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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-13 · 288 added, 236 removed, 281 unchanged (65% of the section changed)

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The operating company directly or indirectly owns equity interests in:

Five Point Land, LLC (“FPL”), which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia (formerly known as Newhall Ranch), our community in northern Los Angeles County, California;

• Five Point Land, LLC, which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia (formerly known as Newhall Ranch), our community in northern Los Angeles County, California;

• The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard, our communities in the City of San Francisco, California;

• Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods, our community in Orange County, California;

• 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;

• Five Point Communities, LP and Five Point Communities Management, Inc.

(together, the “management company”), which have historically managed the development of Great Park Neighborhoods and Valencia;

Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns the Five Point Gateway Campus, our commercial office campus located within the Great Park Neighborhoods.

(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 Great Park Venture and the Gateway Commercial Venture.

The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method.

The management company performs development management services for the Great Park Venture and property management services for the Gateway Commercial Venture.

Please review “Our Communities” and “Commercial” under Part I, Item 1 of this report for a description of each of our communities and our commercial venture.

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.

Operational Highlights

In 2019, we continued our horizontal land development activities at Valencia by investing in the community’s infrastructure, including grading and utility improvements, and in the fourth quarter we entered into purchase and sale agreements to sell 781 homesites.

We closed on 711 of the homesites in the fourth quarter,

resulting in gross proceeds of approximately $135.2 million.

The remaining homesites are anticipated to close in the first half of 2020.

In San Francisco, in early 2019, we mutually agreed to unwind the partnership with Macerich resulting in us making a principal payment of $65.1 million related to an outstanding promissory note.

Concurrently, we were released from certain obligations, including the obligation to convey certain parcels at Candlestick to the partnership, which has allowed us to redesign the property for alternative uses.

We recognized a noncash gain in 2019 of $64.9 million as a result of the Macerich partnership unwind.

In the fourth quarter, we received approval from the City of San Francisco on our 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.

In 2019, the Great Park Venture entered into purchase and sale agreements to sell 660 homesites.

The Great Park Venture closed escrow on 587 of the homesites in 2019 and 73 of the homesites are anticipated to close in 2020.

Gross proceeds received by the Great Park Venture on the closed sales were approximately $255.4 million.

In early 2020, the Great Park Venture made a distribution of $76.3 million to the holders of legacy interests, reducing the remaining aggregate distributions to the holders of legacy interests to approximately $134.0 million.

Of the remaining $134.0 million, the first $45.0 million will be paid to the holders of legacy interests prior to the commencement of distributions to the holders of percentage interests.

See Note 4 to our consolidated financial statements included under Part II, Item 8 of this report for additional discussion of distribution priorities at the Great Park Venture.

Liquidity and financing highlights

As of December 31, 2019, total liquidity of $470.8 million was comprised of cash and cash equivalents totaling $346.8 million and borrowing availability of $124.0 million under our unsecured revolving credit facility.

In 2019, we completed a $125.0 million add-on offering of our 2025 senior notes providing us additional liquidity for our operations, including our ability to pursue commercial opportunities.

Additionally, we amended our revolving credit facility during the year to extend the maturity date to April 2022.

In 2020, we continued our horizontal land development activities at Valencia by investing in the community’s infrastructure, including grading and utility improvements.

In the fourth quarter, we sold 487 homesites for a gross purchase price of $115.4 million and closed escrow on 442 of the homesites, resulting in gross proceeds of approximately $102.2 million.

The remaining 45 homesites are expected to close in the latter part of 2021.

In May 2020, we also closed 70 previously sold homesites at Valencia with a base purchase price of $16.6 million.

Since our first land sales at Valencia in December 2019, we have sold or entered into sales contracts for 1,268 homesites.

Our guest builders continue to prepare for the opening of the first development areas at Valencia, and we expect homes sales to begin in Summer 2021.

In 2020, the Gateway Commercial Venture closed on the sale of three buildings and approximately 11 acres of land at the Five Point Gateway Campus for a combined purchase price of $463.0 million.

The sale of the buildings and land resulted in a total gain to the Gateway Commercial Venture of approximately $112.2 million, net of transaction costs.

Additionally, the Gateway Commercial Venture made debt payments of $275.0 million to its lender and made total distributions of approximately $182.0 million to its members, of which approximately $136.5 million was distributed to us.

Following these sales, the Gateway Commercial Venture retains ownership of one building and approximately 50 acres of commercial land with additional development rights at the campus.

In the first quarter of 2020, the Great Park Venture closed the second take down of a two-take down purchase and sale agreement.

The first take down closed in 2019.

The gross proceeds of the second take down were $20.3 million, representing the base purchase price for land entitled for 35 homesites.

In December 2020, we entered into a joint venture formed to provide land banking opportunities to homebuilders acquiring homesites at Valencia (the “Valencia Landbank Venture”).

We made an initial contribution of $4.2 million and have a 10% interest in the Valencia Landbank Venture.

210 of the homesites sold at Valencia in December 2020 were sold to the Valencia Landbank Venture, and the Valencia Landbank Venture concurrently entered into option agreements with homebuilders for these homesites.

We expect the Valencia Landbank Venture will continue to facilitate land sales at Valencia to certain homebuilders who are pursuing balance sheet alternatives to land acquisition and just-in-time delivery of homesites.

In response to the COVID-19 pandemic that was declared in early 2020, we took immediate steps to protect the health and well-being of our associates and to preserve the financial strength of the company.

Beginning in March 2020, all our associates started working remotely with access to necessary systems and resources to ensure business continuity.

Substantially all our associates are continuing to work remotely, however, our executive team has been working at our corporate headquarters, and certain field operations associates are working at our project sites.

Our executive team analyzed the impact of projected land sale revenues being delayed and then assessed which variable expenditures should be deferred, accordingly.

As a result, we immediately limited development activities at our communities to only those activities essential to supporting active homebuilding by builders and to meet our contractual obligations.

Despite continued economic volatility, homebuilding ended up being a bright spot in 2020 due to consumer demand for more space and a historically favorable mortgage environment.

At the Great Park Neighborhoods, after a significant but brief decline in home sales in March and April of 2020, our guest builders returned to consistent rates of home sales in the second half of 2020.

We are optimistic that favorable market conditions will continue for our guest builders and have therefore resumed regular development activities.

As we monitor trends in COVID-19 cases in California, we will manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders.

Factors That May Influence our Results of Operations

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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.

prevailing interest rates for mortgages, and the availability of mortgage financing for residential and commercial developers and residential and commercial buyers.

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

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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.

Our four reportable segments are Valencia (formerly Newhall), San Francisco, Great Park and Commercial:

Our Valencia segment includes operating results for the Valencia community, agricultural operations in Los Angeles and Ventura Counties, California, as well as results attributable to The Tournament Players Club at Valencia Golf Course (which was sold in January 2018).

Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities, as well as results attributable to the development management services that we provide to affiliates of Lennar Corporation (“Lennar”) with respect to the Concord community and the Treasure Island community in the San Francisco Bay Area.

As of December 31, 2018, we terminated the services we provided under the development management agreement for the Treasure Island Community, and the management agreement with respect to the Concord community was terminated in early 2020.

Our four reportable segments are Valencia, San Francisco, Great Park and Commercial:

• Our Valencia segment (formerly Newhall) includes operating results related to the Valencia community and agricultural operations in Los Angeles and Ventura Counties, California.

• Our San Francisco segment includes operating results for the Candlestick and The 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 the San Francisco Bay Area.

Our management agreement with Lennar with respect to the Concord community was terminated in early 2020.

• Our Great Park segment includes operating results for the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.

Our Commercial segment includes the operating results of the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.

• Our Commercial segment includes the operating results of the Gateway Commercial Venture’s ownership in the Five Point Gateway Campus and 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 ended December 31, 2020 and 2019.

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 ended December 31, 2018 for financial data and related discussions on results of operations for the fiscal years ended December 31, 2018 and 2017.

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 ended December 31, 2019 for financial data and related comparative discussions on results of operations for the fiscal years ended December 31, 2019 and 2018.

The following table summarizes our consolidated historical results of operations for the years ended December 31, 2020 and 2019.

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Statement of Operations Data

$ 69,398 $ 140,020

Land sales—related party

Management services—related party

28,132 39,580

Operating properties

Total revenues

153,619 184,380

COSTS AND EXPENSES:

85,753 97,113

Management services

20,486 28,492

Operating properties

Selling, general, and administrative

83,504 103,586

Total costs and expenses

194,870 234,756

OTHER INCOME:

Adjustment to payable pursuant to tax receivable agreement

Interest income

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Total other income

EQUITY IN EARNINGS (LOSS) FROM UNCONSOLIDATED ENTITIES

INCOME (LOSS) BEFORE INCOME TAX (PROVISION) BENEFIT

INCOME TAX (PROVISION) BENEFIT

NET INCOME (LOSS)

LESS NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

Revenues increased by $135.4 million , to $184.4 million for the year ended December 31, 2019 , from $49.0 million for the year ended December 31, 2018 .

The increase in revenues was primarily due to land sales at our Valencia segment (formerly Newhall) in 2019.

EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 42,364 2,327

INCOME BEFORE INCOME TAX PROVISION 2,838 24,713

INCOME TAX PROVISION (1,744) (2,445)

NET INCOME 1,094 22,268

LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 1,522 13,235

NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY $ (428) $ 9,033

Revenues decreased by $30.8 million, to $153.6 million for the year ended December 31, 2020, from $184.4 million for the year ended December 31, 2019.

The decrease in revenues was primarily due to fewer land sales at our Valencia segment in 2020 compared to 2019.

Cost of land sales.

The higher cost of land sales for the year ended December 31, 2019 was primarily due to the land sale at our Valencia segment.

The cost of land sales decreased by $11.4 million, to $85.8 million for the year ended December 31, 2020, from $97.1 million for the year ended December 31, 2019.

The decrease in cost of land sales was attributable to fewer land sales at our Valencia segment in 2020 compared to 2019.

Cost of management services.

Cost of management services increased by $ 4.5 million , or 18.9% , to $28.5 million for the year ended December 31, 2019 , from $24.0 million for the year ended December 31, 2018 .

The increase was primarily due to an increase in intangible asset amortization expense at our Great Park segment.

Cost of management services decreased by $8.0 million, or 28.1%, to $20.5 million for the year ended December 31, 2020, from $28.5 million for the year ended December 31, 2019.

The decrease was primarily due to less intangible asset amortization expense at our Great Park segment.

Selling, general, and administrative.

Selling, general, and administrative expenses increased by $4.6 million , or 4.7% , to $103.6 million for the year ended December 31, 2019 , from $99.0 million for the year ended December 31, 2018 .

The increase was primarily attributable to an increase in employee related expenses.

Selling, general, and administrative expenses decreased by $20.1 million, or 19.4%, to $83.5 million for the year ended December 31, 2020, from $103.6 million for the year ended December 31, 2019.

The decrease was primarily attributable to a decrease in employee related expenses.

Other income.

Other income for the year ended December 31, 2019 consisted primarily of a $64.9 million gain recognized by our San Francisco segment pertaining to the settlement of a contingent consideration liability.

Other income for the year ended December 31, 2018 consisted primarily of a $6.7 million gain on the sale of an operating asset at our Valencia segment in addition to interest income earned on our cash and cash equivalents.

Equity in earnings (loss) from unconsolidated entities.

Equity in earnings from unconsolidated entities increased to earnings of $2.3 million for the year ended December 31, 2019 , from a loss of $2.2 million for the year ended December 31, 2018 .

The earnings were primarily due to our proportionate share of the Great Park Venture’s net income of $6.2 million offset by our proportionate share of the Gateway Commercial Venture’s net loss of $3.9 million.

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.

Equity in earnings from unconsolidated entities increased by $40.0 million, to $42.4 million for the year ended December 31, 2020, from $2.3 million for the year ended December 31, 2019.

The increase was primarily due to an increase in earnings from the Gateway Commercial Venture due to gains from the sale of land and three buildings during the year ended December 31, 2020.

The increase was offset by fewer land sales at the Great Park Venture during year ended December 31, 2020 compared to the same period in 2019.

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 Great Park Venture that is included in equity in earnings from unconsolidated entities in our consolidated statement of operations.

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 Great Park Venture.

In determining that the impairment was other-than-temporary, we concluded 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 of the COVID-19 pandemic would occur.

See Note 4 to our consolidated financial statements included under Part II, Item 8 of this report.

Additionally, included in the results of operations of our Valencia segment is our 10% interest in the Valencia Landbank Venture that was formed in 2020 to take assignment of land purchase and sale agreements for residential lots within the Valencia community and enter into option and development agreements with homebuilders who intend to purchase the lots from the Valencia Landbank Venture to ultimately construct and sell homes.

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 $2.8 million for the year ended December 31, 2020 resulted in a tax provision of $1.7 million.

The tax provision was the result of a $5.5 million decrease to our net deferred tax asset offset by a $3.1 million decrease to our deferred tax asset valuation allowance.

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 suspends the use of net operating losses in tax years 2020 through 2022.

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 at December 31, 2020 it is more likely than not that such net deferred tax assets will not be realized.

Pre-tax losses of $58.8 million for the year ended December 31, 2018 resulted in an increase to the net deferred tax asset of $6.1 million.

The recording of a tax provision to increase our valuation allowance, against a pre-tax book loss, provided for a negative effective tax rate and resulted in a $9.2 million provision in 2018.

Our effective tax rate, before changes in valuation allowance, increased for the year ended December 31, 2019 compared to the year ended December 31, 2018 , primarily due to a slight decrease in the ownership percentage of our noncontrolling interests.

Pre-tax income of $24.7 million for the year ended December 31, 2019 resulted in a tax provision of $2.4 million.

The tax provision was the result of a $5.5 million decrease to our net deferred tax asset offset by a $3.1 million decrease to our deferred tax asset valuation allowance.

Our effective tax rate, before changes in valuation allowance, for the year ended December 31, 2020 was substantially similar to our effective tax rate, before changes in valuation allowance, for the year ended December 31, 2019.

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 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.

Valencia Segment (formerly Newhall)

Our Valencia property (formerly known as Newhall Ranch) consists of approximately 15,000 acres in northern Los Angeles County and is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space.

Our Valencia property consists of approximately 15,000 acres in northern Los 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 master-planned community where already today approximately 20,000 households reside and approximately 60,000 people work.

In 2019, we entered into purchase and sale agreements to sell 781 homesites in the first development area at the community, known as Mission Village.

We closed on 711 of the homesites in the fourth quarter and the balance of homesites is anticipated to close in the first half of 2020.

We are continuing horizontal development activities at Mission Village, which is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development.

We began selling homesites in the first development area

at Valencia in 2019, and as of December 31, 2020 we had sold 1,268 homesites, comprised of 1,223 homesites that closed in either 2019 or 2020 and 45 homesites expected to close in the latter part of 2021.

The following table summarizes the results of operations of our Valencia segment for the years ended December 31, 2020 and 2019.

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Statement of Operations Data

$ 69,398 $ 140,020

Land sales—related party

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Total revenues

124,892 143,190

Costs and expenses

85,753 97,113

Operating properties

Selling, general, and administrative

11,629 14,782

Total costs and expenses

Segment income (loss)

Land sales revenues.

Land sales revenues increased by $139.9 million , to $140.0 million for the year ended December 31, 2019 , from $0.1 million for the year ended December 31, 2018 .

The increase in land sales revenues was attributable to the sale of 711 homesites on approximately 59 acres during the year ended December 31, 2019 .

Initial gross proceeds were $135.2 million, representing the base purchase price.

We also recognized $4.7 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.

The homesites were sold to a third party land banking entity whereby a related party has retained the option to acquire these homesites in the future from the land bank entity.

In 2019, we also entered into a separate purchase and sale agreement for 70 homesites with a third party homebuilder.

That sale is anticipated to close in the first half of 2020.

Operating Properties.

Revenues from operating properties decreased by $3.1 million , or 49.9% , to $3.1 million for the year ended December 31, 2019 , from $6.3 million for the year ended December 31, 2018 .

The decrease in revenues was mainly attributable to lower market prices for certain citrus crops, lower revenues generated from miscellaneous operations and the sale of The Tournament Players Club at Valencia Golf Course in January 2018.

Revenues generated prior to the sale were included in operating properties revenues for the year ended December 31, 2018 .

102,509 117,460

Equity in loss from unconsolidated entity (1,569) —

Segment income $ 21,193 $ 25,779

Land sales revenues and Land sales revenues—related party.

Total land sales revenues decreased by $17.4 million, or 12.5%, to $122.6 million for the year ended December 31, 2020, from $140.1 million for the year ended December 31, 2019.

The decrease in total land sales revenues was attributable to the recognition of revenue from the sale of land entitled for an aggregate of 512 homesites on approximately 52 acres during the year ended December 31, 2020 compared to the recognition of revenue from the sale of land entitled for an aggregate of 711 homesites on approximately 59 acres during the year ended December 31, 2019.

The base purchase price was $118.7 million for the 2020 sales.

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.

The base purchase price was $135.2 million for the 2019 sales.

We also recognized additional revenue of $4.7 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 2020, 210 of the homesites sold were purchased by the Valencia Landbank Venture, in which we own a 10% equity interest.

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.

All of the homesites sold in 2019 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 in 2019 was $97.1 million, or 69.3% of land sale revenues.

Cost of land sales during the years ended December 31, 2020 and 2019 were $85.8 million and $97.1 million, or 69.9% and 69.3% of total land sale 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 the expected sales prices for the entire project, 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.

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.

Selling, general, and administrative.

Selling, general, and administrative expenses decreased by $3.2 million, or 21.3%, to $11.6 million for the year ended December 31, 2020, from $14.8 million for the year ended December 31, 2019.

This decrease was primarily due to decreased legal and consulting expenses incurred in 2019 compared to 2018, offset by an increase in employee related expenses.

Other Income.

In January 2018, The Tournament Players Club at Valencia Golf Course was sold for net cash proceeds of $5.7 million, and the buyer assumed certain liabilities, including certain club membership related liabilities.

We recognized a gain of $6.7 million as a result of the sale.

The decrease was mainly attributable to a decrease in employee related expenses, offset by an

increase in community related selling and marketing expenses as we began to increase master marketing activities in anticipation of expected builder openings in the first half of 2021.

Equity in loss from unconsolidated entity.

During the year ended December 31, 2020, we recognized equity in loss of $1.6 million from the Valencia Landbank Venture as a result of eliminating our pro-rata share of the intra-entity profits generated from the related party land sales.

San Francisco Segment

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Candlestick and The San Francisco Shipyard are designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space.

On May 2, 2016, the San Francisco Venture transferred to a joint venture (“CPHP”) between an affiliate of Lennar and an affiliate of Castlelake L.P.

(“Castlelake”) certain assets and liabilities of the San Francisco Venture, including property within The San Francisco Shipyard known as the Phase 1 Land (the “Separation Transaction”).

CPHP is responsible for current and future residential construction on the Phase 1 Land.

We are not entitled to any of the proceeds from future sales of homes on the Phase 1 Land (although we will receive a marketing fee for each home sold).

CPHP was also transferred the ownership interest in a joint venture (the “Mall Venture”) formed with affiliates of The Macerich Company (“Macerich”) that intended to construct an urban retail outlet shopping district (the “Retail Project”) at Candlestick.

Following the Separation Transaction, we were obligated to complete certain development activities and convey the parcels of property to the Mall Venture upon which the Retail Project was to be developed.

In early 2019, following discussions with the members of the Mall Venture, we and the members of the Mall Venture decided not to proceed with the Retail Project.

As part of the termination of the Retail Project, we were released from our obligation to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture.

We were also released from certain development obligations.

As a result of the termination of the Retail Project, we recognized a gain of $64.9 million, representing the settlement of the contingent consideration pertaining to the development obligations and relief from the conveyance of these parcels.

Additionally, we repaid Macerich a $65.1 million obligation related to a promissory note in the same amount, plus $11.1 million of accrued interest associated with the promissory note.

The San Francisco Venture also issued an aggregate of 436,498 of its Class A Units (while we concurrently issued 436,498 of our Class B common shares) to affiliates of Lennar and Castlelake and concurrently received a contribution of $5.5 million from affiliates of Lennar and Castlelake.

In October 2019, we received approval from the City 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 and The San Francisco Shipyard is not subject San 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.

Our development at Candlestick and The San Francisco Shipyard is not subject to San 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 and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco.

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However, allegations that Tetra Tech, Inc.

and Tetra Tech EC, Inc (collectively, “Tetra Tech”), a contractor hired by the U.S.

and Tetra Tech EC, Inc.

(collectively, “Tetra Tech”), contractors hired by the U.S.

Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S.

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Selling, general, and administrative

11,297 17,873

Total costs and expenses

11,785 18,975

Other income—gain on settlement of contingent consideration, related party

Segment income (loss)

Segment (loss) income $ (10,355) $ 49,890

Management services—related party revenues.

Management services revenues decreased by $1.6 million, or 65.0%, to $0.8 million for the year ended December 31, 2020, from $2.4 million for the year ended December 31, 2019.

The decrease was mainly attributable to the December 2018 expiration of a management services agreement with an affiliate of Lennar with respect to the Treasure Island community.

The decrease was primarily attributable to the termination of our management agreement with Lennar with respect to the Concord community in early 2020.

Selling, general, and administrative.

Selling, general, and administrative expenses decreased by $6.6 million, or 36.8%, to $11.3 million for the year ended December 31, 2020, from $17.9 million for the year ended December 31, 2019.

The decrease was mainly attributable to a decrease in employee related expenses and professional fees.

The decrease was mainly attributable to a decrease in employee related expenses.

Other Income.

In early 2019, we and the members of the Mall Venture determined not to proceed with the Retail Project, and we were released from obligations to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture.

We were previously a party to an agreement with a related party that had planned to construct a retail shopping district at Candlestick.

In early 2019, we were released from obligations to convey parcels of property on which the retail project was intended to be developed.

As a result of the relief of these obligations, we recognized a gain of $64.9 million during the year ended December 31, 2019.

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Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction.

In the first quarter of 2019, Great Park Neighborhoods received approval to develop an additional 1,056 homesites.

As a result of the approval, Great Park Neighborhoods is now designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space.

Great Park Neighborhoods is designed to include approximately 10,500 homesites and approximately 4.9 million square feet of commercial space.

The Great Park Venture sold the first homesites in April 2013 and, as of December 31, 2020, had sold 6,196 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 $2.6 billion.

Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests are entitled to receive priority distributions in an amount up to $565.0 million, and holders of percentage interests are entitled to all other distributions.

As of December 31, 2019 , aggregate distributions to holders of legacy interests totaled $355.0 million.

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Statement of Operations Data

$ 22,165 $ 137,699

Land sales—related party

2,662 133,271

Management services—related party

26,900 36,873

Total revenues

51,727 307,843

Costs and expenses

15,304 179,836

Management services

19,998 27,390

Selling, general, and administrative

35,823 37,436

Management fees—related party

Total costs and expenses

75,503 266,963

Interest income

Segment income

Revenues increased by $97.1 million , or 46.1% , to $307.8 million for the year ended December 31, 2019 from $210.8 million for the year ended December 31, 2018 .

The increase was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 587 homesites on approximately 48 acres during the year ended December 31, 2019 compared to the recognition of revenue from the sale of land entitled for an aggregate of 536 homesites on approximately 33 acres during the same period in 2018.

Initial gross proceeds from the 2019 sale were $255.4 million, representing the base purchase price.

We also recognized $6.0 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.

Segment (loss) income $ (22,504) $ 44,369

Revenues decreased by $256.1 million, or 83.2%, to $51.7 million for the year ended December 31, 2020, from $307.8 million for the year ended December 31, 2019.

The decrease was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 35 homesites on approximately four acres during the year ended December 31, 2020 compared to the recognition of revenue from the sale of land entitled for an aggregate of 587 homesites on approximately 48 acres during the same period in 2019.

Initial gross proceeds from the 2020 sale were $20.3 million, representing the base purchase price.

The Great Park 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.

Initial gross proceeds from the 2019 sales were $255.4 million, representing the base purchase price.

We also recognized $6.0 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.

During the years ended December 31, 2019 and 2018, revenues also included changes in estimates of variable consideration, including profit participation, from those amounts previously recorded by the Great Park Venture in accordance with the application of the new revenue guidance, as well as revenues generated by the management company from development management services provided to the Great Park Venture.

During the years ended December 31, 2020 and 2019, revenues also included changes in estimates of variable consideration, including profit participation, from those amounts previously recorded by the Great Park Venture.

During the years ended December 31, 2020 and 2019, the Great Park Venture recognized $3.6 million and $8.8 million in profit participation revenue, respectively.

Revenues generated by the management company from development management services provided to the Great Park Venture include a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation.

Reduction in management services related party revenue was mainly attributable to changes in estimates of the amount of variable consideration pertaining to incentive compensation.

Cost of Land Sales.

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The cost of land sales includes both actual and estimated future capitalized costs allocated based upon relative sales values.

Since this method requires the Great Park Venture to estimate the expected sales prices for the entire project, 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.

Since this method requires the Great Park 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.

Management services costs and expenses.

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We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the Great Park Venture.

Corporate and non-project team salaries and overhead 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 ended December 31, 2019 , management services costs and expenses increased by $4.4 million , or 19.4% , to $27.4 million from $22.9 million for the year ended December 31, 2018 .

The increase is primarily a result of amortization expense related to the intangible asset of $15.6 million in 2019 compared to $12.5 million in 2018.

Corporate and non-project team salaries and overhead 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 ended December 31, 2020, management services costs and expenses decreased by $7.4 million, or 27.0%, to $20.0 million, from $27.4 million for the year ended December 31, 2019.

The decrease was primarily a result of changes in estimates in the utilization of the intangible asset.

Intangible asset amortization expense was $8.6 million in 2020 compared to $15.6 million in 2019.

Selling, general, and administrative.

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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 increased by $5.1 million , or 15.8% , to $37.4 million for the year ended December 31, 2019 , from $32.3 million for the year ended December 31, 2018 .

The higher expense during the year ended December 31, 2019 is primarily due to increased field and property maintenance expenses at the Great Park Neighborhoods resulting from an increase in the number of active development areas in 2019.

Selling, general, and administrative costs decreased by $1.6 million, or 4.3%, to $35.8 million for the year ended December 31, 2020, from $37.4 million for the year ended December 31, 2019.

The lower expense during the year ended December 31, 2020 was mainly attributable to a decrease in marketing fee expenses incurred at the Great Park Neighborhoods.

Management fees—related party.

Management fees decreased by $17.9 million, to $4.4 million for the year ended December 31, 2020, from $22.3 million for the year ended December 31, 2019.

Management fees incurred by the Great Park Venture are comprised of base development management fees and incentive compensation fees.

Management fees incurred by the Great Park 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 Great Park Venture’s percentage interests.

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When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes.

The Great Park Venture recognized $15.7 million and $18.3 million of incentive compensation fees during the years ended December 31, 2019 and 2018, respectively.

In addition, during the year ended December 31, 2019 , the Great Park Venture recognized $6.6 million in base management fees compared to $6.3 million recognized during the year ended December 31, 2018 .

The table below reconciles the Great Park segment results for the years ended December 31, 2019 and 2018 to the equity in earnings (loss) from our investment in the Great Park Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2019 and 2018 , respectively.

The Great Park Venture recognized a credit of $2.4 million and $15.7 million in expense for incentive compensation fees during the years ended December 31, 2020 and 2019, respectively.

The table below reconciles the Great Park segment results for the years ended December 31, 2020 and 2019 to the equity in (loss) earnings from our investment in the Great Park Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.

Year Ended December 31,

(in thousands)

Segment net income from operations

Segment net (loss) income from operations $ (22,504) $ 44,369

Less net income of management company attributed to the Great Park segment

Net income of Great Park Venture

The Company’s share of net income of the Great Park Venture

Net (loss) income of Great Park Venture (29,406) 34,886

The Company’s share of net (loss) income of the Great Park Venture (11,027) 13,082

Basis difference amortization

Equity in earnings (loss) from Great Park Venture

(2,073) (6,900)

Other-than-temporary investment impairment (26,851) —

Equity in (loss) earnings from Great Park Venture $ (39,951) $ 6,182

Commercial Segment

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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

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.

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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 office campus consisting of approximately 73 acres of land in the Great Park Neighborhoods containing four newly constructed buildings, two of which are leased by a subsidiary of Broadcom Limited (together with its subsidiaries, “Broadcom”).

The Five Point Gateway Campus includes approximately one million square feet planned for research and development and office space in the four buildings, which are designed to accommodate thousands of employees.

Broadcom is the largest tenant, leasing approximately 660,000 square feet of research and development space pursuant to a 20-year triple net lease.

We and Lennar have entered into separate 130-month full service gross leases occupying approximately 135,000 aggregate square feet.

In June 2019, the Gateway Commercial Venture entered into a non-binding letter of intent to sell one of the buildings to City of Hope, which intends to develop and operate a comprehensive cancer care center and build a future micro hospital.

The Five Point Gateway Campus is a commercial campus consisting of approximately 73 acres of land in the Great Park Neighborhoods acquired by the Gateway 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, which are designed to accommodate thousands of employees.

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 the Gateway 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.

The following table summarizes the results of operations of our Commercial segment for the years ended December 31, 2020 and 2019.

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Rental and related income

$ 15,797 $ 25,881

Rental and related income—related party

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Total revenues

24,638 34,479

Costs and expenses

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Total costs and expenses

Revenues increased by $6.4 million , or 22.8% , to $34.5 million for the year ended December 31, 2019 , from $28.1 million for the year ended December 31, 2018 .

Revenues are generated from tenant leases and property management services provided by the management company to the Gateway Commercial Venture.

The increase was primarily due to revenue recognized from Lennar’s and our leases that both commenced in the last quarter of 2018.

24,656 39,297

Other income—gain on asset sales, net 112,260 —

Segment income (loss) $ 112,242 $ (4,818)

Revenues decreased by $9.8 million, or 28.5%, to $24.6 million for the year ended December 31, 2020, from $34.5 million for the year ended December 31, 2019.

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.

In May 2020, the Gateway Commercial Venture closed on the sale of approximately 11 acres of land and an approximately 189,000 square foot building to City of Hope 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, the Gateway 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.

In August 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 currently leased to one tenant under a triple net lease 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 .

Costs and expenses increased by $11.0 million , or 39.1% , to $39.3 million for the year ended December 31, 2019 , from $28.3 million for the year ended December 31, 2018 .

The increase was primarily due to the Five Point Gateway Campus being fully placed into service, which resulted in higher depreciation expense incurred by the Gateway Commercial Venture during the year ended December 31, 2019 compared to the same period in 2018.

Interest expense also increased as a portion of the expense was eligible for capitalization for the year ended December 31, 2018 , prior to the Five Point Gateway Campus being fully placed into service.

The table below reconciles the Commercial segment results for the years ended December 31, 2019 and 2018 to the equity in loss from our investment in the Gateway Commercial Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2019 and 2018 , respectively.

Costs and expenses decreased by $14.6 million, or 37.3%, to $24.7 million for the year ended December 31, 2020, from $39.3 million for the year ended December 31, 2019.

As a result of the Gateway 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 ended December 31, 2020.

The table below reconciles the Commercial segment results for the years ended December 31, 2020 and 2019 to the equity in earnings (loss) from our investment in the Gateway Commercial Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.

Year ended December 31,

(in thousands)

Segment net loss from operations

Segment net income (loss) from operations $ 112,242 $ (4,818)

Less net income of management company attributed to the Commercial segment

Net loss of Gateway Commercial Venture

Equity in loss from Gateway Commercial Venture

Net income (loss) of Gateway Commercial Venture 111,845 (5,140)

Equity in earnings (loss) from Gateway Commercial Venture $ 83,884 $ (3,855)

Liquidity and Capital Resources

At December 31, 2020, we had $298.1 million of consolidated cash and cash equivalents, compared to $346.8 million at December 31, 2019.

As of December 31, 2019 , no funds have been drawn on the operating company’s $125.0 million revolving credit facility.

However, letters of credit of $1.0 million are issued and outstanding under the revolving credit facility, thus reducing the available capacity to $124.0 million.

As of December 31, 2020, 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 of December 31, 2020, thus reducing the available capacity to $124.7 million.

Our short-term cash needs consist primarily of general and administrative expenses and development expenditures at Valencia and the Candlestick and The San Francisco Shipyard communities, interest payments under our senior notes and payments under a related party reimbursement obligation.

The development stages of our master-planned communities continue to require significant cash outlays on both a short-term and long-term basis.

While we expect land sales at Valencia to continue in 2020, the Candlestick and The San Francisco Shipyard communities are not expected to generate significant liquidity within the next 12 months.

We expect to meet our cash requirements for at least the next 12 months with available cash, proceeds from land sales in Valencia, distributions from our unconsolidated entities and collection of management fees under our various management agreements.

In 2021, we will make interest payments of $49.2 million on our $625.0 million senior notes due 2025, and we expect to make $35.5 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.

The development stages of our master-planned 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 at Valencia in 2021.

While our current financial position is strong, and the new home market has seen a recovery from the initial reaction to the COVID-19 pandemic, the pandemic has had a significant impact on the U.S.

and California economies and our business, and the extent and duration of the current environment is unknown.

We will continue to manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders.

We expect to meet our cash requirements for at least the next 12 months with available cash, in addition to proceeds from land sales in Valencia, distributions from our unconsolidated entities and collection of management fees under our various management agreements.

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.

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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, which can occur at various points over the life cycle of our communities.

Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales, 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.

However, we may experience cost increases, our plans may change or circumstances may arise that result in our needing additional capital to execute our development plan.

In addition, 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.

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 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.

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.

We are committed under various letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of business.

Outstanding LOCs totaled $1.3 million and $2.4 million at December 31, 2020 and 2019, respectively.

At December 31, 2020 and 2019, we had $1.0 million and $1.4 million, respectively, 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 of December 31, 2020, we were using approximately $0.3 million in capacity under the revolving credit facility to support LOCs.

As a part of the entitlement and development process, we are required to provide performance bonds to ensure completion of certain development obligations.

We had outstanding performance bonds of $229.6 million as of December 31, 2020.

At December 31, 2020, 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.

Contractual Obligations

The following table aggregates certain of our cash contractual obligations and commitments as of December 31, 2020:

Payment due by period

(in thousands)

Total Less than

1 year 1-3 years 3-5 years More than

Senior notes payable

$ 625,000 $ — $ — $ 625,000 $ —

Interest commitment on senior notes

246,094 49,219 98,438 98,437 —

Operating lease obligations

29,085 5,017 11,003 4,969 8,096

Water purchase agreement (1)

33,822 1,315 2,759 2,941 26,807

Interchange funding agreement (2)

8,862 8,862 — — —

Valencia approval settlement (3)

15,000 1,500 9,000 3,000 1,500

Related party reimbursement obligation (4)

95,144 38,543 43,031 13,570 —

$ 1,053,007 $ 104,456 $ 164,231 $ 747,917 $ 36,403

(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) In January 2012, we entered into an agreement with Los Angeles County pursuant to which we agreed to finance construction costs of an interchange project that Los Angeles County is managing.

The interchange project is a critical infrastructure project that will benefit Valencia.

Under the agreement, we have committed to pay the remainder of the actual construction costs, up to $8.9 million.

We currently expect this amount to be paid within twelve months of December 31, 2020.

(3) In September 2017, we reached a settlement with key national and state environmental and Native American organizations that were petitioners in various legal challenges to Valencia’s regulatory approvals and permits.

Under the settlement terms, we agreed to fund certain environmental and cultural investments and protections at Valencia and the surrounding region.

(4) 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 4.4%.

Reimbursement payments may be deferred when the related parties receive an extension on the maturity date of the associated EB-5 loan liability.

Summary of Cash Flows

2 unchanged sentences

Operating activities

$ (78,499) $ (232,040)

Investing activities

Financing activities

(23,541) 83,206

Cash Flows from Operating Activities.

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Our operating cash flows may vary significantly each year due to the timing of land sales and the development efforts related to our master-planned communities.

Net cash used in operating activities decreased by $111.3 million for the year ended December 31, 2019 , compared to the year ended December 31, 2018 due to $135.2 million in net proceeds received upon closing escrow from land sales at our Valencia segment offset by net cash used for operating activities during the year ended December 31, 2019 .

We did not have any significant land sale proceeds during the year ended December 31, 2018 .

During the years ended December 31, 2019 and 2018, we made total interest payments of $42.4 million and $38.6 million, respectively on our senior notes.

Net cash used in operating activities decreased by $153.5 million for the year ended December 31, 2020, compared to the year ended December 31, 2019.

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 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).

During the years ended December 31, 2020 and 2019, we received $118.5 million and $135.2 million, respectively, in net proceeds upon closing escrow from land sales at our Valencia segment.

During the years ended December 31, 2020 and 2019, we made total interest payments of $49.2 million and $42.4 million, respectively on our senior notes.

Cash Flows from Investing Activities.

Net cash provided by investing activities was $52.9 million for the year ended December 31, 2020, compared to the net cash provided by investing activities of $0.3 million for the year ended December 31, 2019.

For the year ended December 31, 2019 , we made purchases of properties and equipment of $1.7 million and received distributions from Gateway Commercial Venture of $2.0 million.

The full amount of our $8.4 million capital contribution made in 2018 for funding tenant improvements has now been fully distributed back by the Gateway Commercial Venture.

For the year ended December 31, 2018 , net proceeds from the sale of the Valencia segment’s golf course operating property were $5.7 million.

Additionally, we used $1.8 million of cash to acquire an

indirect interest in rights to certain legacy interests in the Great Park Venture that were held by our CEO, Mr.

Emile Haddad.

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).

We made a capital contribution of $4.2 million and received a 10% interest in the Valencia Landbank Venture in 2020, and we also received a distribution of $1.7 million from our indirect legacy interest in the Great Park Venture.

Cash Flows from Financing Activities.

Net cash provided by financing activities was $83.2 million for the year ended December 31, 2019 , an increase of $93.3 million compared to net cash used in financing activities of $10.1 million for the year ended December 31, 2018 .

Net cash used in financing activities was $23.5 million for the year ended December 31, 2020, compared to net cash provided by financing activities of $83.2 million for the year ended December 31, 2019.

For the year ended December 31, 2020, we made a tax distribution of $4.6 million to a noncontrolling interest 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 $13.5 million to reduce our related party reimbursement obligation during the year ended December 31, 2020.

For the year ended December 31, 2019, we issued an aggregate of $125.0 million principal amount of 7.875% senior notes due 2025.

We used $5.5 million and $4.1 million during the years ended December 31, 2020 and 2019, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes.

Additionally, during the year ended December 31, 2019 , we received cash proceeds of $25.0 million related to the issuance of San Francisco Venture Class C units to an affiliate of Lennar (see Note 5 to our consolidated financial statements included under Part II, Item 8 of this report) and repaid the Macerich promissory note of $65.1 million.

Additionally, during the year ended December 31, 2019, we received cash proceeds of $25.0 million related to the issuance of San Francisco Venture Class C units to an affiliate of Lennar (see Note 5 to our consolidated financial statements included under Part II, Item 8 of this report) and repaid a promissory note of $65.1 million in connection with the termination of the retail project at Candlestick.

Changes in Capital Structure

During the year ended December 31, 2019 , our ownership percentage in the operating company increased to 62.4% , primarily due to the operating company issuing us 2.2 million Class A units of the operating company in connection with our net issuance of the same amount of Class A common shares under our share-based compensation plan.

Additionally, we reacquired approximately 0.3 million restricted Class A common shares from employees for income tax withholding purposes that resulted in the operating company retiring an equal number of Class A units of the operating company we previously held.

During the year ended December 31, 2020, our ownership percentage in the operating company increased to 62.5%, primarily due to the operating company issuing us additional Class A units in connection with our issuance of Class A common shares under our share-based compensation plan.

Additionally, we reacquired approximately 436,675 restricted Class A common shares from employees for income tax withholding purposes that resulted in the operating company retiring an equal number of Class A units of the operating company 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, at December 31, 2020 and 2019 held by us and those held by noncontrolling interest members.

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Class A units of the operating company:

Held by us 69,051,284 68,788,257

Held by noncontrolling interest members 41,363,271 41,363,271

110,414,555 110,151,528

Class A units of the San Francisco Venture held by noncontrolling interest members 37,870,273 37,870,273

148,284,828 148,021,801

At December 31, 2020, we had 79,233,544 Class B common shares 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 at our election for our Class A common shares or cash.

In January 2020, we granted approximately 0.7 million restricted Class A common shares under our share-based compensation plan that resulted in the operating company issuing us an equal number of Class A units of the operating company.

Contractual Obligations

The following table aggregates certain of our cash contractual obligations and commitments as of December 31, 2019 :

Payment due by period

(in thousands)

Senior notes payable

Interest commitment on senior notes

Operating lease obligations

Water purchase agreement (1)

Interchange funding agreement (2)

Valencia approval settlement (3)

Related party reimbursement obligation (4)

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.

In January 2012, we entered into an agreement with Los Angeles County pursuant to which we agreed to finance construction costs of an interchange project that Los Angeles County is managing.

The interchange project is a critical infrastructure project that will benefit Valencia (formerly known as Newhall Ranch).

Under the agreement, we have committed to pay the remainder of the actual construction costs, up to $8.9 million.

We currently expect this amount to be paid within twelve months of December 31, 2019 .

In September 2017, we reached a settlement with key national and state environmental and Native American organizations that were petitioners in various legal challenges to Valencia’s regulatory approvals and permits.

Under the settlement terms, we agreed to fund certain environmental and cultural investments and protections at Valencia and the surrounding region.

Prior to the Separation Transaction, 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.

On May 2, 2016, in connection with the Separation Transaction, CPHP or its subsidiaries assumed the EB-5 loan liabilities, and the San Francisco Venture entered into reimbursement agreements pursuant to which it agreed to reimburse CPHP or its subsidiaries 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 4.1%.

In the first quarter of 2020, the reimbursement agreements were amended to defer principal payments, resulting in approximately $12.2 million in principal payments shifting from less than one year obligations to one to three year obligations per the table above.

Other Contractual Obligations and Commitments

The following contractual obligation payments are not included in the table above due to the contingent nature of the amount and timing of the payment obligations.

Unless otherwise stated, all of the below contractual obligation payments are as of December 31, 2019 .

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.

Holders of the management company’s Class B interests (an affiliate of Lennar and FPC-HF Venture I) are entitled to receive all remaining distributions, up to a maximum of $9.0 million, from the management company that are attributable to any contingent payments that may be received by the management company from the Great Park Venture pursuant to a cash flow participation agreement.

We anticipate making contributions of $0.6 million related to our defined pension plan over the next twelve months and will continue to fund the plan annually in amounts sufficient to at least meet minimum funding requirements.

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 are committed under various letters of credit (“LOCs”) to perform certain development activities and provide certain guarantees in the normal course of business.

Outstanding LOCs totaled $2.4 million at both December 31, 2019 and 2018 , respectively.

At both December 31, 2019 and 2018 , we had $1.4 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 of December 31, 2019 , we were using approximately $1.0 million in capacity under the revolving credit facility to support LOCs.

Additionally, in the ordinary course of business and as a part of the entitlement and development process, we are required to provide performance bonds to ensure completion of certain development obligations.

We had outstanding performance bonds of $230.0 million as of December 31, 2019 .

At December 31, 2019 , 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 $197.8 million .

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

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During the years ended December 31, 2020, 2019 and 2018, we recognized $0.1 million, $0.9 million, and $0.9 million, respectively, of such revenue.

We did not sell homesites to Lennar during the years ended December 31, 2019 and 2018 but did recognize revenues related to certain fees or profit participation associated with homesites sold in prior periods.

During the year ended December 31, 2019, we sold homesites to a land banking entity and recognized $139.9 million of such revenue.

A related party has retained the option to acquire these homesites in the future from the land banking entity.

Additionally, we provide certain management services for ventures in the San Francisco Bay area in which Lennar is a significant participant.

We did not sell homesites directly to Lennar during the years ended December 31, 2020, 2019, and 2018 but did recognize revenues related to certain fees or profit participation associated with homesites sold directly to Lennar in prior periods.

During the year ended December 31, 2020, we sold homesites to the Valencia Landbank Venture, our equity method investee, and recognized $53.2 million of such revenue.

During the year ended December 31, 2019, we sold homesites to an unaffiliated land banking entity and recognized $139.9 million of such revenue.

Lennar retained the option to acquire these homesites in the future from the unaffiliated land banking entity that acquired the homesites from us in 2019.

Additionally, we previously provided certain management services for ventures in the San Francisco Bay Area in which Lennar is a significant participant.

For the years ended December 31, 2020, 2019 and 2018, we recognized $0.8 million, $2.4 million, and $4.4 million, respectively, of revenue related to these agreements.

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For the years ended December 31, 2020, 2019 and 2018, we recognized $26.9 million, $36.9 million, and $35.1 million, respectively, of revenue from management services provided to the Great Park Venture.

Other than Lennar, the land banking entity and the Great Park Venture, no customer accounted for more than 10% of our revenue during the years ended December 31, 2019 , 2018 and 2017 .

Other than the Valencia Landbank Venture and the Great Park Venture, no related party customer accounted for more than 10% of our revenue during the years ended December 31, 2020, 2019 and 2018.

In addition to the related party revenues, during the year ended December 31, 2020, we also sold homesites to a third party home builder and recognized $59.1 million of such revenue, which accounted for more than 10% of total consolidated revenues.

Other than the third party home builder and the unaffiliated land bank entity, no third party customer accounted for more than 10% of our revenue during the years ended December 31, 2020, 2019 and 2018.

Critical Accounting Policies and Estimates

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Consolidation

The consolidated financial statements include our accounts, the accounts of all subsidiaries in which we have a controlling interest and the accounts of variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary.

A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

We examine specific criteria and use our judgment when determining if we are the primary beneficiary of a VIE.

Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s) and contracts to purchase assets from VIEs.

Our consolidated financial statements include the consolidation of four VIEs.

The accounting policy relating to VIEs is a critical accounting policy because the determination of whether an entity is a VIE and, if so, whether we are primary beneficiary, may require us to exercise significant judgment.

Impairment of Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable.

Impairment indicators for long-lived inventory assets include, but are not limited to, significant increases in horizontal development costs, significant decreases in the pace and pricing of home sales within our communities and surrounding areas and political and societal events that may negatively impact the local economy.

For operating properties, impairment indicators may include significant increases in operating costs, decreased utilization and continued net operating losses.

If indicators of impairment exist, and the undiscounted cash flows expected to be generated by a long-lived asset are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such long-lived asset to its estimated fair value.

We generally estimate the fair value of our long-lived assets using a discounted cash flow model or through appraisals of the underlying property or a combination thereof.

Our projected cash flows for each long-lived inventory asset 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 costs and other factors.

For operating properties, our projected cash flows also include estimates and assumptions about the use and eventual disposition of such properties, including utilization, capital expenditures, operating expenses, and the amount of proceeds to be realized upon eventual disposition of such properties.

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 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.

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 asset and related estimated cash flow streams.

The discount rate used in determining each asset’s fair value generally depends on the asset’s projected life and development stage.

The evaluation of inventory for impairment is a critical accounting policy because the development of estimated cash flows used in the analysis requires multiple assumptions to be made by management that are subjective and significantly affect the resulting projected cash flows.

If an impairment is identified and recognized at one of our communities, the impairment charge recorded may be material to our consolidated financial statements.

Voting Interest Entities (“VOE”) and Variable Interest Entities (“VIE”):

We consolidate all subsidiaries or other entities in which we have a controlling financial interest.

The consolidation guidance requires us to perform an analysis to determine if an entity should be evaluated for consolidation using the VOE model or the VIE model.

Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting rights.

Under the VIE model, controlling financial interest is defined as (i) the power to direct activities that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of or the right to receive benefits from the entity that could potentially be significant to the entity.

For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE.

We consolidate the financial position and results of operations of every VOE in which we have a controlling financial interest and VIEs in which we are considered to be the primary beneficiary.

Revenue Recognition and Cost of Land Sales

Revenues from land sales contain both fixed (stated purchase price of the land) and variable considerations.

Revenues from land sales contain both fixed (stated purchase price of the land) and variable consideration.

A form of variable consideration is profit participation whereby we receive from homebuilders a portion of profit after the builder has received an agreed-upon margin.

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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 the expected sales price for the entire project, 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.

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.

Revenues from management services are recognized as the customer consumes the benefits of the performance obligation satisfied over time.

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In doing so, we typically utilize cash flow projections for our communities.

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.

We believe that the accounting policy related to revenue recognition and cost of land sales is a critical accounting policy because of the significance of revenue and the use of estimated cash flows in each policy.

As described in more detail above in the section entitled “Impairment of Assets,” 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, general and administrative costs, and other factors.

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.

We believe that the accounting estimates related to revenue recognition and cost of land sales are critical accounting estimates because of the use of projected cash flows in each 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.

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.

Investments in Unconsolidated Entities

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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 approach consistent with how we estimate the fair value of our real estate inventories as described in more detail above in the section entitled "Impairment of Assets." 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.

We typically estimate the fair value of our investments using a discounted cash flow of distributions we expect to receive from the venture.

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 policy because (1) our impairment evaluation uses significant estimates in determining the fair value of our investments, including estimated cash flows and the selected discount rate and (2) significant judgment is involved in concluding if an impairment is “other-than-temporary.”

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.

We record income taxes in accordance with ASC 740, which requires an asset and liability approach, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid.

The effect on deferred tax assets and liabilities of a change in tax

rates is recognized in earnings in the period when the changes are enacted.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

A valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized.

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See our consolidated financial statements included under Part II, Item 8 of this report for a discussion of new accounting pronouncements applicable to us.

In November 2020, the SEC issued Final Rule Release No.

33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information.

This rule, which became effective on February 10, 2021, amended certain SEC disclosure requirements in order to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K.

Specifically, the amendments eliminate the requirement for Selected Financial Data, streamline the requirement to disclose Supplementary Financial Information, and amend Management's Discussion and Analysis.

The final rule is applicable for fiscal years beginning after December 31, 2020, however, early adoption on an Item-by-Item basis is permitted after February 10, 2021.

We early adopted the amendments to two items resulting in the elimination of Item 301, Selected Financial Data, from Part II, Item 6 of this report and the omission of Regulation S-K Item 302(a), Supplementary Financial Information, from the notes to our consolidated financial statements in Part II, Item 8 of this report.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis