What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-03-11 compared with 2021-03-10 · 388 added, 24 removed, 194 unchanged (68% of the section changed)

39 unchanged sentences

Not applicable.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

Directors, Executive Officers and Corporate Governance

3 unchanged sentences

The information in the Proxy Statement relevant to this item is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information in the Proxy Statement relevant to this item is incorporated herein by reference, except for the information required by Item 201(d) of Regulation S-K, which is provided below.

10 unchanged sentences

The information in the Proxy Statement relevant to this item is incorporated herein by reference.

Principal Accounting Fees and Services

Principal Accountant Fees and Services

The information in the Proxy Statement relevant to this item is incorporated herein by reference.

Exhibits, Financial Statement Schedules

(a) Documents filed as part of this Report.

The following financial statements are contained in Item 8.

Financial Statements Page in this Report

Report of Independent Registered Public Accounting Firm

(a)(1) The following consolidated financial statements are contained in Part II, Item 8 of this Report.

Financial Statements - Five Point Holdings, LLC Page in this Report

Report of Independent Registered Public Accounting Firm (Public Company Accounting Oversight Board identification number 34 )

Consolidated Balance Sheets as of December 31, 202 1 and 20 20

Consolidated Statements of Operations for the years ended December 31, 202 1 , 20 20 and 20 19

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019 and 2018

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 202 1 , 20 20 and 20 19

Consolidated Statements of Capital for the years ended December 31, 202 1 , 20 20 and 20 19

1 unchanged sentence

Notes to the Consolidated Financial Statements

The following financial statement schedule is included in this Report:

Financial Statement Schedule Page in this Report

(a)(2) The following financial statement schedules are included in this Report:

Financial Statement Schedule - Five Point Holdings, LLC

Schedule III—Real Estate and Accumulated Depreciation

Information required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable to us.

The following exhibits are filed with this Report or incorporated by reference:

Financial Statements - Heritage Fields LLC

Independent Auditor’s Report

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Capital for the years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019

Notes to the Consolidated Financial Statements

Information required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable.

(a)(3) The following exhibits are filed with this Report or incorporated by reference:

Exhibit Exhibit Description

15 unchanged sentences

Five Point Holdings, LLC Senior Management Severance and Change in Control Plan (Exhibit 10.11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is incorporated herein by this reference)

Employment Transition Agreement, dated as of August 23, 2021, by and among Emile Haddad, Five Point Operating Company, LP, Five Point Communities Management, Inc., and Five Point Holdings, LLC (Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is incorporated herein by this reference)

Advisory Agreement, dated as of August 23, 2021, by and between Emile Haddad and Five Point Operating Company, LP (Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 is incorporated herein by this reference)

Form of Indemnification Agreement by and between the Registrant and each of its Directors and Executive Officers (Exhibit 10.7 to Registrant's Registration Statement on Form S-11 filed April 7, 2017 is incorporated herein by this reference)

27 unchanged sentences

(Exhibit 10.1 to the Current Report on Form 8-K filed on May 16, 2019 is incorporated herein by this reference)

Third Amendment to Credit Agreement, dated as of April 19, 2021, by and among Five Point Operating Company, LP, Zions Bancorporation, N.A.

dba California Bank & Trust, Comerica Bank, JPMorgan Chase Bank, N.A., and Citibank, N.A.

(Exhibit 10.1 to the Current Report on Form 8-K filed on April 20, 2021 is incorporated herein by this reference)

Guaranty Agreement, executed as of August 10, 2017, by Five Point Holdings, LLC for the benefit of SPT CA Funding 2, LLC (Exhibit 10.2 to the Current Report on Form 8-K filed on August 10, 2017 is incorporated herein by this reference)

2 unchanged sentences

Consent of Independent Registered Public Accounting Firm**

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification of Principal Executive Officer Pursuant to 18 U.S.C.

14 unchanged sentences

FIVE POINT HOLDINGS, LLC

/s/ Emile Haddad

President and

/s/ Daniel Hedigan

Daniel Hedigan

Chief Executive Officer

2 unchanged sentences

Principal Executive Officer:

Emile Haddad /s/ Emile Haddad

Chairman of the Board, President, and Chief Executive Officer Date:

Daniel Hedigan /s/ Daniel Hedigan

Chief Executive Officer Date:

March 11, 2022

15 unchanged sentences

March 11, 2022

Emile Haddad /s/ Emile Haddad

March 11, 2022

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

31 unchanged sentences

227,482 189,395 290,813

Cost of real estate sold (2)

( 85,953 ) ( 96,897 ) ( 9,586 )

Reimbursements and disposals (3)

( 2,243 ) ( 198 ) ( 9,388 )

Inventory relief from real estate sold ( 116,393 ) ( 85,953 ) ( 96,897 )

Reimbursements ( 5,116 ) ( 2,243 ) ( 198 )

Balance at end of year $ 2,126,949 $ 2,020,976 $ 1,919,777

(1) Improvements and additions include noncash project accruals and capitalized interest.

(2) Includes inventory relief associated with adoption of the new revenue recognition standard in 2018.

(3) Includes disposal of TPC Golf Course in 2018.

Reconciliation of Accumulated Depreciation

5 unchanged sentences

Balance at end of year $ 2,020 $ 1,891 $ 1,758

INDEPENDENT AUDITOR’S REPORT

To the Members of

Heritage Fields LLC

Irvine, California

We have audited the consolidated financial statements of Heritage Fields LLC, a Delaware limited liability company, and its subsidiaries (the "Company"), which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, members’ capital, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in accordance with accounting principles generally accepted in the United States of America.

Basis of Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS).

Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report.

We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.

Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

In performing an audit in accordance with GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.

Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

Accordingly, no such opinion is expressed.

• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California

March 11, 2022

HERITAGE FIELDS LLC AND SUBSIDIARIES

(A Delaware Limited Liability Company)

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2021 AND 2020

(In thousands)

LAND UNDER DEVELOPMENT $ 668,967 $ 896,538

HOMES UNDER CONSTRUCTION 18,267 19,589

CASH AND CASH EQUIVALENTS

140,004 128,850

INVESTMENT IN JOINT VENTURE 2,985 —

RECEIVABLES AND OTHER ASSETS—Net

29,566 24,449

$ 859,789 $ 1,069,426

LIABILITIES, REDEEMABLE INTERESTS, AND MEMBERS’ CAPITAL

$ 3,667 $ 5,381

Accrued management fees and reimbursements

102,686 109,730

Accounts payable and other liabilities

22,324 24,818

Total liabilities

128,677 139,929

COMMITMENTS AND CONTINGENCIES (Note 8)

REDEEMABLE LEGACY INTERESTS

82,719 133,695

MEMBERS’ CAPITAL

648,393 795,802

$ 859,789 $ 1,069,426

See notes to consolidated financial statements.

HERITAGE FIELDS LLC AND SUBSIDIARIES

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

(In thousands)

Year Ended December 31,

2021 2020 2019

$ 409,555 $ 24,827 $ 270,970

Home sales 26,172 — —

Total revenues 435,727 24,827 270,970

COSTS AND EXPENSES:

301,247 15,304 179,836

Home sales 20,022 — —

Management fee

25,969 4,378 22,301

Selling, general and administrative

30,658 35,823 37,437

Total costs and expenses

377,896 55,505 239,574

EQUITY IN LOSS FROM JOINT VENTURE (1,409) — —

INTEREST INCOME 496 1,272 3,489

NET INCOME (LOSS) $ 56,918 $ (29,406) $ 34,885

See notes to consolidated financial statements.

HERITAGE FIELDS LLC AND SUBSIDIARIES

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF MEMBERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

(In thousands)

MEMBERS’ CAPITAL— January 1, 2019 $ 791,441

Net income 34,885

MEMBERS’ CAPITAL— December 31, 2019 826,326

Cumulative effect of change in accounting principle (See Note 2) (1,118)

Net loss (29,406)

MEMBERS’ CAPITAL—December 31, 2020 795,802

Cash distributions (204,327)

Net income 56,918

MEMBERS’ CAPITAL—December 31, 2021 $ 648,393

See notes to consolidated financial statements.

HERITAGE FIELDS LLC AND SUBSIDIARIES

(A Delaware Limited Liability Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

(In thousands)

Year Ended December 31,

2021 2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 56,918 $ (29,406) $ 34,885

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Cost of land sales

301,247 15,304 179,836

Cost of home sales 20,022 — —

Equity in loss of from joint venture 1,409 — —

Changes in operating assets and liabilities:

Land under development (73,676) (56,512) 9,020

Homes under construction (18,700) (4,058) —

Receivables and other assets, net (5,117) 6,828 1,441

Accrued management fees and reimbursements

(7,044) (2,896) 16,282

Accounts payable and other liabilities (2,494) (16,602) (9,125)

Net cash provided by (used in) operating activities 272,565 (87,342) 232,339

CASH FLOWS FROM INVESTING ACTIVITIES:

Contributions to joint venture (4,589) — —

Distributions from joint venture 195 — —

Net cash used in investing activities (4,394) — —

CASH FLOWS FROM FINANCING ACTIVITIES:

Legacy Interest distributions (50,976) (76,272) —

Payments of debt (1,714) (538) —

Percentage Interest distributions (204,327) — —

Net cash used in financing activities

(257,017) (76,810) —

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,154 (164,152) 232,339

CASH AND CASH EQUIVALENTS—Beginning of year

128,850 293,002 60,663

CASH AND CASH EQUIVALENTS—End of year

$ 140,004 $ 128,850 $ 293,002

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION—

Cash paid for interest, all of which was capitalized to inventories

$ 12,037 $ 3,190 $ —

See notes to consolidated financial statements.

HERITAGE FIELDS LLC AND SUBSIDIARIES

(A Delaware Limited Liability Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF ORGANIZATION AND OPERATIONS

Heritage Fields LLC, a Delaware limited liability company (the “Company”), was formed on January 20, 2005.

On July 12, 2005, the Company purchased property that was the site of the former Marine Corps Air Station, El Toro from the United States Department of the Navy (“Navy”), located in Irvine, California (the “Property”).

On December 22, 2005, the Company conveyed its rights, title, and interests in the Property to the Company's subsidiary, Heritage Fields El Toro, LLC, a Delaware limited liability company ("HF El Toro") at the Company’s original cost for the purpose of developing and selling homesites and certain commercial sites in a mixed-use and residential community located on the Company’s Property (the “Project”).

The Company has two classes of membership interests, Percentage Interests and Legacy Interests.

The Company is managed by an Executive Committee comprised of representatives appointed by only the holders of Percentage Interests.

The holders of Legacy Interests are entitled to receive certain priority distributions (see Note 6).

The holders of the Percentage Interests will receive all other distributions.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation —The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the Company’s accounts and all of its direct and indirect wholly-owned subsidiaries’ accounts.

All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates —The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported period.

Actual results could differ from those estimates.

Concentration of Credit Risk —The Company’s inventories are all located in Irvine, California.

The Company is subject to risks incidental to the ownership, development, and operation of commercial and residential real estate.

These include, among others, the risks normally associated with changes in the general economic climate in the communities in which the Company operates, trends in the real estate industry, availability of land for development, changes in tax laws, interest rate levels, availability of financing, and potential liability under environmental and other laws.

The Company’s credit risk relates primarily to cash and cash equivalents, notes receivable and contract assets.

Cash accounts at certain institutions are currently insured by the Federal Deposit Insurance Corporation up to $250,000 in aggregate.

At various times the Company maintained cash account balances in excess of insured amounts.

Cash equivalents —Cash equivalents are short-term investments that have original maturity dates of three months or less.

The carrying amount approximates fair value due to the short-term nature of these investments.

Land under development —Land under development is stated at cost, unless it is determined to be impaired, in which case the impaired land under development is written down to fair value.

Land under development includes land, land development costs, real estate taxes, and interest related to development.

Included in land development costs are costs to entitle and permit the land for its intended use;

costs incurred for infrastructure projects, such as schools, sewer, and roads;

and site costs such as grading and amenities to bring the land to a finished state.

Certain land development costs are reimbursable through development or other agreements with City of Irvine (the “City”) or other agencies and offset costs when received.

Total reimbursements were $52.1 million, $9.3 million and $127.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Development overhead and selling expenses are expensed as incurred.

Cost of land sales are allocated to residential homesites and commercial sites within the Project using the relative sales value method.

Since this method requires the Company to estimate future development costs and expected revenue for the entire Project, the profit margin on subsequent land sales will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total development costs of the Project.

Accordingly, these estimates are reviewed regularly and revised for changes in actual experience, changes in revenue and cost estimates and changes in development plans.

Given that development expenditures are capitalized to land under development and reflected in the consolidated statements of operations over the periods in which the Company has land sales, which generally includes future periods, the non-cash cost of land sales are reflected as an add back to net income in the consolidated statements of cash flows.

Land under development is reviewed for potential impairment when events or changes in circumstances indicate that the carrying value of land under development may not be recoverable.

Impairment indicators for the Project include, but are not

limited to significant increases in land development costs, significant decreases in pace and pricing of home sales within the Project and surrounding areas, and political and societal events that may negatively impact the local economy.

There were no impairments identified for the years ended December 31, 2021, 2020 and 2019.

Homes under construction —Homes under construction are a result of a fee build agreement with an unrelated third-party ("Fee Builder") that the Company contracted to build and act as a sales agent for a population of residential homes within the Project.

The Fee Builder initially incurs all costs to build, market and sell the residential homes and the Company reimburses the Fee Builder as construction progresses.

The Company pays the Fee Builder a fixed monthly overhead allowance for its services to construct, manage and maintain the homes during the construction process that is capitalized to homes under construction as incurred.

Land, land development, amenities and home construction costs attributed to the fee build agreement are capitalized to homes under construction and allocated to cost of sales using the relative sales value method when homes are sold.

The Company sets and approves the price at which the completed homes will be sold to homebuyers and upon the closing of a residential home to a third-party homebuyer, the Fee Builder will receive additional fees that are expensed as a cost of the home sale.

Costs incurred for tangible assets constructed solely for model homes directly used in the sale process such as sales offices, design studios, landscaping, and furnishings are capitalized to receivables and other assets, net on the accompanying consolidated balance sheets and were depreciated over the expected selling life of the fee build community which was substantially complete as of December 31, 2021.

All other selling and marketing costs, such as commissions and advertising, are expensed as incurred.

Homes under construction are reviewed for potential impairment when events or changes in circumstances indicate that the carrying value of the homes may not be recoverable.

Impairment indicators for the homes include, but are not limited to significant increases in construction costs, significant decreases in pace and pricing of home sales for the Project and surrounding areas, and political and societal events that may negatively impact the local economy.

No impairments were identified for the years ended December 31, 2021 and 2020.

Investment in joint venture —For investments in entities that the Company does not control, but exercises significant influence, the Company uses the equity method of accounting.

The Company's judgment with regard to control involves consideration of various factors including the form of ownership, representation of the entity's governance, and the ability to participate in policy-making decisions.

Investments accounted for under the equity method of accounting are recorded at cost and adjusted for the Company's share of cash contributions, cash distributions, and gain or loss of the entity's earnings.

The Company eliminates a portion of intra-entity profits resulting from land sales between the Company and the joint venture until the assets are sold to a third-party.

Note Receivables —Note receivables held by the Company are reflected at principal and accrued interest amounts due, net of an allowance for expected credit losses or discounts, if any.

Interest payments are accrued in the period earned based on the stated interest rate and the outstanding principal balance, less any interest discounts stipulated by the note.

Included in receivables and other assets, net on the accompanying consolidated balance sheets are notes and accrued interest receivables that the Company has with builders that are constructing affordable housing apartments on the Project (“Affordable Notes”).

The Company records a discount on the principal balance for Affordable Notes when the note is zero interest bearing or contains other terms that are below market rate.

Any such discount on Affordable Notes is capitalized as a project cost.

The Company monitors the payment provisions of each note when determining past due or delinquency status.

Additionally, the Company evaluates the carrying value of note and interest receivables at each reporting date to determine the need for an allowance for credit losses.

Revenue Recognition —Under Accounting Standards Codification ("ASC") Topic 606, Revenue From Contracts With Customers (“ASC 606”), revenues from land sales are recognized when the Company satisfies the performance obligation at a point in time, which typically occurs when the control of the land passes to its customers.

Revenue is recognized in an amount that reflects the consideration the Company expects to be entitled to receive (i.e.

the transaction price) in exchange for the transfer of land.

The transaction price typically contains fixed and variable components in which the fixed consideration represents the stated purchase price for the land.

Some of the Company’s purchase and sale agreements contain a profit participation provision, a variable form of consideration, whereby the Company receives 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, no additional revenues are received.

In most contracts, at the time of the land sale, the Company's estimate of profit participation, if any, is constrained, as there are significant factors outside of the Company’s 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.

Such fees are estimated as a variable consideration and the amount the Company expects to be entitled to receive is recognized as revenue at the time of land sale.

A contract asset or liability is recognized when the timing of the satisfaction of a performance obligation is different from the timing of the payments made by customers.

Contract assets typically consist of estimates of contingent or variable consideration that has been included in the transaction price and recognized as revenue before the contingency is resolved and the contractual payment is due.

Contract liabilities typically consist of payments received prior to satisfying the associated performance obligation.

Changes in estimates of variable components of transaction prices could result in cumulative catch-up adjustments to revenue in periods after the Company transfers control of the land to the builder.

Profit participation revenue of

$6.7 million, $3.6 million and $8.8 million were recognized for the years ended December 31, 2021, 2020 and 2019, respectively.

Home sale revenues are recognized at the time of escrow closing, when title to and possession of the home is transferred to the homebuyer, and the single performance obligation of the Company, the delivery of a completed home, has been satisfied.

Fair Value Measurements —The accounting guidance for fair value measurements and disclosures emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.

The hierarchy classifies the inputs used to determine fair value into three levels as follows:

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets or inputs, other than quoted prices, that are observable for the instrument either directly or indirectly.

Level 3 —Significant inputs to the valuation model are unobservable.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.

Income Taxes —The consolidated financial statements contain no provision for income taxes since the income or loss of the Company flows through to the members who are responsible for including their share of the taxable results of operations on their respective tax returns.

Accounting Standards Updates —In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No.

2016-13 , Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ("ASU No.

2016-13") which amends the guidance on the impairment of financial instruments, including most debt instruments, trade receivables and loans.

2016-13 adds to GAAP an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses for instruments measured at amortized cost, resulting in a net presentation of the amount expected to be collected on the financial asset.

The Company adopted ASU No.

2016-13 on January 1, 2020 using a modified retrospective approach resulting in a cumulative adjustment to Members' Capital of $1.1 million upon adoption.

RECEIVABLES AND OTHER ASSETS, net

Receivables and other assets, net as of December 31, 2021 and 2020, consisted of the following (in thousands):

Affordable notes, net $ 15,425 $ 15,101

Marketing fee contract assets 14,141 9,348

Total receivables and other assets, net $ 29,566 $ 24,449

Principal and interest collected on affordable notes, net, was $0.3 million, $2.4 million and $2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Interest income on affordable notes, net, was $0.4 million, $0.2 million and $0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively, and are included in interest income on the accompanying consolidated statements of operations.

At both December 31, 2021 and 2020, the Company had an allowance for credit loss of $1.0 million associated with the affordable notes.

For the years ended December 31, 2021, 2020 and 2019, marketing fee revenue of $9.5 million, $0.9 million and $6.8 million, respectively, is included in land sale revenues in the accompanying consolidated statements of operations.

Of these amounts, $9.1 million, $0.5 million and $6.1 million, respectively, represent marketing fee estimates recorded as contract assets when escrow closed with the homebuilder.

Receipts of contractual amounts were $4.3 million, $4.6 million and $5.9 million for the years ended December 31, 2021, 2020 and 2019, respectively and reduced the carrying amount of the contract assets.

In 2010, HF El Toro entered into an unsecured cash flow participation agreement in connection with a series of transfers, payoffs, and pay downs related to its then outstanding loan facility (“Debt Restructure”).

The cash flow participation agreement, was determined to be a new debt instrument and in accordance with ASC 470-50, Modifications and Extinguishments was recorded at its fair value on the date of the Debt Restructure.

Under the terms of the participation agreement, 4.66% of capital distributions (as defined in the participation agreement) made by HF El Toro are due to the holder of the participation agreement.

When a participation payment is made or reasonably assured to be made, the Company uses a proportional interest method to determine the portion of the payment that represents interest expense and the portion applied to the principal.

The principal carrying balance of the participation agreement was $3.7 and $5.4 million as of December 31, 2021 and 2020, respectively, and is included in debt on the accompanying consolidated balance sheets.

Total interest incurred related to the participation agreement during the years ended December 31, 2021 and 2019 was $12.0 million and $3.2 million, respectively, and was capitalized to land under development in the accompanying consolidated balance sheets.

No interest was incurred during the year ended December 31, 2020.

ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities as of December 31, 2021 and 2020, consisted of the following (in thousands):

Accounts payable

$ 5,289 $ 8,265

Other liabilities:

Accrued liabilities

Development obligations

Total accounts payable and other liabilities

$ 22,324 $ 24,818

REDEEMABLE LEGACY INTERESTS

The Legacy Interest is classified as temporary equity and reported on the consolidated balance sheet as Redeemable Legacy Interests.

The Legacy Interests are not reported as permanent equity within Members’ Capital as management believes that it is probable that the Legacy Interests will be fully redeemed through distributions of available cash in accordance with the terms of the amended and restated limited liability company agreement.

The holders of Legacy Interests were entitled to receive i) $476.0 million in priority distributions over Percentage Interests, plus ii) an amount up to $89.0 million in distributions paid jointly with distributions to holders of Percentage Interests.

Distributions of $51.0 million and $76.3 million were made to holders of the Legacy Interest during the years ended December 31, 2021 and 2020, respectively.

No distributions were made to the holders of Legacy Interests during the year ended December 31, 2019.

As of December 31, 2021, the $476.0 million priority distributions had been fully paid and $82.7 million in Legacy Interests to be paid jointly with distributions to holders of Percentage Interests were outstanding.

After the cumulative distributions to the holders of Legacy Interests has reached $565.0 million, the Legacy Interest will no longer be deemed outstanding.

RELATED PARTY TRANSACTIONS

Management Fee

HF El Toro and Five Point Communities Management, Inc., as nominee for the benefit of Five Point Communities, LP (the “Management Company”), are parties to a development management agreement in which the Management Company has been engaged to manage the development of the Project and to generally supervise the day-to-day affairs of the Project.

The Management Company is an affiliate of a member of the Company that holds a 37.5% Percentage Interest.

The development management agreement was amended and restated on May 2, 2016 and subsequently amended and restated on April 21, 2017 (“A&R DMA”) to among other things, extend the initial term until December 2021 with up to five years of additional renewal periods, subject to a mutual agreement of parties.

The A&R DMA’s initial term has been extended by mutual agreement of the parties to April 30, 2022 while the Company and the Management Company discuss the terms of a renewal.

The base annualized management fee for the initial term of the A&R DMA was subject to annual increases for changes in a specified consumer price index.

The total annual base management fee incurred for the years ended December 31, 2021, 2020 and 2019 was $6.8 million, $6.8 million and $6.6 million, respectively, and is included in management fee in the accompanying consolidated statements of operations.

The A&R DMA also contains incentive compensation that becomes payable to the Management Company, calculated generally, as 9% of distributions in excess of the priority $476.0 million Legacy Interests.

Total incentive compensation management fee incurred with respect to the A&R DMA for the years ended December 31, 2021, 2020 and 2019 was $19.1 million, $2.0 million and $17.9 million, respectively, and is included in management fee in the accompanying consolidated statements of operations.

The amount incurred for the years ended December 31, 2021, 2020 and 2019 represents an estimated amount of incentive compensation attributed to services provided during the periods that are determined to be probable of being paid.

Management’s estimate is based on various underlying assumptions which include but are not limited to, the current and projected performance of the Project and the resulting cash that will be available for distributions.

Changes in the estimated amount of aggregate payments probable of being made are recognized as a cumulative adjustment in the period the estimate changes.

Actual payments of incentive compensation may differ materially from current estimates.

During the year ended December 31, 2021, the Company paid $20.7 million in incentive compensation.

No amounts were paid in 2020 and 2019.

As of December 31, 2021 and 2020, $77.6 million and $79.2 million, respectively, was accrued for incentive compensation management fees, and is included in accrued management fees and reimbursements in the accompanying consolidated balance sheets.

Included in selling, general and administrative costs and expenses in the accompanying consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 are $11.2 million, $11.4 million and $11.9 million, respectively, for general and administrative expenses incurred by the Management Company on behalf of the Company that are reimbursable under the A&R DMA.

General and administrative expense reimbursements are settled in cash on a monthly basis.

At December 31, 2021 and 2020, $2.9 million and $3.1 million, respectively, was accrued for general and administrative expense reimbursements and is included in accrued management fees and reimbursements in the accompanying consolidated balance sheets.

Commercial Sub-Management Agreement

Effective June 30, 2013, HF El Toro terminated its commercial development sub-management agreement (“Sub-MA”) with a member of the Company that holds a 12.5% Percentage Interest and a 12.5% Legacy Interest in the Company.

Under the terms of the Sub-MA, certain incentive compensation provisions were vested upon termination.

Incentive compensation payments become payable, calculated generally, as 2% of distributions (as defined in the Sub-MA) in excess of the first $476 million of priority Legacy Interests.

As of December 31, 2021 and 2020, $23.0 million and $27.5 million, respectively, of incentive compensation management fee pertaining to the Sub-MA was accrued and is included in accrued management fees and reimbursements in the accompanying consolidated balance sheets.

The amount accrued at December 31, 2021 and 2020 represents an estimated amount of incentive compensation determined to be earned and probable of being paid.

Changes in the estimated amount of aggregate payments probable of being made in future periods will be recognized as a cumulative adjustment to management fee expense in the period the estimate changes.

Actual payments of incentive compensation may differ materially from current estimates.

During the year ended December 31, 2021, the Company paid $4.6 million in incentive compensation.

No amounts were paid in 2020 and 2019.

Purchase and Sale and Development Agreements

In the normal course of business, the Company may enter into purchase and sale agreements, development agreements or other contracts with the Company's Joint Venture or the Company's members or affiliates of members.

Land sale revenues recognized from related party transactions and included in the accompanying consolidated statements of operations during the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

2021 2020 2019

$ 56,112 $ — $ 121,500

Profit participation

5,127 2,458 8,400

Marketing fees

1,558 204 3,400

Related party land sale revenues

$ 62,797 $ 2,662 $ 133,300

Contract Asset

Contract asset balances are recorded on the consolidated balance sheet in receivables and other assets, net.

For each of the years ended December 31, 2021 and 2020, included in receivables and other assets, net on the accompanying consolidated balance sheets were related party contract assets of $3.6 million.

Investment in Joint Venture

In 2021, the Company made a capital contribution of $4.6 million to an entity (the “Landbank Venture”) organized for the purpose of taking assignment from homebuilders land purchase and sale agreements and purchasing residential lots within the Project while concurrently entering into option and development agreements with homebuilders in which the homebuilder retains the option to purchase the land to construct and sell homes.

The Company has a 10% interest in the Landbank Venture,

and most major decisions require the Company’s approval in addition to the approval of the Landbank Venture’s other unaffiliated member.

The Company does not have a controlling financial interest in the Landbank Venture but has the ability to significantly influence the Landbank Venture’s operating and financial policies and accounts for the Landbank Venture under the equity method of accounting.

Subsequent to the Company’s investment, the Landbank Venture took assignment of certain purchase and sale agreements and purchased land from the Company for $56.1 million while concurrently entering into option and development agreements with third-party homebuilders.

When the Company sells land to the 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 Landbank Venture to third-party homebuilders.

During the year ended December 31, 2021, the Company recognized equity in loss of $1.4 million from the Landbank Venture.

At December 31, 2021, the carrying value of the Company’s investment in the Landbank Venture was $3.0 million.

COMMITMENTS AND CONTINGENCIES

In the routine conduct of its business, the Company is subject to the usual obligations associated with entering into contracts for the purchase, development, and sale of real estate.

In the ordinary course of business and as a part of the entitlement and development process, the Company is required to provide performance bonds to ensure completion of certain development obligations.

The Company had outstanding performance bonds of $43.8 million and $70.0 million as of December 31, 2021 and 2020, respectively.

On September 8, 2009, the Irvine City Council approved an Amended and Restated Development Agreement (the "ARDA") between HF El Toro and the City (on behalf of itself and now as successor agency to the dissolved Irvine Redevelopment Agency, which Irvine Redevelopment Agency was an original party to the ARDA).

The ARDA became effective on December 27, 2010 and obligated the Company to construct certain defined public infrastructure improvements (i.e.

joint backbone improvements) in and around the Project.

The Company will have the right to reimbursement for a portion of the public infrastructure improvement costs from the City of Irvine Community Facilities District No.

2013-3 ("CFD").

The CFD is supported by special taxes levied on landowners within the improvement areas of the CFD.

The CFD will also fund certain improvements, operations and maintenance costs of the Orange County Great Park (the "Park").

The Company, as a landowner within the improvement areas will be subject to the special taxes while it owns land within the improvement areas.

On November 26, 2013, HF El Toro and the City entered into a second adjacent landowner agreement ("ALA II") in which HF El Toro committed to construct or cause the construction of a portion of the Park (the “Great Park Improvements”), which otherwise would have been an obligation of the City to construct under the terms of the ARDA.

The ALA II stipulated that HF El Toro’s aggregate investment in the Great Park Improvements would total a minimum of $172.0 million.

In addition to the Great Park Improvements, the ALA II and a memorandum of understanding regarding funding of Marine Way (“MOU”) infrastructure improvements committed HF El Toro to perform on certain other defined items in the amount of $19.5 million as well as it committed HF El Toro to make $20.0 million of certain direct payments to the City beginning in August 2016.

As of December 31, 2021 and 2020, the carrying balance of amounts payable to the City totaled $2.4 million and $3.6 million, respectively, and the Company estimated the present value of the direct payments to equal their carrying amounts.

The Company made $1.3 million in payments to the City under the ALA II and MOU for each of the years ended December 31, 2021 and 2020, respectively.

Amortization expense, all of which was capitalized to inventories, totaled $0.1 million for each of the years ended December 31, 2021 and 2020.

As also defined in the agreements, HF El Toro will have the right to receive up to an additional $40.0 million in CFD reimbursements for public infrastructure components of the Great Park Improvements.

During 2019, the Company and the City entered into an amendment to ALA II.

The amendment altered the scope of the Great Park Improvements to include water polo, basketball and volleyball facilities that would initially be paid for by the Company and ultimately reimbursed to the Company by the CFD.

The amendment also altered the scope of the Great Park Improvements to consider the City's desire to eliminate the golf course currently contemplated and build a veteran's cemetery.

The City is required to perform the necessary due diligence on the feasibility of a cemetery and complete its due diligence by October 2022.

If the City concludes that a cemetery will ultimately be built, the Company agreed to pay an additional $28.0 million for the development and long-term maintenance of the cemetery.

Due to the fact that the cemetery has not yet been approved by the City, the Company has not recorded any obligations on the accompanying consolidated balance sheets.

If the City determines that a cemetery is not feasible, then both the Company and the City will revert back to building the golf course as originally contemplated in ALA II, with no additional obligation required by the Company.

The Company may be a party to various claims, legal actions, and complaints arising in the ordinary course of business.

The Company believes, the disposition of these other matters would not have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

As a significant landowner, developer, and holder of commercial properties, there exists the possibility that environmental contamination conditions exist that would require the Company to take corrective action.

The Company believes any potential costs will not materially affect its consolidated financial statements.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through March 11, 2022 the date the consolidated financial statements were issued, and has determined that, other than as disclosed, no events or transactions have occurred subsequent to December 31, 2021 that require adjustments to or disclosure in the Company’s consolidated financial statements.

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 9A. Controls and Procedures