"), which provide development and property management services for the Great Park Neighborhoods and the Five Point Gateway Campus. The operating company consolidates and controls the management of all of these entities, except for the GreatPark Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the GreatPark Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. Please review "Structure and Formation of Our Company", "Our Communities" and "Commercial" under Part I, Item 1 of this report for a description of our organizational structure, each of our communities and our commercial venture.
Changes to Board and Executive Positions
OnFebruary 9, 2022 ,Daniel Hedigan was appointed as our Chief Executive Officer.Mr. Hedigan is an industry veteran with over 40 years of experience in the residential real estate sector and extensive expertise in mixed-use planned communities. PrecedingMr. Hedigan's appointment, and effective as ofSeptember 30, 2021 , our founder,Emile Haddad , stepped down from his roles as Chairman, Chief Executive Officer and President and transitioned to a senior advisory role.Mr. Haddad remains a member of the Board of Directors, and as the company founder, the Board elected him as Chairman Emeritus. Concurrent withMr. Haddad's transition, the Board of Directors namedStuart Miller as Executive Chairman of the Board. InJanuary 2022 ,Erik Higgins , our Chief Financial Officer, informed us of his plans to resign following the filing of this annual report, and the Board of Directors appointed our Vice President and Corporate Controller,Leo Kij , to serve as interim Chief Financial Officer uponMr. Higgins' resignation. In addition, inFebruary 2022 ,Lynn Jochim transitioned from her position as President and Chief Operating Officer into an advisory role pursuant to a three-year advisory agreement.
Operational Highlights
In 2021, ourValencia and Great Park Neighborhood communities saw significant homebuyer demand which in turn led to strong land sale activity. AtValencia , we continued to invest in the development of infrastructure with a focus on completing utility improvements and community amenities in our initial neighborhoods. By the end of 2021, our guest builders had opened 14 of our initial 18 neighborhoods for home sales and had sold 346 homes since sales began inMay 2021 . Homes in our initial neighborhoods consist of a wide mix of attached and detached single family homes that are attracting first time buyers along with trade-up buyers. In the fourth quarter of 2021, homebuilders purchased 643 homesites from us on approximately 57 acres of land for an aggregate gross purchase price of$167.3 million . At the Great Park Neighborhoods, in which we have a 37.5% percentage interest and manage all aspects of the development cycle, a robust demand for homes in our community drove home sales by builders to a total of 655 homes, an increase of approximately 11% over 589 homes sold in 2020. The high-quality schools and amenities at Great Park Neighborhoods and a strong 24
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local economy continue to attract homebuyers to our community. Additionally, a limited supply of new home inventory inOrange County has led to strong price appreciation among the single family attached and detached products available at the Great Park Neighborhoods. In 2021, the GreatPark Venture closed the sale of 887 homesites on approximately 72 acres of land for an aggregate gross purchase price of$393.3 million . The GreatPark Venture made distributions and related payments with proceeds from the land sales, of which we received approximately$98.3 million for both our ownership interests and incentive management fee compensation. The initial term of our development management agreement with the GreatPark Venture expired onDecember 31, 2021 but has been extended by mutual agreement of the parties throughApril 30, 2022 . We are currently in discussions with the other members of the GreatPark Venture regarding renewal of the agreement. While we currently expect the development management agreement to be renewed, we can provide no assurance as to the terms or timing of any such renewal, or that such renewal will be completed at all. In response to the COVID-19 pandemic, we took immediate steps to protect the health and well-being of our associates and to preserve the financial strength of the company. The substantial majority of our associates are still working remotely with access to necessary systems and resources to ensure business continuity. We will transition our associates back to our offices when we believe it is appropriate after taking into account all federal, state and local laws, rules and regulations.
Factors That May Influence our Results of Operations
Fluctuations in the Economy and Market Conditions
Our results of operations are subject to various risks and fluctuations in value and demand, many of which are beyond our control. Our business could be impacted by, among other things, downturns in economic conditions at the national, regional or local levels, particularly where our communities are located, inflation and increases in interest rates, significant job losses and unemployment levels, and declines in consumer confidence and spending. Inflation poses a risk to our business due to the possibility that higher prices would increase our development expenditures. In particular, our development expenditures are influenced by the price of oil, which is used in our development activities, including grading and paving roads. However, inflation can also indirectly improve our revenues by increasing the amount that homebuyers and commercial buyers are willing to pay for newly constructed homes and commercial buildings, which in turn, increases the amount that homebuilders and commercial developers are willing to pay for our residential and commercial lots.
Supply and Demand for
We generate most of our revenue from land sales, which are dependent on demand from homebuilders, commercial developers and commercial buyers, which is in turn dependent on the prices that homebuyers, commercial buyers and renters are expected to pay. In addition, sales of homesites typically include participation provisions that allow us to share in the profits realized by the homebuilders if the overall profitability of a block of homes exceeds an agreed-upon margin. Because our revenue is influenced by the prices that homebuyers and commercial buyers are willing to pay for homes or commercial buildings in our region, our results of operations may be influenced by, among other things, the overall supply and demand for housing and commercial properties, the prevailing interest rates for mortgages, and the availability of mortgage financing for residential and commercial developers and residential and commercial buyers.
Timing of Obtaining the Necessary Approvals for Development Activities
As a developer of real property inCalifornia , we are subject to numerous land use and environmental laws and regulations. Before we can begin developing our communities or development areas within them, we must obtain entitlements, permits and approvals. Depending upon the type of the approval being sought, we may also need to complete an environmental impact report, remediate environmental impacts or agree to finance or develop public infrastructure within the community or applicable development area, each of which would impose additional costs on us. In the event that we materially modify any of our existing entitlements, approvals or permits, we may also need to go through a discretionary approval process before the relevant governmental authority or go through an additional or supplemental environmental review and certification process. In addition, laws and regulations governing the approval processes provide third parties with the opportunity to challenge our entitlements, permits and approvals. The prospect of these third-party challenges creates additional uncertainty. Third-party challenges in the form of litigation can adversely affect the length of time or the cost required to obtain the necessary governmental approvals to develop, or result in the denial of our right to develop the particular community or development area in accordance with our current development plans. Furthermore, adverse decisions arising from any litigation can increase the cost or length of time to obtain ultimate approval of a project, if such approval is obtained at all, and can adversely affect the design, scope, plans and profitability of a project, which can negatively affect our financial condition and results of operations. See Part I, Item 3, of this report for a discussion of legal proceedings.
As a result of many of the factors described above, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
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Segments
Our four reportable operating segments include our three community segments,
•Our Valencia segment (formerly Newhall) includes operating results related to theValencia community and agricultural operations inLos Angeles andVentura Counties,California . Our investment in the Valencia Landbank Venture is also reported in theValencia segment. •Our San Francisco segment includes operating results for the Candlestick andThe San Francisco Shipyard communities, as well as results attributable to the development management services that we previously provided to affiliates of Lennar Corporation ("Lennar") in theSan Francisco Bay Area . Our last remaining management agreement with Lennar was terminated in early 2020.
•Our
•Our Commercial segment includes the operating results of the Gateway Commercial Venture's ownership in the Five Point Gateway Campus as well as property management services provided by the management company for the Gateway Commercial Venture.
Results of Operations
The following tables and related discussions on the results of operations are for the fiscal years endedDecember 31, 2021 and 2020. Refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II of our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 for financial data and related comparative discussions on results of operations for the fiscal years endedDecember 31, 2020 and 2019. 26
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The Company
The following table summarizes our consolidated historical results of operations
for the years ended
Year Ended December 31,
2021 2020
(in thousands)
Statement of Operations Data
REVENUES:
Land sales $ 139,500 $ 69,398
Land sales-related party 43,286 53,219
Management services-related party 39,081 28,132
Operating properties 2,527 2,870
Total revenues 224,394 153,619
COSTS AND EXPENSES:
Land sales 106,012 85,753
Management services 31,459 20,486
Operating properties 6,822 5,127
Selling, general, and administrative 77,118 83,504
Total costs and expenses 221,411 194,870
OTHER INCOME:
Interest income 94 1,369
Miscellaneous 3,720 356
Total other income 3,814 1,725
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 6,188 42,364
INCOME BEFORE INCOME TAX PROVISION 12,985 2,838
INCOME TAX BENEFIT (PROVISION) 325 (1,744)
NET INCOME 13,310 1,094
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 6,742 1,522
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY $ 6,568 $ (428)
Revenues. Revenues increased by $70.8 million , to $224.4 million for the year
ended December 31, 2021 , from $153.6 million for the year ended December 31,
2020 . The increase in revenues was primarily due to more land sales at our
Valencia segment in 2021 compared to 2020.
Cost of land sales. The cost of land sales increased by $20.3 million , to $106.0
million for the year ended December 31, 2021 , from $85.8 million for the year
ended December 31, 2020 . The increase in cost of land sales was attributable to
more land sales at our Valencia segment in 2021 compared to 2020.
Cost of management services. Cost of management services increased by $11.0
million , or 53.6%, to $31.5 million for the year ended December 31, 2021 , from
$20.5 million for the year ended December 31, 2020 . The increase was primarily
due to an increase in intangible asset amortization expense at our Great Park
segment.
Selling, general, and administrative. Selling, general, and administrative
expenses decreased by $6.4 million , or 7.6%, to $77.1 million for the year ended
December 31, 2021 , from $83.5 million for the year ended December 31, 2020 . The
decrease was primarily attributable to a decrease in corporate employee related
expenses, including share-based compensation, offset by an increase in selling
and marketing costs at our Valencia segment.
Equity in earnings from unconsolidated entities. Our consolidated results
reflect our share in the earnings or losses of our interests in our
unconsolidated entities, including the Great Park Venture and the Gateway
Commercial Venture, within equity in earnings from unconsolidated entities on
our consolidated statement of operations. Our segment results for the Great Park
segment and the Commercial segment present the results of the Great Park Venture
and the Gateway Commercial Venture at the book basis of the ventures within the
respective segments.
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Equity in earnings from unconsolidated entities decreased by$36.2 million , to$6.2 million for the year endedDecember 31, 2021 , from$42.4 million for the year endedDecember 31, 2020 . Equity in earnings for the year endedDecember 31, 2021 was primarily a result of recognizing our share of the net income of the GreatPark Venture generated from land and home sales during the period. At the end of the first quarter of 2020, we recognized an other-than-temporary impairment of$26.9 million attributed to our investment in the GreatPark Venture , which is included in equity in earnings from unconsolidated entities in our consolidated statement of operations for 2020. The impairment was primarily a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the GreatPark Venture . In determining that the impairment was other-than-temporary, we concluded at the time that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts at the onset of the COVID-19 pandemic would occur. See Note 4 to our consolidated financial statements included under Part II, Item 8 of this report. Offsetting the impairment loss for the year endedDecember 31, 2020 was our share of the gains from the sale of three buildings and land by the Gateway Commercial Venture. Income tax provision. All operations are carried on through our subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to the partners, including the partners of the operating company and the San Francisco Venture. We are responsible for income taxes on our allocable share of the operating company's income or gain. Pre-tax income of$13.0 million for the year endedDecember 31, 2021 resulted in a tax benefit of$0.3 million . The tax benefit was primarily the result of a$0.8 million state tax benefit from a change in estimates when we filed our tax return for the tax year endedDecember 31, 2020 during 2021, offset by an increase in our net deferred tax liability after changes in our valuation allowance. We assessed the realization of the net deferred tax asset and the need for a valuation allowance, based on positive and negative evidence, and determined that atDecember 31, 2021 it was more likely than not that such net deferred tax assets would not be realized. Pre-tax income of$2.8 million for the year endedDecember 31, 2020 resulted in a tax provision of$1.7 million . The tax provision was primarily the result of a$2.9 million decrease to our net deferred tax asset offset by a$1.9 million decrease to our deferred tax asset valuation allowance. Additionally, we recognized approximately$0.8 million of current state tax provision as a result of California Assembly Bill 85, which suspended the use of net operating losses in tax years 2020 through 2021. Our effective tax rate, before changes in valuation allowance, for the year endedDecember 31, 2021 increased from the year endedDecember 31, 2020 due to an increase in executive compensation subject to limitations in 2021. Net income attributable to noncontrolling interests. Until exchanged for our class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and other members of the San Francisco Venture. Net income attributable to the noncontrolling interests on the consolidated statement of operations represents the portion of earnings attributable to the interests in our subsidiaries held by the noncontrolling interests. 28
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Segment Results and Financial Information
The following tables reconcile the results of operations of our segments to our consolidated results for the years endedDecember 31, 2021 and 2020 (in thousands). Year Ended December 31, 2021 Total Removal of reportable Corporate and Total under unconsolidatedValencia San Francisco Great Park Commercial segments unallocated management entities(1) Total consolidated REVENUES: Land sales$ 139,500 $ -$ 346,758 $ -$ 486,258 $ -$ 486,258 $ (346,758) $ 139,500 Land sales-related party 43,286 - 62,797 - 106,083 - 106,083 (62,797) 43,286 Home sales - - 26,172 - 26,172 - 26,172 (26,172) - Management services-related party(2) - - 38,675 406 39,081 - 39,081 - 39,081 Operating properties 1,979 548 - 8,475 11,002 - 11,002 (8,475) 2,527 Total revenues 184,765 548 474,402 8,881 668,596 - 668,596 (444,202) 224,394 COSTS AND EXPENSES: Land sales 106,012 - 301,247 - 407,259 - 407,259 (301,247) 106,012 Home sales - - 20,022 - 20,022 - 20,022 (20,022) - Management services(2) - - 31,459 - 31,459 - 31,459 - 31,459 Operating properties 6,822 - - 1,889 8,711 - 8,711 (1,889) 6,822 Selling, general, and administrative 18,340 5,190 30,658 4,473 58,661 53,588 112,249 (35,131) 77,118 Management fees-related party - - 25,969 - 25,969 - 25,969 (25,969) - Total costs and expenses 131,174 5,190 409,355 6,362 552,081 53,588 605,669 (384,258) 221,411 OTHER INCOME (EXPENSE): Interest income - - 496 - 496 94 590 (496) 94 Interest expense - - - (1,235) (1,235) - (1,235) 1,235 - Miscellaneous 1,672 1,070 - - 2,742 978 3,720 - 3,720 Total other income (expense) 1,672 1,070 496 (1,235) 2,003 1,072 3,075 739 3,814 EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES (903) - (1,409) - (2,312) - (2,312) 8,500 6,188 SEGMENT PROFIT (LOSS)/INCOME BEFORE INCOME TAX BENEFIT 54,360 (3,572) 64,134 1,284 116,206 (52,516) 63,690 (50,705) 12,985 INCOME TAX BENEFIT - - - - - 325 325 - 325 SEGMENT PROFIT (LOSS)/NET INCOME$ 54,360 $ (3,572) $ 64,134 $ 1,284 $ 116,206 $ (52,191) $ 64,015 $ (50,705) $ 13,310 (1) Represents the removal of the GreatPark Venture and Gateway Commercial Venture operating results, which are included in theGreat Park segment and Commercial segment operating results at 100% of each venture's historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the
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Year Ended December 31, 2020
Total Removal of
reportable Corporate and Total under unconsolidated
Valencia San Francisco Great Park Commercial segments unallocated management entities(1) Total consolidated
REVENUES:
Land sales $ 69,398 $ - $ 22,165 $ - $ 91,563 $ - $ 91,563 $ (22,165) $ 69,398
Land sales-related party 53,219 - 2,662 - 55,881 - 55,881 (2,662) 53,219
Management services-related
party(2) - 835 26,900 397 28,132 - 28,132 - 28,132
Operating properties 2,275 595 - 24,241 27,111 - 27,111 (24,241) 2,870
Total revenues 124,892 1,430 51,727 24,638 202,687 - 202,687 (49,068) 153,619
COSTS AND EXPENSES:
Land sales 85,753 - 15,304 - 101,057 - 101,057 (15,304) 85,753
Management services(2) - 488 19,998 - 20,486 - 20,486 - 20,486
Operating properties 5,127 -
- 5,347 10,474 - 10,474 (5,347) 5,127
Selling, general, and
administrative 11,629 11,297 35,823 9,978 68,727 60,578 129,305 (45,801) 83,504
Management fees-related party - - 4,378 - 4,378 - 4,378 (4,378) -
Total costs and expenses 102,509 11,785 75,503 15,325 205,122 60,578 265,700 (70,830) 194,870
OTHER INCOME (EXPENSE):
Interest income 23 - 1,272 - 1,295 1,346 2,641 (1,272) 1,369
Interest expense - - - (8,857) (8,857) - (8,857) 8,857 -
Loss on extinguishment of debt - - - (474) (474) - (474) 474 -
Gain on asset sales, net - - - 112,260 112,260 - 112,260 (112,260) -
Miscellaneous 356 - - - 356 - 356 - 356
Total other income (expense) 379 - 1,272 102,929 104,580 1,346 105,926 (104,201) 1,725
EQUITY IN (LOSS) EARNINGS FROM
UNCONSOLIDATED ENTITIES (1,569) - - - (1,569) - (1,569) 43,933 42,364
SEGMENT PROFIT (LOSS)/LOSS
BEFORE INCOME TAX BENEFIT 21,193 (10,355) (22,504) 112,242 100,576 (59,232) 41,344 (38,506) 2,838
INCOME TAX PROVISION - - - - - (1,744) (1,744) - (1,744)
SEGMENT PROFIT (LOSS)/NET LOSS
$ 39,600 $ (38,506) $ 1,094 (1) Represents the removal of the GreatPark Venture and Gateway Commercial Venture operating results, which are included in theGreat Park segment and Commercial segment operating results at 100% of each venture's historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.
(2) For the
Valencia Segment (formerly Newhall)
OurValencia property consists of approximately 15,000 acres in northernLos Angeles County and is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space.Valencia is the continuation of our community where already today approximately 20,000 households reside and approximately 60,000 people work. We began selling homesites in the first development area atValencia in 2019, and as ofDecember 31, 2021 we had sold 1,866 homesites for aggregate consideration of approximately$421.2 million . Land sales and related party land sales revenues. Total land sales revenues increased by$60.2 million , or 49.1%, to$182.8 million for the year endedDecember 31, 2021 , from$122.6 million for the year endedDecember 31, 2020 . The increase in total land sales revenues was attributable to the recognition of revenue from the sale of land entitled for an aggregate of 643 homesites on approximately 57 acres during the year endedDecember 31, 2021 compared to the recognition of revenue from the sale of land entitled for an aggregate of 512 homesites on approximately 52 acres during the year endedDecember 31, 2020 . The base purchase price was$167.3 million for the 2021 sales. We also recognized additional revenue of$5.1 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive. The base purchase price was$118.7 million for the 2020 sales, and we also recognized additional revenue of$3.7 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive. In 2021, we also recognized$10.0 30
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million in land sale revenues associated with the receipt of$10.0 million in cash from a customer that acquired commercial property from us in 2011. The payment was contingent on the customer obtaining certain land use approvals for the property. In 2021, 123 of the homesites sold were purchased by the Valencia Landbank Venture, in which we own a 10% equity interest, and in 2020, 210 of the homesites sold were purchased by the Valencia Landbank Venture. Revenues associated with these closings are reported as land sales-related party. When we sell land to the Valencia Landbank Venture, we eliminate our pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Valencia Landbank Venture to third-party homebuilders. Additionally, in 2021, 328 of the homesites were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity. Cost of land sales. Cost of land sales during the years endedDecember 31, 2021 and 2020 were$106.0 million and$85.8 million , or 58.0% and 69.9% of total land sale revenues and land sales-related party revenues, respectively. The cost of land sales includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires us to estimate future development costs and the expected sales prices for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project. In 2021, we exonerated development bonds attributed to accrued development obligations on previously sold property, and as a result we reversed approximately$10.6 million in accrued development obligations from these prior period land sales as reductions to the current period's cost of sales. Selling, general, and administrative. Selling, general, and administrative expenses increased by$6.7 million , or 57.7%, to$18.3 million for the year endedDecember 31, 2021 , from$11.6 million for the year endedDecember 31, 2020 . The increase was mainly attributable to an increase in community related selling and marketing expenses in preparation for and in support of builder model home openings at the first development area ofValencia that occurred in 2021. Equity in loss from unconsolidated entity. During the years endedDecember 31, 2021 and 2020, we recognized equity in loss of$0.9 million and$1.6 million , respectively, from the Valencia Landbank Venture primarily as a result of eliminating our pro-rata share of the intra-entity profits generated from land sales to the Valencia Landbank Venture, offset by recognition of our pro-rata share of profits from land sold by the Valencia Landbank Venture to third-party homebuilders. San Francisco Segment Located almost equidistant between downtownSan Francisco and theSan Francisco International Airport , Candlestick andThe San Francisco Shipyard consist of approximately 800 acres of bayfront property in theCity of San Francisco . Candlestick andThe San Francisco Shipyard are designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space. InOctober 2019 , we received approval from theCity of San Francisco on a revised development plan for the first phase of Candlestick that is currently planned to include approximately 750,000 square feet of office space, 1,600 homes, and 300,000 square feet of lifestyle amenities centered around retail and entertainment. As currently planned, Candlestick ultimately is expected to include approximately 7,000 homes. Our development at Candlestick andThe San Francisco Shipyard is not subject toSan Francisco's Proposition M growth control measure, which imposes annual limitations on office development and is applicable to all other developers with projects in the city. This means the full amount of permitted commercial square footage at Candlestick andThe San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere inSan Francisco . In 2018, our disposition and development agreement with theCity of San Francisco was amended to increase the total amount of commercial use at Candlestick andThe San Francisco Shipyard by over two million square feet and increases our total commercial space to approximately 6.3 million square feet. AtThe San Francisco Shipyard , approximately 408 acres are still owned by theU.S. Navy and will not be conveyed to us until theU.S. Navy satisfactorily completes its finding of suitability to transfer, or "FOST," process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with theU.S. Navy , we had previously expected theU.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. andTetra Tech EC, Inc. (collectively, "Tetra Tech"), contractors hired by theU.S. Navy , misrepresented sampling results atThe San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by theU.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, theU.S. Department of Defense allocated$36.0 million to help fund resampling efforts atThe San Francisco Shipyard . An additional$60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from theU.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused byU.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans. 31
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We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination atThe San Francisco Shipyard and Tetra Tech's alleged misrepresentations of related sampling work. See Part I, Item 3 of this report for additional information. Given the preliminary nature of the claims to date, we cannot predict the outcome of these matters. Management services-related party revenues. The decrease in management services-related party revenues was due to the termination in early 2020 of our management agreement with Lennar with respect to theConcord community. In addition, in 2021, we amended certain other related party agreements, which resulted in recognition of a miscellaneous other income-related party gain of$1.1 million during the year endedDecember 31, 2021 . Selling, general, and administrative. Selling, general, and administrative expenses decreased by$6.1 million , or 54.1%, to$5.2 million for the year endedDecember 31, 2021 , from$11.3 million for the year endedDecember 31, 2020 . The decrease was mainly attributable to a decrease in employee related expenses as a result of reallocations of human capital resources among our projects resulting in lower cost allocations to the San Francisco Venture.
Great Park Segment
We have a 37.5% percentage interest in the GreatPark Venture , and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, an entity which performs development management services at Great Park Neighborhoods. We do not include the GreatPark Venture as a consolidated subsidiary in our consolidated financial statements. However, because of the relationship between the management company and the GreatPark Venture , we assess our investment in the GreatPark Venture based on the financial information for the GreatPark Venture in its entirety, and not just our equity interest in it. As a result, ourGreat Park segment consists of the operations of both the GreatPark Venture and the development management services provided by the management company at the GreatPark Venture . Great Park Neighborhoods consists of approximately 2,100 acres inOrange County and is being built around the approximately 1,300 acreOrange County Great Park , a metropolitan public park that is under construction. Great Park Neighborhoods is designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space. The GreatPark Venture sold the first homesites inApril 2013 and, as ofDecember 31, 2021 , had sold 7,099 homesites (including 709 affordable homesites) and commercial land allowing for development of up to 2 million square feet of commercial (research and development) space for aggregate consideration of approximately$3.0 billion . Interests in the GreatPark Venture are either "percentage interests" or "legacy interests." Holders of the legacy interests were entitled to receive priority distributions in an aggregate amount equal to$476.0 million and up to an additional$89.0 million from participation in subsequent distributions. The holders of percentage interests are entitled to all other distributions. During the year endedDecember 31, 2021 , the GreatPark Venture made aggregate distributions of$51.0 million to holders of legacy interests and$204.3 million to holders of percentage interests. The Company received$76.6 million for its 37.5% percentage interest. With the distributions to the holders of legacy interests, the GreatPark Venture fully satisfied the$476.0 million priority distribution rights and reduced the remaining maximum participating legacy interest distribution rights to$82.7 million . The remaining$82.7 million legacy interest will be paid on a pro-rata basis, with approximately 10% of future distributions paid to the holders of legacy interests and approximately 90% of such distributions paid to the holders of the percentage interests, until such time as the remaining balance has been fully paid. Land sales and related party land sales revenues. Land sales and related party land sales revenues increased by$384.7 million to$409.6 million for the year endedDecember 31, 2021 , from$24.8 million for the year endedDecember 31, 2020 . The increase was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 887 homesites on approximately 72 acres during the year endedDecember 31, 2021 compared to the recognition of revenue from the sale of land entitled for an aggregate of 35 homesites on approximately four acres during the same period in 2020. The base purchase price was$393.3 million for the 2021 sales. The GreatPark Venture also recognized$9.1 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive. The base purchase price was$20.3 million for the 2020 sales. The GreatPark Venture also recognized$0.5 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive for the 2020 sales. In 2021, 117 of the homesites sold were purchased by the Great Park Landbank Venture, in which the GreatPark Venture owns a 10% equity interest. Revenues associated with these closings are reported as land sales-related party. When the GreatPark Venture sells land to the Great Park Landbank Venture, it eliminates its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Great Park Landbank Venture to third-party homebuilders. Additionally, in 2021, 572 of the homesites sold were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity. During the years endedDecember 31, 2021 and 2020, revenues also included changes in estimates of variable consideration, including profit participation, from those amounts previously recorded by the Great 32
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Cost of land sales. Cost of land sales during the years endedDecember 31, 2021 and 2020 were$301.2 million and$15.3 million , or 73.6% and 61.6% of total land sales revenues, respectively. The cost of land sales includes both actual and estimated future capitalized costs allocated based upon relative sales values. Since this method requires the GreatPark Venture to estimate future development costs and the expected sales prices for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project. Home sale revenues. The GreatPark Venture has a fee build agreement with an unrelated third-party ("Fee Builder") that the GreatPark Venture contracted to build and act as a sales agent for 38 homesites within theGreat Park Neighborhoods. The Fee Builder initially incurs all costs to build, market and sell the residential homes, and the GreatPark Venture reimburses the Fee Builder as construction progresses and pays the Fee Builder certain fees during the construction phase of the homes and when homes are sold to homebuyers. During the year endedDecember 31, 2021 , the GreatPark Venture closed the sales of 16 homes to homebuyers generating$26.2 million in home sale revenues. The remaining homes subject to the fee building agreement are expected to close in 2022. Cost of home sales. Cost of home sales includes an allocation of land basis for each home sold in addition to home construction costs the GreatPark Venture reimburses to the Fee Builder and fees paid to the Fee Builder for the services provided. During the year endedDecember 31, 2021 , the GreatPark Venture recognized$20.0 million in cost of home sales. Management fee revenues. Management fee revenues are revenues generated by the management company from development management services provided to the GreatPark Venture . The management company receives a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation. The increase in management services related party revenue was mainly attributable to changes in estimates of the amount of variable consideration pertaining to the incentive compensation. Management services costs and expenses. Included within management services costs and expenses are general and administrative costs and expenses incurred directly by the management company's project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the GreatPark Venture . Corporate and non-project team salaries and overhead incurred by us are not allocated to management services costs and expenses or to our reportable segments and are reported in selling, general, and administrative costs in the consolidated statement of operations. During the year endedDecember 31, 2021 , management services costs and expenses increased by$11.5 million , or 57.3%, to$31.5 million , from$20.0 million for the year endedDecember 31, 2020 . The increase was primarily a result of changes in estimates in the utilization of the intangible asset. Intangible asset amortization expense was$20.3 million in 2021 compared to$8.6 million in 2020. Selling, general, and administrative. Selling, general, and administrative expenses are comprised of the GreatPark Venture's marketing related costs, property maintenance expenses, project team and other administrative costs. Project team and certain other administrative costs that are reimbursed to the management company per the terms of the development management agreement are not eliminated for segment reporting. Selling, general, and administrative costs decreased by$5.2 million , or 14.4%, to$30.7 million for the year endedDecember 31, 2021 , from$35.8 million for the year endedDecember 31, 2020 . The lower expense during the year endedDecember 31, 2021 was mainly attributable to a decrease in community related selling and marketing expenses incurred at the Great Park Neighborhoods. Management fees-related party. Management fees increased by$21.6 million , to$26.0 million for the year endedDecember 31, 2021 , from$4.4 million for the year endedDecember 31, 2020 . Management fees incurred by the GreatPark Venture were comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid as a percentage of distributions made to holders of the GreatPark Venture's percentage interests. When payments are deemed probable of being made, the GreatPark Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the GreatPark Venture records a cumulative adjustment in the period in which the estimate changes. The increase in management fees-related party was mainly attributable to changes in estimates of the amount of incentive compensation probable of being paid. The GreatPark Venture recognized expense of$19.1 million and a credit of$2.4 million for incentive compensation fees during the years endedDecember 31, 2021 and 2020, respectively. 33
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The table below reconciles theGreat Park segment results for the years endedDecember 31, 2021 and 2020 to the equity in earnings (loss) from our investment in the GreatPark Venture that is reflected in the consolidated statements of operations for the years endedDecember 31, 2021 and 2020, respectively. Year Ended December 31, 2021 2020 (in thousands) Segment net income (loss) from operations$ 64,134 $ (22,504)
Less net income of management company attributed to the
7,216 6,902
Net income (loss) of Great Park Venture 56,918 (29,406)
The Company's share of net income (loss) of the Great
21,344 (11,027) Basis difference amortization (14,912) (2,073) Other-than-temporary investment impairment - (26,851) Equity in earnings (loss) from Great Park Venture$ 6,432 $ (39,951) Commercial Segment We have a 75% interest in the Gateway Commercial Venture that is held through a wholly owned subsidiary of the operating company, and we serve as the manager of the Gateway Commercial Venture. However, the manager's authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture's financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company's results of operations related to these property management services within the Commercial segment. The Five Point Gateway Campus is a commercial campus consisting of approximately 73 acres of land in the Great Park Neighborhoods acquired by theGateway Commercial Venture in 2017. The Five Point Gateway Campus currently includes approximately one million square feet planned for research and development, medical and office space in four buildings. In 2020, the Gateway Commercial Venture sold three of the buildings and approximately 11 acres of land at the campus, generating$463.0 million in gross proceeds. Our corporate headquarters are located in the fourth building, which remains owned by theGateway Commercial Venture. In addition to the fourth building, the Gateway Commercial Venture owns approximately 50 acres of commercial land with additional development rights at the campus. Revenues. Revenues decreased by$15.8 million , or 64.0%, to$8.9 million for the year endedDecember 31, 2021 , from$24.6 million for the year endedDecember 31, 2020 . The decrease in revenues was mainly attributable to the Gateway Commercial Venture no longer receiving rental income attributed to the buildings that were sold in 2020. Other income. InMay 2020 , the Gateway Commercial Venture closed on the sale of approximately 11 acres of land and an approximately 189,000 square foot building for a purchase price of$108.0 million . The sale of this land and building, which had a carrying value of approximately$67.5 million , resulted in a gain of approximately$37.4 million , net of transaction costs. Concurrently, theGateway Commercial Venture made a debt payment of$30.0 million to its lender and made total distributions to its members of approximately$75.0 million , of which approximately$56.3 million was distributed to us. InAugust 2020 , the Gateway Commercial Venture closed on the sale of two buildings, comprising a total of approximately 660,000 square feet of research and development space for a purchase price of$355.0 million . The sale of the buildings, which had a carrying value of approximately$278.0 million , resulted in a gain of approximately$74.8 million , net of transaction costs. Concurrently, the Gateway Commercial Venture made a debt payment of$245.0 million to its lender and made total distributions to its members of approximately$107.0 million , of which approximately$80.3 million was distributed to us. Costs and expenses and interest expense. Costs and expenses decreased by$17.1 million , or 69.2%, to$7.6 million for the year endedDecember 31, 2021 , from$24.7 million for the year endedDecember 31, 2020 . As a result of theGateway Commercial Venture's asset dispositions and related debt repayments in 2020, cost and expenses, including interest, depreciation, and amortization expenses, were lower for the year endedDecember 31, 2021 . 34
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The table below reconciles the Commercial segment results for the years endedDecember 31, 2021 and 2020 to the equity in earnings from our investment in the Gateway Commercial Venture that is reflected in the consolidated statements of operations for the years endedDecember 31, 2021 and 2020, respectively. Year EndedDecember 31, 2021 2020 (in thousands) Segment net income from operations $
1,284
406 397
Net income of Gateway Commercial Venture 878 111,845
Equity in earnings from Gateway Commercial Venture $
659
Liquidity and Capital Resources
AtDecember 31, 2021 , we had$265.5 million of consolidated cash and cash equivalents, compared to$298.1 million atDecember 31, 2020 . As ofDecember 31, 2021 , no funds had been drawn on the operating company's$125.0 million revolving credit facility. However, letters of credit of$0.3 million were issued and outstanding under the revolving credit facility as ofDecember 31, 2021 , thus reducing the available capacity to$124.7 million . InApril 2021 , we entered into the third amendment to our unsecured revolving credit facility, which extended the maturity date of the revolving credit facility fromApril 2022 toApril 2024 , with one option to extend the maturity date by an additional year, subject to the satisfaction of certain conditions, including the approval of the administrative agent and lenders. Our short-term cash needs consist primarily of general and administrative expenses and development expenditures atValencia and the Candlestick andThe San Francisco Shipyard communities, interest payments under our senior notes and payments under a related party reimbursement obligation. In 2022, we will make interest payments of$49.2 million on our$625.0 million senior notes due 2025, and we expect to make$56.3 million in principal payments under our related party reimbursement obligation. Reimbursement payments may be deferred when our related party receives an extension on the maturity date of the associated EB-5 loan liability. Our related party has a history of receiving maturity date extensions, however, such further extensions are not within our control. The development stages of our communities continue to require significant cash outlays on both a short-term and long-term basis, and we expect to invest significant amounts on continued horizontal development atValencia over the next 12 months. We manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders with the objective of maintaining an appropriate level of liquidity. We expect to meet our cash requirements for at least the next 12 months with available cash, in addition to proceeds from land sales inValencia , distributions from our unconsolidated entities and collection of management fees under our management agreement with the GreatPark Venture . The initial term of our development management agreement has been extended by mutual agreement of the parties throughApril 30, 2022 . While we currently expect the development management agreement to be renewed, if we are unable to reach agreement on a renewal, or if the terms of any such renewal are less favorable to the company, our short-term cash flows may be negatively impacted. We still expect, however, to be able to meet both short-term and long-term cash obligations with our other sources of cash. Our long-term cash needs relate primarily to future horizontal development expenditures and investments in or vertical construction costs for properties that we may acquire or develop for our income-producing portfolio, along with debt service and general and administrative expenses. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales and reimbursements, which can occur at various points over the life cycle of our communities. We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. The level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives. These financings may not be available on attractive terms, or at all. We are a party to a tax receivable agreement ("TRA") with current and former holders of Class A units of the operating company and the holders of Class A units of the San Francisco Venture. The TRA provides for payments by us to such investors or their successors in aggregate amounts equal to 85% of the cash savings, if any, in income tax that we realize as a result of (a) increases 35
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in tax basis that are attributable to exchanges of Class A units of the
operating company for our Class A common shares or cash or certain other taxable
acquisitions of equity interests by us, (b) allocations that result from the
application of the principles of Section 704(c) of the Code and (c) tax benefits
related to imputed interest or guaranteed payments deemed to be paid or incurred
by us as a result of the TRA. We expect the TRA payments to be substantial,
however, the actual amount and timing of any payments under the TRA will vary
depending upon a number of factors, including the timing of exchanges of Class A
units of the operating company, the price of our Class A common shares at the
time of such exchanges, the extent to which such exchanges are taxable and our
ability to use the potential tax benefits, which will depend on the amount and
timing of our taxable income and the rate at which we pay income tax.
We are committed under various performance bonds and letters of credit ("LOCs")
to perform certain development activities and provide certain guarantees in the
normal course of the entitlement and development process.
We had outstanding performance bonds of
AtDecember 31, 2021 , the San Francisco Venture had outstanding guarantees benefiting a municipal agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of$198.3 million . Outstanding LOCs totaled$1.3 million at bothDecember 31, 2021 and 2020. At bothDecember 31, 2021 and 2020, we had$1.0 million in restricted cash and certificates of deposit securing certain of our LOCs. Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs. As ofDecember 31, 2021 , we were using approximately$0.3 million in capacity under the revolving credit facility to support LOCs. In 2004, our defined benefit pension plan was amended to cease future benefit accruals for services provided by participants of the plan and to close the plan to new participants. We do not anticipate making contributions to our pension plan over the next twelve months. We believe the pension plan is currently appropriately funded, however, declines in the value of the plan's assets could result in increased funding requirements in the long-term.
The following table aggregates certain of our material cash obligations and
commitments as of
Payment due by period
(in thousands)
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Senior notes payable $ 625,000 $ - $ - $ 625,000 $ -
Interest commitment on senior notes 196,876 49,219 98,438 49,219 -
Operating lease obligations 23,979 5,331 8,078 5,019 5,551
Water purchase agreement (1) 32,507 1,357 2,848 3,037 25,265
Related party reimbursement obligation
(2) 73,178 58,271 2,094 12,813 -
Total $ 951,540 $ 114,178 $ 111,458 $ 695,088 $ 30,816
(1)We are subject to a water purchase agreement requiring annual payments in
exchange for the delivery of water for our exclusive use. The agreement has an
initial 35-year term, which expires in 2039 with an option for a second 35-year
term.
(2)Prior to our acquisition of the San Francisco Venture, certain subsidiaries
of the San Francisco Venture entered into EB-5 loan agreements with lenders that
are authorized by the United States Citizenship and Immigration Services to
raise capital from foreign nationals who seek to obtain permanent residency in
the United States . Prior to our acquisition, related parties assumed the EB-5
loan liabilities, and the San Francisco Venture entered into reimbursement
agreements pursuant to which it agreed to reimburse the related parties for a
portion of the EB-5 loan liabilities and related interest. The amounts set forth
in the above table include interest based on the weighted average interest rate
of 4.5%. Reimbursement payments may be deferred when the related parties receive
an extension on the maturity date of the associated EB-5 loan liability.
The above table does not present accounts payable and other development liabilities incurred in the normal course of business.
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Summary of Cash Flows
The following table outlines the primary components of net cash provided by (used in) operating, investing and financing activities (in thousands):
Year Ended December 31,
2021 2020
Operating activities $ (81,420) $ (78,499)
Investing activities 75,315 52,940
Financing activities (26,577) (23,541)
Cash Flows from Operating Activities. Cash flows from operating activities are
primarily comprised of cash inflows from land sales, management services and
operating property results. Cash outflows are comprised primarily of cash
outlays for horizontal development costs, employee compensation, and selling,
general, and administrative costs. Our operating cash flows may vary
significantly each year due to the timing of land sales and the development
efforts related to our mixed-use planned communities.
Net cash used in operating activities increased by $2.9 million for the year
ended December 31, 2021 , compared to the year ended December 31, 2020 . Major
components of operating cash used in both periods consist of our continued
investment in horizontal development at our communities and selling, general,
and administrative costs.
During the years ended December 31, 2021 and 2020, we received $167.0 million
and $118.5 million , respectively, in net proceeds upon closing escrow from land
sales at our Valencia segment. During the year ended December 31, 2021 , we
received incentive compensation payments of $20.7 million under our development
management agreement with the Great Park Venture . The payment is net of $0.6
million that we concurrently distributed to the holders of the management
company's class B units. Additionally, we received $10.0 million in contingent
consideration associated with a commercial land sale that closed in 2011. During
the year ended December 31, 2020 , we received total distributions of $136.5
million from the Gateway Commercial Venture, of which $79.0 million is reflected
as a return on our investment (operating activity) in the statement of cash
flows with the balance reflected as an investing activity. We made total
interest payments of $49.2 million on our senior notes in each of the years
ended December 31, 2021 and 2020.
Cash Flows from Investing Activities. Net cash provided by investing activities
was $75.3 million for the year ended December 31, 2021 , compared to the net cash
provided by investing activities of $52.9 million for the year ended
December 31, 2020 .
During the year ended December 31, 2021 , we received a distribution of $76.6
million from the Great Park Venture , which is reflected as a return of our
investment (investing activity) in the statement of cash flows. Additionally, we
received a distribution of $1.0 million from our indirect legacy interest in the
Great Park Venture . For the year ended December 31, 2020 , we received total
distributions of $136.5 million from the Gateway Commercial Venture, of which
$57.5 million is reflected as a return of our investment (investing activity) in
the statement of cash flows with the balance reflected as an operating activity.
Cash Flows from Financing Activities. Net cash used in financing activities was
$26.6 million for the year ended December 31, 2021 , compared to net cash used in
financing activities of $23.5 million for the year ended December 31, 2020 .
During the years ended December 31, 2021 and 2020, we made tax distributions of
$4.4 million (net of amounts distributable to us as a partner of the operating
company) and $4.6 million , respectively, to noncontrolling interests in
accordance with the operating company's Limited Partnership Agreement ("LPA").
The tax distribution is treated as an advance distribution under the LPA. We
also made payments of $19.4 million and $13.5 million to reduce our related
party reimbursement obligation during the years ended December 31, 2021 and
2020, respectively. We used $2.0 million and $5.5 million during the years ended
December 31, 2021 and 2020, respectively, to net settle certain share-based
compensation awards with employees for tax withholding purposes.
Changes in Capital Structure
During the year endedDecember 31, 2021 , our ownership percentage in the operating company increased to 62.9%, primarily due to our issuance of shared-based compensation in the form of 1.4 million restricted Class A common shares offset by our reacquisition of approximately 0.3 million restricted Class A common shares from employees for income tax withholding purposes. The issuances and settlements resulted in the operating company issuing to us an equal number of Class A units of the operating company or retiring an equal number of Class A units of the operating company that we previously held. The table below summarizes outstanding Class A units of the operating company and Class A units of the San Francisco Venture, which are redeemable on a one-for-one basis for Class A units of the operating company, atDecember 31, 2021 and 2020 held by us and those held by noncontrolling interest members. 37
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2021 2020
Class A units of the operating company:
Held by us 70,107,552 69,051,284
Held by noncontrolling interest members 41,363,271 41,363,271
111,470,823 110,414,555
Class A units of the San Francisco Venture held by noncontrolling
interest members 37,870,273 37,870,273
149,341,096 148,284,828
At December 31, 2021 , we had 79,233,544 Class B common shares outstanding that
were held by the noncontrolling interest members of the operating company and
the Class A unitholders of the San Francisco Venture. The Class B common shares
will automatically convert to Class A common shares at a ratio of 0.0003 Class A
common shares for each Class B common share. The conversions will occur when the
holders of Class A units of the operating company, including Class A units that
have been issued upon redemption of Class A units of the San Francisco Venture,
are redeemed for our Class A common shares or cash, at our election.
Related Party Revenues
In the ordinary course of our business, we have sold and expect to continue to sell homesites to Lennar, which is our largest equity owner, or its affiliates, subsidiaries or joint ventures in which it is a member. We did not sell homesites directly to Lennar during the years endedDecember 31, 2021 , 2020, and 2019 but did recognize revenues related to certain fees or profit participation associated with homes sold by Lennar to homebuyers atValencia . During the years endedDecember 31, 2021 and 2019, we sold homesites to an unaffiliated land banking entity and recognized$76.5 million and$139.9 million of such revenue, respectively. Lennar has retained the option to acquire these homesites in the future from the unaffiliated land banking entity. During the years endedDecember 31, 2021 and 2020, we sold homesites to the Valencia Landbank Venture, our equity method investee, and recognized$43.2 million and$53.2 million of such revenue, respectively. We also provide management services to the GreatPark Venture pursuant to a development management agreement. In addition to our 37.5% percentage interest in the GreatPark Venture , Lennar owns a 25% legacy interest in the GreatPark Venture . Lennar, along with an affiliate ofCastlelake , also owns interests in an entity that owns a 12.5% legacy interest in the GreatPark Venture . For the years endedDecember 31, 2021 and 2020, we recognized$38.7 million and$26.9 million , respectively, of revenue from management services provided to the GreatPark Venture . Other than theValencia Landbank Venture and the GreatPark Venture , no related party customer accounted for more than 10% of our revenue during the years endedDecember 31, 2021 and 2020. In addition to the related party revenues, during the year endedDecember 31, 2021 , we also sold homesites to two third-party home builders and recognized$30.3 million and$22.5 million of revenue, respectively, which separately accounted for more than 10% of total consolidated revenues. During the year endedDecember 31, 2020 , we sold homesites to a third-party home builder and recognized$59.1 million of revenue, which accounted for more than 10% of total consolidated revenues. Other than the third-party home builders and the unaffiliated land bank entity, no third-party customer accounted for more than 10% of our revenue during the years endedDecember 31, 2021 and 2020.
Critical Accounting Estimates
Critical accounting estimates are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. Our critical accounting estimates are discussed below. For a summary of our significant accounting policies, see Note 2 to the notes to the consolidated financial statements in Item 8, Part II of this report.
Cost of Land Sales
Capitalized inventory costs include land, horizontal development, indirect
project costs, real estate taxes and interest related to financing development
and construction. The allocation of capitalized inventory costs to individual
parcels within a project utilizes the relative sales value method. Under the
relative sales value method, each parcel in the project under development is
allocated costs in proportion to the estimated overall sales price of the
project. Since this method requires us to estimate future development costs and
the expected sales price for future land sales, the profit margin on subsequent
parcels sold will be affected by both changes in the estimated total revenues,
as well as any changes in the estimated total cost of the project.
We believe that the accounting estimates related to cost of land sales are
critical accounting estimates because of the use of projected cash flows in the
estimate. Cash flows are significantly affected by estimates and assumptions
related to market supply and demand, the local economy, projected pace of sales
of homesites, pricing and price appreciation over the estimated selling period,
the length of the estimated development and selling periods, remaining
development obligations and the cost of completing development, general and
administrative costs, and other factors. In determining these estimates and
assumptions, we utilize historical trends from our past development projects, in
addition to internal and external market studies and trends, which generally
include, but are not
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limited to, statistics on population demographics and unemployment rates. Using all available information, we calculate our best estimate of projected cash flows for each asset. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change as market and economic conditions change.
Incentive Management Agreement Fees
Revenues from management services are recognized as the customer consumes the benefits of the performance obligation over time. The transaction price pertaining to our management agreement with the GreatPark Venture is comprised of fixed and variable components, including incentive compensation fee provisions that are contingent on the performance of the GreatPark Venture . In making estimates of incentive compensation we expect to be entitled to receive in exchange for providing management services, we make significant assumptions and judgments in evaluating the factors that may determine the amount of consideration we will ultimately receive. In doing so, we typically utilize cash flow projections for the community. We believe that the accounting estimate related to incentive management fees is a critical accounting estimate because when changes in our estimates and assumptions occur, our estimate of the amount of incentive compensation we expect to be entitled to receive may change, resulting in a cumulative adjustment being recorded in the period of the change that may be material.
Investments in Unconsolidated Entities
For investments in entities that we do not control, but over which we exercise significant influence, we use the equity method of accounting. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for our share in the earnings (losses) of the venture and cash contributions and distributions. We evaluate the recoverability of our investments in unconsolidated entities by first reviewing each investment for any indicators of impairment. If indicators are present, we estimate the fair value of the investment. We typically estimate the fair value of our investments using a discounted cash flow of distributions we expect to receive from the venture. The determination of fair value also requires discounting the estimated cash flows at a rate that we believe a market participant would determine to be commensurate with the inherent risks associated with the investment and related estimated cash flow streams. The discount rate used in determining each investment's fair value generally depends on the investment's projected life and development stage. If the carrying value of the investment is greater than the estimated fair value, management makes an assessment of whether the impairment is "temporary" or "other-than-temporary." In making this assessment, management considers (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the entity and (3) our intent and ability to retain our interest long enough for a recovery in market value. If management concludes that the impairment is "other-than-temporary," we reduce the investment to its estimated fair value. We believe that the accounting related to investments in unconsolidated entities is a critical accounting estimate because our impairment evaluation uses significant estimates in determining the fair value of our investments, including projected cash flows and the selected discount rate. Changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment losses.
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