What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-10 · 245 added, 280 removed, 289 unchanged (64% of the section changed)

18 unchanged sentences

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

Changes to Board and Executive Positions

On February 9, 2022, Daniel Hedigan was appointed as our Chief Executive Officer.

Hedigan is an industry veteran with over 40 years of experience in the residential real estate sector and extensive expertise in mixed-use planned communities.

Preceding Mr.

Hedigan’s appointment, and effective as of September 30, 2021, our founder, Emile Haddad, stepped down from his roles as Chairman, Chief Executive Officer and President and transitioned to a senior advisory role.

Haddad remains a member of the Board of Directors, and as the company founder, the Board elected him as Chairman Emeritus.

Concurrent with Mr.

Haddad’s transition, the Board of Directors named Stuart Miller as Executive Chairman of the Board.

In January 2022, Erik Higgins, our Chief Financial Officer, informed us of his plans to resign following the filing of this annual report, and the Board of Directors appointed our Vice President and Corporate Controller, Leo Kij, to serve as interim Chief Financial Officer upon Mr.

Higgins’ resignation.

In addition, in February 2022, Lynn Jochim transitioned from her position as President and Chief Operating Officer into an advisory role pursuant to a three-year advisory agreement.

Operational Highlights

In 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.

In 2021, our Valencia and Great Park Neighborhood communities saw significant homebuyer demand which in turn led to strong land sale activity.

At Valencia, we continued to invest in the development of infrastructure with a focus on completing utility improvements and community amenities in our initial neighborhoods.

By the end of 2021, our guest builders had opened 14 of our initial 18 neighborhoods for home sales and had sold 346 homes since sales began in May 2021.

Homes in our initial neighborhoods consist of a wide mix of attached and detached single family homes that are attracting first time buyers along with trade-up buyers.

In the fourth quarter of 2021, homebuilders purchased 643 homesites from us on approximately 57 acres of land for an aggregate gross purchase price of $167.3 million.

At the Great Park Neighborhoods, in which we have a 37.5% percentage interest and manage all aspects of the development cycle, a robust demand for homes in our community drove home sales by builders to a total of 655 homes, an increase of approximately 11% over 589 homes sold in 2020.

The high-quality schools and amenities at Great Park Neighborhoods and a strong

local economy continue to attract homebuyers to our community.

Additionally, a limited supply of new home inventory in Orange County has led to strong price appreciation among the single family attached and detached products available at the Great Park Neighborhoods.

In 2021, the Great Park Venture closed the sale of 887 homesites on approximately 72 acres of land for an aggregate gross purchase price of $393.3 million.

The Great Park Venture made distributions and related payments with proceeds from the land sales, of which we received approximately $98.3 million for both our ownership interests and incentive management fee compensation.

The initial term of our development management agreement with the Great Park Venture expired on December 31, 2021 but has been extended by mutual agreement of the parties through April 30, 2022.

We are currently in discussions with the other members of the Great Park Venture regarding renewal of the agreement.

While we currently expect the development management agreement to be renewed, we can provide no assurance as to the terms or timing of any such renewal, or that such renewal will be completed at all.

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

The substantial majority of our associates are still working remotely with access to necessary systems and resources to ensure business continuity.

We will transition our associates back to our offices when we believe it is appropriate after taking into account all federal, state and local laws, rules and regulations.

Factors That May Influence our Results of Operations

2 unchanged sentences

Our business could be impacted by, among other things, downturns in economic conditions at the national, regional or local levels, particularly where our communities are located, inflation and increases in interest rates, significant job losses and unemployment levels, and declines in consumer confidence and spending.

Inflation poses a risk to our business due to the possibility that higher prices would increase our development expenditures.

In particular, our development expenditures are influenced by the price of oil, which is used in our development activities, including grading and paving roads.

However, inflation can also indirectly improve our revenues by increasing the amount that homebuyers and commercial buyers are willing to pay for newly constructed homes and commercial buildings, which in turn, increases the amount that homebuilders and commercial developers are willing to pay for our residential and commercial lots.

Supply and Demand for Residential and Commercial Properties

13 unchanged sentences

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, San Francisco, Great Park and Commercial:

Our four reportable operating segments include our three community segments, Valencia, San Francisco and Great Park, and our Commercial segment:

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

Our investment in the Valencia Landbank Venture is also reported in the Valencia segment.

• 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 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.

Our last remaining management agreement with Lennar was terminated in early 2020.

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

• Our Commercial segment includes the operating results of the Gateway Commercial Venture’s ownership in the Five Point Gateway Campus as well as property management services provided by the management company for the Gateway Commercial Venture.

Results of Operations

7 unchanged sentences

Land sales—related party

43,286 53,219

Management services—related party

14 unchanged sentences

Interest income

Gain on settlement of contingent consideration—related party

Miscellaneous

2 unchanged sentences

INCOME BEFORE INCOME TAX PROVISION 12,985 2,838

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

INCOME TAX BENEFIT (PROVISION) 325 (1,744)

NET INCOME 13,310 1,094

LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 6,742 1,522

NET (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.

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY $ 6,568 $ (428)

Revenues increased by $70.8 million, to $224.4 million for the year ended December 31, 2021, from $153.6 million for the year ended December 31, 2020.

The increase in revenues was primarily due to more land sales at our Valencia segment in 2021 compared to 2020.

Cost of land sales.

The cost of land sales 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.

The cost of land sales increased by $20.3 million, to $106.0 million for the year ended December 31, 2021, from $85.8 million for the year ended December 31, 2020.

The increase in cost of land sales was attributable to more land sales at our Valencia segment in 2021 compared to 2020.

Cost of management services.

Cost of management services 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.

Cost of management services increased by $11.0 million, or 53.6%, to $31.5 million for the year ended December 31, 2021, from $20.5 million for the year ended December 31, 2020.

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

Selling, general, and administrative.

Selling, general, and administrative expenses decreased by $6.4 million, or 7.6%, to $77.1 million for the year ended December 31, 2021, from $83.5 million for the year ended December 31, 2020.

The decrease was primarily attributable to a decrease in 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.

The decrease was primarily attributable to a decrease in corporate employee related expenses, including share-based compensation, offset by an increase in selling and marketing costs at our Valencia segment.

Equity in earnings from unconsolidated entities.

1 unchanged sentence

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.

Equity in earnings from unconsolidated entities decreased by $36.2 million, to $6.2 million for the year ended December 31, 2021, from $42.4 million for the year ended December 31, 2020.

Equity in earnings for the year ended December 31, 2021 was primarily a result of recognizing our share of the net income of the Great Park Venture generated from land and home sales during the period.

At the end of the first quarter of 2020, we recognized an other-than-temporary impairment of $26.9 million attributed to our investment in the Great Park Venture, which is included in equity in earnings from unconsolidated entities in our consolidated statement of operations for 2020.

The impairment was primarily a result of expected delays in both the timing of land sales to builders and distributions to us causing a decline in the fair value of our investment in the 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.

In determining that the impairment was other-than-temporary, we concluded at the time that it was uncertain if a near term recovery of value that was lost as a result of delays to expected land sales from the impacts at the onset of the COVID-19 pandemic would occur.

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

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.

Offsetting the impairment loss for the year ended December 31, 2020 was our share of the gains from the sale of three buildings and land by the Gateway Commercial Venture.

Income tax provision.

1 unchanged sentence

We are responsible for income taxes on our allocable share of the operating company's income or gain.

Pre-tax income of $13.0 million for the year ended December 31, 2021 resulted in a tax benefit of $0.3 million.

The tax benefit was primarily the result of a $0.8 million state tax benefit from a change in estimates when we filed our tax return for the tax year ended December 31, 2020 during 2021, offset by an increase in our net deferred tax liability after changes in our valuation allowance.

We assessed the realization of the net deferred tax asset and the need for a valuation allowance, based on positive and negative evidence, and determined that at December 31, 2021 it was more likely than not that such net deferred tax assets would not be realized.

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

The tax provision was primarily the result of a $2.9 million decrease to our net deferred tax asset offset by a $1.9 million decrease to our deferred tax asset valuation allowance.

Additionally, we recognized approximately $0.8 million of current state tax provision as a result of California Assembly Bill 85, which 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 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.

Additionally, we recognized approximately $0.8 million of current state tax provision as a result of California Assembly Bill 85, which suspended the use of net operating losses in tax years 2020 through 2021.

Our effective tax rate, before changes in valuation allowance, for the year ended December 31, 2021 increased from the year ended December 31, 2020 due to an increase in executive compensation subject to limitations in 2021.

Net income attributable to noncontrolling interests.

Until exchanged for our class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and members of the San Francisco Venture.

Until exchanged for our class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and other members of the San Francisco Venture.

Net income attributable to the noncontrolling interests on the consolidated statement of operations represents the portion of earnings attributable to the interests in our subsidiaries held by the noncontrolling interests.

Valencia Segment (formerly Newhall)

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.

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.

Segment Results and Financial Information

The following tables reconcile the results of operations of our segments to our consolidated results for the years ended December 31, 2021 and 2020 (in thousands).

Year Ended December 31, 2021

(in thousands)

Statement of Operations Data

$ 69,398 $ 140,020

Valencia San Francisco Great Park Commercial Total reportable segments

Corporate and unallocated Total under management Removal of unconsolidated entities (1)

Total consolidated

Land sales $ 139,500 $ — $ 346,758 $ — $ 486,258 $ — $ 486,258 $ (346,758) $ 139,500

Land sales—related party 43,286 — 62,797 — 106,083 — 106,083 (62,797) 43,286

Home sales — — 26,172 — 26,172 — 26,172 (26,172) —

Management services—related party (2)

— — 38,675 406 39,081 — 39,081 — 39,081

Operating properties 1,979 548 — 8,475 11,002 — 11,002 (8,475) 2,527

Total revenues 184,765 548 474,402 8,881 668,596 — 668,596 (444,202) 224,394

124,892 143,190

COSTS AND EXPENSES:

Land sales 106,012 — 301,247 — 407,259 — 407,259 (301,247) 106,012

Home sales — — 20,022 — 20,022 — 20,022 (20,022) —

Management services (2)

— — 31,459 — 31,459 — 31,459 — 31,459

1 unchanged sentence

Selling, general, and administrative 18,340 5,190 30,658 4,473 58,661 53,588 112,249 (35,131) 77,118

11,629 14,782

Management fees—related party — — 25,969 — 25,969 — 25,969 (25,969) —

Total costs and expenses 131,174 5,190 409,355 6,362 552,081 53,588 605,669 (384,258) 221,411

OTHER INCOME (EXPENSE):

Interest income — — 496 — 496 94 590 (496) 94

Interest expense — — — (1,235) (1,235) — (1,235) 1,235 —

Miscellaneous 1,672 1,070 — — 2,742 978 3,720 — 3,720

Total other income (expense) 1,672 1,070 496 (1,235) 2,003 1,072 3,075 739 3,814

EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES (903) — (1,409) — (2,312) — (2,312) 8,500 6,188

SEGMENT PROFIT (LOSS)/INCOME BEFORE INCOME TAX BENEFIT 54,360 (3,572) 64,134 1,284 116,206 (52,516) 63,690 (50,705) 12,985

INCOME TAX BENEFIT — — — — — 325 325 — 325

SEGMENT PROFIT (LOSS)/NET INCOME $ 54,360 $ (3,572) $ 64,134 $ 1,284 $ 116,206 $ (52,191) $ 64,015 $ (50,705) $ 13,310

(1) Represents the removal of the Great Park Venture and Gateway Commercial Venture operating results, which are included in the Great Park segment and Commercial segment operating results at 100% of each venture’s historical basis, respectively, but are not included in our consolidated results as we account for our investment in each venture using the equity method of accounting.

(2) For the Great Park and Commercial segments, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture and the Gateway Commercial Venture, as applicable.

Year Ended December 31, 2020

Valencia San Francisco Great Park Commercial Total reportable segments

Corporate and unallocated Total under management Removal of unconsolidated entities (1)

Total consolidated

Land sales $ 69,398 $ — $ 22,165 $ — $ 91,563 $ — $ 91,563 $ (22,165) $ 69,398

Land sales—related party 53,219 — 2,662 — 55,881 — 55,881 (2,662) 53,219

Management services—related party (2)

— 835 26,900 397 28,132 — 28,132 — 28,132

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.

Operating properties 2,275 595 — 24,241 27,111 — 27,111 (24,241) 2,870

Total revenues 124,892 1,430 51,727 24,638 202,687 — 202,687 (49,068) 153,619

COSTS AND EXPENSES:

Land sales 85,753 — 15,304 — 101,057 — 101,057 (15,304) 85,753

Management services (2)

— 488 19,998 — 20,486 — 20,486 — 20,486

Operating properties 5,127 — — 5,347 10,474 — 10,474 (5,347) 5,127

Selling, general, and administrative 11,629 11,297 35,823 9,978 68,727 60,578 129,305 (45,801) 83,504

Management fees—related party — — 4,378 — 4,378 — 4,378 (4,378) —

Total costs and expenses 102,509 11,785 75,503 15,325 205,122 60,578 265,700 (70,830) 194,870

OTHER INCOME (EXPENSE):

Interest income 23 — 1,272 — 1,295 1,346 2,641 (1,272) 1,369

Interest expense — — — (8,857) (8,857) — (8,857) 8,857 —

Loss on extinguishment of debt — — — (474) (474) — (474) 474 —

Gain on asset sales, net — — — 112,260 112,260 — 112,260 (112,260) —

Miscellaneous 356 — — — 356 — 356 — 356

Total other income (expense) 379 — 1,272 102,929 104,580 1,346 105,926 (104,201) 1,725

EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES (1,569) — — — (1,569) — (1,569) 43,933 42,364

SEGMENT PROFIT (LOSS)/LOSS BEFORE INCOME TAX BENEFIT 21,193 (10,355) (22,504) 112,242 100,576 (59,232) 41,344 (38,506) 2,838

INCOME TAX PROVISION — — — — — (1,744) (1,744) — (1,744)

SEGMENT PROFIT (LOSS)/NET LOSS $ 21,193 $ (10,355) $ (22,504) $ 112,242 $ 100,576 $ (60,976) $ 39,600 $ (38,506) $ 1,094

Valencia Segment (formerly Newhall)

Valencia is the continuation of our community where already today approximately 20,000 households reside and approximately 60,000 people work.

We began selling homesites in the first development area at Valencia in 2019, and as of December 31, 2021 we had sold 1,866 homesites for aggregate consideration of approximately $421.2 million.

Land sales and related party land sales revenues.

Total land sales revenues increased by $60.2 million, or 49.1%, to $182.8 million for the year ended December 31, 2021, from $122.6 million for the year ended December 31, 2020.

The increase in total land sales revenues was attributable to the recognition of revenue from the sale of land entitled for an aggregate of 643 homesites on approximately 57 acres during the year ended December 31, 2021 compared to the recognition of revenue from the sale of land entitled for an aggregate of 512 homesites on approximately 52 acres during the year ended December 31, 2020.

The base purchase price was $167.3 million for the 2021 sales.

We also recognized additional revenue of $5.1 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive.

In 2020, 210 of the homesites sold were purchased by the Valencia Landbank Venture, in which we own a 10% equity interest.

The base purchase price was $118.7 million for the 2020 sales, and we also recognized additional revenue of $3.7 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that we expect to be entitled to receive.

In 2021, we also recognized $10.0

million in land sale revenues associated with the receipt of $10.0 million in cash from a customer that acquired commercial property from us in 2011.

The payment was contingent on the customer obtaining certain land use approvals for the property.

In 2021, 123 of the homesites sold were purchased by the Valencia Landbank Venture, in which we own a 10% equity interest, and in 2020, 210 of the homesites sold were purchased by the Valencia Landbank Venture.

Revenues associated with these closings are reported as land sales — related party.

When we sell land to the Valencia Landbank Venture, we eliminate our pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Valencia Landbank Venture to third-party homebuilders.

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.

Additionally, in 2021, 328 of the homesites were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity.

Cost of land sales.

Cost of land sales during the years 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.

Cost of land sales during the years ended December 31, 2021 and 2020 were $106.0 million and $85.8 million, or 58.0% and 69.9% of total land sale revenues and land sales—related party revenues, respectively.

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

Since this method requires us to estimate future development costs and the expected sales prices for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.

In 2021, we exonerated development bonds attributed to accrued development obligations on previously sold property, and as a result we reversed approximately $10.6 million in accrued development obligations from these prior period land sales as reductions to the current period’s cost of sales.

Selling, general, and administrative.

Selling, general, and administrative expenses 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.

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.

Selling, general, and administrative expenses increased by $6.7 million, or 57.7%, to $18.3 million for the year ended December 31, 2021, from $11.6 million for the year ended December 31, 2020.

The increase was mainly attributable to an increase in community related selling and marketing expenses in preparation for and in support of builder model home openings at the first development area of Valencia that occurred in 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.

During the years ended December 31, 2021 and 2020, we recognized equity in loss of $0.9 million and $1.6 million, respectively, from the Valencia Landbank Venture primarily as a result of eliminating our pro-rata share of the intra-entity profits generated from land sales to the Valencia Landbank Venture, offset by recognition of our pro-rata share of profits from land sold by the Valencia Landbank Venture to third-party homebuilders.

San Francisco Segment

5 unchanged sentences

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.

In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick and The San Francisco Shipyard by over two million square feet, most of which we anticipate will be for office use, and increases our total commercial space to approximately 6.3 million square feet.

In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick and The San Francisco Shipyard by over two million square feet and increases our total commercial space to approximately 6.3 million square feet.

At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S.

19 unchanged sentences

Given the preliminary nature of the claims to date, we cannot predict the outcome of these matters.

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

Year Ended December 31,

(in thousands)

Statement of Operations Data

Land sales—related party

Operating property

Management services—related party

Total revenues

Costs and expenses

Management services

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

The decrease in management services—related party revenues was due to the termination in early 2020 of our management agreement with Lennar with respect to the Concord community.

In addition, in 2021, we amended certain other related party agreements, which resulted in recognition of a miscellaneous other income—related party gain of $1.1 million during the year ended December 31, 2021.

Selling, general, and administrative.

Selling, general, and administrative expenses decreased by $6.1 million, or 54.1%, to $5.2 million for the year ended December 31, 2021, from $11.3 million for the year ended December 31, 2020.

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

Other Income.

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.

The decrease was mainly attributable to a decrease in employee related expenses as a result of reallocations of human capital resources among our projects resulting in lower cost allocations to the San Francisco Venture.

Great Park Segment

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The Great Park Venture sold the first homesites in April 2013 and, as of December 31, 2021, had sold 7,099 homesites (including 709 affordable homesites) and commercial land allowing for development of up to 2 million square feet of commercial (research and development) space for aggregate consideration of approximately $3.0 billion.

Interests in the 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.

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.

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

Year Ended December 31,

(in thousands)

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 (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.

Interests in the Great Park Venture are either “percentage interests” or “legacy interests.” Holders of the legacy interests were entitled to receive priority distributions in an aggregate amount equal to $476.0 million and up to an additional $89.0 million from participation in subsequent distributions.

The holders of percentage interests are entitled to all other distributions.

During the year ended December 31, 2021, the Great Park Venture made aggregate distributions of $51.0 million to holders of legacy interests and $204.3 million to holders of percentage interests.

The Company received $76.6 million for its 37.5% percentage interest.

With the distributions to the holders of legacy interests, the Great Park Venture fully satisfied the $476.0 million priority distribution rights and reduced the remaining maximum participating legacy interest distribution rights to $82.7 million.

The remaining $82.7 million legacy interest will be paid on a pro-rata basis, with approximately 10% of future distributions paid to the holders of legacy interests and approximately 90% of such distributions paid to the holders of the percentage interests, until such time as the remaining balance has been fully paid.

Land sales and related party land sales revenues.

Land sales and related party land sales revenues increased by $384.7 million to $409.6 million for the year ended December 31, 2021, from $24.8 million for the year ended December 31, 2020.

The increase was primarily attributable to the recognition of revenue from the sale of land entitled for an aggregate of 887 homesites on approximately 72 acres during the year ended December 31, 2021 compared to the recognition of revenue from the sale of land entitled for an aggregate of 35 homesites on approximately four acres during the same period in 2020.

The base purchase price was $393.3 million for the 2021 sales.

The Great Park Venture also recognized $9.1 million in the transaction price as an estimate of the amount of variable consideration from marketing fees that it expects to be entitled to receive.

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, 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.

The base purchase price was $20.3 million for the 2020 sales.

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 for the 2020 sales.

In 2021, 117 of the homesites sold were purchased by the Great Park Landbank Venture, in which the Great Park Venture owns a 10% equity interest.

Revenues associated with these closings are reported as land sales — related party.

When the Great Park Venture sells land to the Great Park Landbank Venture, it eliminates its pro-rata share of the intra-entity profits generated from the sale through earnings (loss) from unconsolidated entities until the land is sold by the Great Park Landbank Venture to third-party homebuilders.

Additionally, in 2021, 572 of the homesites sold were sold to an unaffiliated land banking entity whereby a related party retained the option to acquire the homesites in the future from the land bank entity.

During the years ended December 31, 2021 and 2020, 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, 2021 and 2020, the Great Park Venture recognized $6.7 million and $3.6 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.

Cost of land sales in 2020 and 2019 was $15.3 million and $179.8 million, or 61.6% and 66.4% of total land sales revenues, respectively.

Cost of land sales during the years ended December 31, 2021 and 2020 were $301.2 million and $15.3 million, or 73.6% and 61.6% of total land sales revenues, respectively.

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

Since this method requires the 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.

Home sale revenues.

The Great Park Venture has a fee build agreement with an unrelated third-party (“Fee Builder”) that the Great Park Venture contracted to build and act as a sales agent for 38 homesites within the Great Park Neighborhoods.

The Fee Builder initially incurs all costs to build, market and sell the residential homes, and the Great Park Venture reimburses the Fee Builder as construction progresses and pays the Fee Builder certain fees during the construction phase of the homes and when homes are sold to homebuyers.

During the year ended December 31, 2021, the Great Park Venture closed the sales of 16 homes to homebuyers generating $26.2 million in home sale revenues.

The remaining homes subject to the fee building agreement are expected to close in 2022.

Cost of home sales.

Cost of home sales includes an allocation of land basis for each home sold in addition to home construction costs the Great Park Venture reimburses to the Fee Builder and fees paid to the Fee Builder for the services provided.

During the year ended December 31, 2021, the Great Park Venture recognized $20.0 million in cost of home sales.

Management fee revenues.

Management fee revenues are revenues generated by the management company from development management services provided to the Great Park Venture.

The management company receives a base management fee, reimbursement for certain defined project team costs and the right to receive certain variable incentive compensation.

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

Management services costs and expenses.

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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, 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.

Corporate and non-project team salaries and overhead incurred by us are not allocated to management services costs and expenses or to our reportable segments and are reported in selling, general, and administrative costs in the consolidated statement of operations.

During the year ended December 31, 2021, management services costs and expenses increased by $11.5 million, or 57.3%, to $31.5 million, from $20.0 million for the year ended December 31, 2020.

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

Intangible asset amortization expense was $20.3 million in 2021 compared to $8.6 million in 2020.

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Selling, general, and administrative costs decreased by $5.2 million, or 14.4%, to $30.7 million for the year ended December 31, 2021, from $35.8 million for the year ended December 31, 2020.

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.

The lower expense during the year ended December 31, 2021 was mainly attributable to a decrease in community related selling and marketing expenses incurred at the Great Park Neighborhoods.

Management fees—related party.

Management fees 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 increased by $21.6 million, to $26.0 million for the year ended December 31, 2021, from $4.4 million for the year ended December 31, 2020.

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

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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 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.

The increase in management fees — related party was mainly attributable to changes in estimates of the amount of incentive compensation probable of being paid.

The Great Park Venture recognized expense of $19.1 million and a credit of $2.4 million for incentive compensation fees during the years ended December 31, 2021 and 2020, respectively.

The table below reconciles the Great Park segment results for the years ended December 31, 2021 and 2020 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, 2021 and 2020, respectively.

Year Ended December 31,

(in thousands)

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

Segment net income (loss) from operations $ 64,134 $ (22,504)

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

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

Net income (loss) of Great Park Venture 56,918 (29,406)

The Company’s share of net income (loss) of the Great Park Venture 21,344 (11,027)

Basis difference amortization

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

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

Equity in earnings (loss) from Great Park Venture $ 6,432 $ (39,951)

Commercial Segment

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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.

The Five Point Gateway Campus currently includes approximately one million square feet planned for research and development, medical and office space in four buildings.

In 2020, the Gateway Commercial Venture sold three of the buildings and approximately 11 acres of land at the campus, generating $463.0 million in gross proceeds.

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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.

Year ended December 31,

(in thousands)

Statement of Operations Data

Rental and related income

$ 15,797 $ 25,881

Rental and related income—related party

Property management services—related party

Total revenues

24,638 34,479

Costs and expenses

Rental operating expenses

Other expenses

Total costs and expenses

24,656 39,297

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

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

Revenues decreased by $15.8 million, or 64.0%, to $8.9 million for the year ended December 31, 2021, from $24.6 million for the year ended December 31, 2020.

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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.

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 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.

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 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 and interest expense .

Costs and expenses decreased by $17.1 million, or 69.2%, to $7.6 million for the year ended December 31, 2021, from $24.7 million for the year ended December 31, 2020.

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, 2021.

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.

The table below reconciles the Commercial segment results for the years ended December 31, 2021 and 2020 to the equity in earnings from our investment in the Gateway Commercial Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2021 and 2020, respectively.

Year Ended December 31,

(in thousands)

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

Segment net income from operations $ 1,284 $ 112,242

Less net income of management company attributed to the Commercial segment

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

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

Net income of Gateway Commercial Venture 878 111,845

Equity in earnings from Gateway Commercial Venture $ 659 $ 83,884

Liquidity and Capital Resources

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However, letters of credit of $0.3 million were issued and outstanding under the revolving credit facility as of December 31, 2021, thus reducing the available capacity to $124.7 million.

In April 2021, we entered into the third amendment to our unsecured revolving credit facility, which extended the maturity date of the revolving credit facility from April 2022 to April 2024, with one option to extend the maturity date by an additional year, subject to the satisfaction of certain conditions, including the approval of the administrative agent and lenders.

Our short-term cash needs consist primarily of general and administrative expenses and development expenditures 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.

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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.

Our related party has a history of receiving maturity date extensions, however, such further extensions are not within our control.

The development stages of our communities continue to require significant cash outlays on both a short-term and long-term basis, and we expect to invest significant amounts on continued horizontal development at Valencia over the next 12 months.

We manage our development activities and expenditures to coincide with projected demand for homesites by our guest builders with the objective of maintaining an appropriate level of liquidity.

The initial term of our development management agreement has been extended by mutual agreement of the parties through April 30, 2022.

While we currently expect the development management agreement to be renewed, if we are unable to reach agreement on a renewal, or if the terms of any such renewal are less favorable to the company, our short-term cash flows may be negatively impacted.

We still expect, however, to be able to meet both short-term and long-term cash obligations with our other sources of cash.

We budget our cash development costs on an annual basis.

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

We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years.

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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.

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.

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

We had outstanding performance bonds of $279.6 million as of December 31, 2021 predominantly related to our Valencia community.

At December 31, 2021, the San Francisco Venture had outstanding guarantees benefiting a municipal agency for infrastructure and construction of certain park and open space obligations with aggregate maximum obligations of $198.3 million.

Outstanding LOCs totaled $1.3 million at both December 31, 2021 and 2020.

At both December 31, 2021 and 2020, we had $1.0 million in restricted cash and certificates of deposit securing certain of our LOCs.

Additionally, under our revolving credit facility, we are able to utilize undrawn capacity to support the issuance of LOCs.

As of December 31, 2021, we were using approximately $0.3 million in capacity under the revolving credit facility to support LOCs.

In 2004, our defined benefit pension plan was amended to cease future benefit accruals for services provided by participants of the plan and to close the plan to new participants.

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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:

The following table aggregates certain of our material cash obligations and commitments as of December 31, 2021:

Payment due by period

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32,507 1,357 2,848 3,037 25,265

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 (2)

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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.

(2) Prior to our acquisition of the San Francisco Venture, certain subsidiaries of the San Francisco Venture entered into EB-5 loan agreements with lenders that are authorized by the United States Citizenship and Immigration Services to raise capital from foreign nationals who seek to obtain permanent residency in the United States.

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

The above table does not present accounts payable and other development liabilities incurred in the normal course of business.

Summary of Cash Flows

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Investing activities

75,315 52,940

Financing activities

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Cash outflows are comprised primarily of cash outlays for horizontal development costs, employee compensation, and selling, general, and administrative costs.

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

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.

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

Net cash used in operating activities increased by $2.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

Major components of operating cash used in both periods consist of our continued investment in horizontal development at our communities and selling, general, and administrative costs.

During the 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, 2021 and 2020, we received $167.0 million and $118.5 million, respectively, in net proceeds upon closing escrow from land sales at our Valencia segment.

During the 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.

During the year ended December 31, 2021, we received incentive compensation payments of $20.7 million under our development management agreement with the Great Park Venture.

The payment is net of $0.6 million that we concurrently distributed to the holders of the management company's class B units.

Additionally, we received $10.0 million in contingent consideration associated with a commercial land sale that closed in 2011.

We made total interest payments of $49.2 million on our senior notes in each of the years ended December 31, 2021 and 2020.

Cash Flows from Investing Activities.

Net cash provided by investing activities was $75.3 million for the year ended December 31, 2021, compared to the net cash provided by investing activities of $52.9 million for the year ended December 31, 2020.

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.

During the year ended December 31, 2021, we received a distribution of $76.6 million from the Great Park Venture, which is reflected as a return of our investment (investing activity) in the statement of cash flows.

Additionally, we received a distribution of $1.0 million from our indirect legacy interest in the Great Park Venture.

Cash Flows from Financing Activities.

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”).

Net cash used in financing activities was $26.6 million for the year ended December 31, 2021, compared to net cash used in financing activities of $23.5 million for the year ended December 31, 2020.

During the years ended December 31, 2021 and 2020, we made tax distributions of $4.4 million (net of amounts distributable to us as a partner of the operating company) and $4.6 million, respectively, to noncontrolling interests in accordance with the operating company's Limited Partnership Agreement (“LPA”).

The tax distribution is treated as an advance distribution under the LPA.

We also made payments of $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 also made payments of $19.4 million and $13.5 million to reduce our related party reimbursement obligation during the years ended December 31, 2021 and 2020, respectively.

We used $2.0 million and $5.5 million during the years ended December 31, 2021 and 2020, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes.

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, 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.

During the year ended December 31, 2021, our ownership percentage in the operating company increased to 62.9%, primarily due to our issuance of shared-based compensation in the form of 1.4 million restricted Class A common shares offset by our reacquisition of approximately 0.3 million restricted Class A common shares from employees for income tax withholding purposes.

The issuances and settlements resulted in the operating company issuing to us an equal number of Class A units of the operating company or retiring an equal number of Class A units of the operating company that we previously held.

The table below summarizes outstanding Class A units of the operating company and Class A units of the San Francisco Venture, which are redeemable on a one-for-one basis for Class A units of the operating company, at December 31, 2021 and 2020 held by us and those held by noncontrolling interest members.

Year ended December 31,

Class A units of the operating company:

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149,341,096 148,284,828

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.

At December 31, 2021, we had 79,233,544 Class B common shares outstanding that were held by the noncontrolling interest members of the operating company and the Class A unitholders of the San Francisco Venture.

The Class B common shares will automatically convert to Class A common shares at a ratio of 0.0003 Class A common shares for each Class B common share.

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In the ordinary course of our business, we have sold and expect to continue to sell homesites to Lennar, which is our largest equity owner, or its affiliates, subsidiaries or joint ventures in which it is a member.

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 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.

However, we do not expect these arrangements to contribute material revenues in future periods.

We did not sell homesites directly to Lennar during the years ended December 31, 2021, 2020, and 2019 but did recognize revenues related to certain fees or profit participation associated with homes sold by Lennar to homebuyers at Valencia.

During the years ended December 31, 2021 and 2019, we sold homesites to an unaffiliated land banking entity and recognized $76.5 million and $139.9 million of such revenue, respectively.

Lennar has retained the option to acquire these homesites in the future from the unaffiliated land banking entity.

During the years ended December 31, 2021 and 2020, we sold homesites to the Valencia Landbank Venture, our equity method investee, and recognized $43.2 million and $53.2 million of such revenue, respectively.

We also provide management services to the Great Park Venture pursuant to a development management agreement.

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Lennar, along with an affiliate of Castlelake, also owns interests in an entity that owns a 12.5% legacy interest in the Great Park Venture.

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.

For the years ended December 31, 2021 and 2020, we recognized $38.7 million and $26.9 million, respectively, of revenue from management services provided to the Great Park Venture.

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, 2021 and 2020.

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

Critical accounting policies and estimates are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments.

Our critical accounting policies and estimates are those applicable to the following:

Consolidation

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 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.

If the project profitability falls short of the participation threshold, we receive no additional revenues.

In most contracts, at the time of the land sale we expect to constrain our estimate of profit participation, if any, as there are significant factors outside our control that will impact whether participation thresholds will be met.

In addition, some residential homesite sale agreements contain a provision requiring the homebuilder to pay a marketing fee per residence sold, as a percentage of the home sale price.

We estimate such fees as a variable consideration and include an amount we expect to be entitled to receive in the transaction price.

At the end of each reporting period, we reassess the variable considerations to ensure changes in circumstances or constraints are appropriately reflected in the estimated transaction price.

Changes in estimates of variable components of transaction prices could result in cumulative catch-up adjustments to revenue.

In addition to the related party revenues, during the year ended December 31, 2021, we also sold homesites to two third-party home builders and recognized $30.3 million and $22.5 million of revenue, respectively, which separately accounted for more than 10% of total consolidated revenues.

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

Other than the third-party home builders and the unaffiliated land bank entity, no third-party customer accounted for more than 10% of our revenue during the years ended December 31, 2021 and 2020.

Critical Accounting Estimates

Critical accounting estimates are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments.

Our critical accounting estimates are discussed below.

For a summary of our significant accounting policies, see Note 2 to the notes to the consolidated financial statements in Item 8, Part II of this report.

Cost of Land Sales

Capitalized inventory costs include land, horizontal development, indirect project costs, real estate taxes and interest related to financing development and construction.

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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.

The transaction price pertaining to management services revenue may be comprised of fixed and variable components, including incentive compensation fee provisions that are contingent on the performance of our customer.

In making estimates of incentive compensation we expect to be entitled to receive in exchange for providing management services, we make significant assumptions and judgments in evaluating the factors that may determine the amount of consideration we will ultimately receive.

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

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

Cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development obligations and the cost of completing development, general and administrative costs, and other factors.

In determining these estimates and assumptions, we utilize historical trends from our past development projects, in addition to internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics and unemployment rates.

limited to, statistics on population demographics and unemployment rates.

Using all available information, we calculate our best estimate of projected cash flows for each asset.

While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change as market and economic conditions change.

Incentive Management Agreement Fees

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

The transaction price pertaining to our management agreement with the Great Park Venture is comprised of fixed and variable components, including incentive compensation fee provisions that are contingent on the performance of the Great Park Venture.

In doing so, we typically utilize cash flow projections for the community.

We believe that the accounting estimate related to incentive management fees is a critical accounting estimate because when changes in our estimates and assumptions occur, our estimate of the amount of incentive compensation we expect to be entitled to receive may change, resulting in a cumulative adjustment being recorded in the period of the change that may be material.

Investments in Unconsolidated Entities

For investments in entities that we do not control, but over which we exercise significant influence, we use the equity method of accounting.

Our judgment with regard to our level of influence or control of an entity involves consideration of various factors, including the form of our ownership interest, our representation in the entity’s governance, our ability to participate in policy-making decisions and the rights of other investors to participate in the decision-making process to replace us as manager or to liquidate the entity.

Investments accounted for under the equity method of accounting are recorded at cost and adjusted for our share in the earnings (losses) of the venture and cash contributions and distributions.

Any difference between the carrying amount of the equity method investment on our balance sheet and the underlying equity in net assets on the entity’s balance sheet results in a basis difference, which is adjusted as the related underlying assets are depreciated, amortized or sold and the liabilities are settled.

We generally allocate income and loss from unconsolidated entities based on the venture’s distribution priorities, which may be different from its stated ownership percentage.

We evaluate the recoverability of our investments in unconsolidated entities by first reviewing each investment for any indicators of impairment.

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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.

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.

When assessing the need for a valuation allowance, we consider, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards and tax planning alternatives, to the extent these items are applicable.

Any increase or decrease in a valuation allowance could have a material adverse effect or beneficial effect on our income tax provision and net income or loss in the period the determination is made.

We recognize interest or penalties related to income tax matters in income tax expense.

Recently Issued Accounting Pronouncements and Developments

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

We had no material off-balance sheet arrangements as of December 31, 2020.

Our business and results of operations are not materially impacted by seasonality.

Inflation poses a risk to our business due to the possibility that higher prices would increase our development expenditures.

In particular, our development expenditures are influenced by the price of oil, which is used in our development activities, including grading and paving roads.

In addition, because 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, we may be able to receive additional benefit in the event of inflation.

Changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment losses.

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