What changed in this filing

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Item 9A. Controls and Procedures

2023-03-06 compared with 2022-03-11 · 68 added, 53 removed, 529 unchanged (19% of the section changed)

7 unchanged sentences

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 Framework).

Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the framework established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 Framework).

Based on this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.

57 unchanged sentences

Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020

Consolidated Statements of Comprehensive Income (Loss) 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, 2022, 2021 and 2020

Consolidated Statements of Capital for the years ended December 31, 2022, 2021 and 2020

32 unchanged sentences

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)

Employment Transition Agreement, dated as of February 9, 2022, by and among Lynn Jochim, 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 March 31, 2022 is incorporated herein by this reference)

Advisory Agreement, dated as of February 14, 2022, by and between Lynn Jochim and Five Point Operating Company, LP (Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 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)

15 unchanged sentences

1 to Registrant's Registration Statement on Form S-11 filed April 24, 2017 is incorporated herein by this reference)

First Amendment to Second Amended and Restated Development Management Agreement, dated as of June 10, 2022, by and among Heritage Fields El Toro, LLC, Five Point Communities Management, Inc., Five Point Operating Company, LP and Five Point Communities, LP (Exhibit 10.1 to the Current Report on Form 8-K filed on June 16, 2022 is incorporated herein by this reference)

Second Amendment to Second Amended and Restated Development Management Agreement, dated as of December 28, 2022, by and among Heritage Fields El Toro, LLC, Five Point Communities Management, Inc., Five Point Operating Company, LP and Five Point Communities, LP (Exhibit 10.1 to the Current Report on Form 8-K filed on January 4 , 2023 is incorporated herein by this reference)

Termination of Development Management Agreement (Candlestick Point Mixed-Use Project) (Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 is incorporated herein by this reference)

45 unchanged sentences

Principal Financial and Accounting Officer:

Erik Higgins /s/ Erik Higgins

Chief Financial Officer and Vice President Date:

Leo Kij /s/ Leo Kij

Interim Chief Financial Officer Date:

March 3, 2023

26 unchanged sentences

Construction Date

Valencia (formerly Newhall Ranch)- Land under development Los Angeles

Valencia- Land under development Los Angeles

County, CA $ — $ 111,172 $ — $ 816,757 $ — $ 927,929 $ — $ 927,929 $ — 2009 N/A

106 unchanged sentences

256,809 377,896 55,505

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

EQUITY IN EARNINGS (LOSS) FROM JOINT VENTURE 354 (1,409) —

INTEREST INCOME 1,532 496 1,272

7 unchanged sentences

MEMBERS’ CAPITAL—January 1, 2020

Net income 34,885

MEMBERS’ CAPITAL— December 31, 2019 826,326

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

4 unchanged sentences

MEMBERS’ CAPITAL—December 31, 2021

Cash distributions (140,512)

Net income 68,954

MEMBERS’ CAPITAL—December 31, 2022

See notes to consolidated financial statements.

12 unchanged sentences

Cost of home sales 29,692 20,022 —

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

Equity in (earnings) loss of from joint venture (354) 1,409 —

Changes in operating assets and liabilities:

9 unchanged sentences

Distributions from joint venture 1,243 195 —

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

Net cash provided by (used in) investing activities 988 (4,394) —

CASH FLOWS FROM FINANCING ACTIVITIES:

42 unchanged sentences

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.

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

Total reimbursements and recoveries were $43.7 million, $52.1 million and $9.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Development overhead and selling expenses are expensed as incurred.

4 unchanged sentences

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.

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, 2022, 2021 and 2020.

4 unchanged sentences

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.

1 unchanged sentence

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.

No impairments were identified for the years ended December 31, 2022, 2021 and 2020 and, as of December 31, 2022, all homes subject to the fee build agreement had been sold to homebuyers and closed escrow.

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.

19 unchanged sentences

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 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.

Profit participation revenue of $19.6 million, $6.7 million and $3.6 million were recognized for the years ended December 31, 2022, 2021 and 2020, 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.

20 unchanged sentences

Affordable notes, net $ 16,097 $ 15,425

Marketing fee contract assets 14,141 9,348

Marketing fee contract assets (see Note 7) 8,946 14,141

Other contract assets 16,625 —

Total receivables and other assets, net $ 41,668 $ 29,566

1 unchanged sentence

Interest income on affordable notes, net, was $0.3 million, $0.4 million and $0.2 million for the years ended December 31, 2022, 2021 and 2020, 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.

At December 31, 2022 and 2021, the Company had an allowance for credit loss of $1.5 million and $1.0 million, respectively, associated with the affordable notes.

For the years ended December 31, 2022, 2021 and 2020, marketing fee revenue of $2.0 million, $9.5 million and $0.9 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.

Of these amounts,

$0.6 million, $9.1 million and $0.5 million, respectively, represent marketing fee estimates recorded as contract assets when escrow closed with the homebuilder.

Receipts of contractual amounts were $5.8 million, $4.3 million and $4.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, and reduced the carrying amount of the contract assets.

The Company’s other contract assets as of December 31, 2022, consisted of consideration held in escrow from the sale of commercial land that closed during 2022.

The balance primarily relates to variable consideration from the commercial land sale that the Company expects to be entitled to receive.

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”).

2 unchanged sentences

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.

The principal carrying balance of the participation agreement was $2.8 million and $3.7 million as of December 31, 2022 and 2021, 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, 2022 and 2021 was $7.8 million and $12.0 million, respectively, and was capitalized to land under development in the accompanying consolidated balance sheets.

6 unchanged sentences

Accrued liabilities

12,446 10,460

Development obligations

5 unchanged sentences

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.

Distributions of $16.5 million, $51.0 million and $76.3 million were made to holders of the Legacy Interest during the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2021, the $476.0 million priority distributions had been fully paid and at December 31, 2022 $66.3 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.

3 unchanged sentences

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 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 was extended by mutual agreement of the parties to December 31, 2022 (the “2022 Extension”) and in December 2022, an amendment to the A&R DMA was entered into in which the A&R DMA was renewed through December 31, 2024 (the “First Renewal Term Amendment”).

Compensation under the A&R DMA includes a base fee, reimbursable general and administrative expenses and incentive compensation.

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, 2022, 2021 and 2020 was $9.3 million, $6.8 million and $6.8 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.

Incentive compensation payable to the Management Company is calculated generally as 9% of distributions in excess of the priority $476.0 million Legacy Interests.

The 2022 Extension and First Renewal Term Amendment of the A&R DMA did not change the incentive compensation provisions of the A&R DMA.

If the A&R DMA is not extended by mutual agreement of the Company and the Management Company beyond December 31, 2024, then the Management Company will remain entitled to future incentive compensation payments at a reduced rate equal to 6.75% of Distributions paid thereafter.

Total incentive compensation management fee expense incurred with respect to the A&R DMA for the years ended December 31, 2022, 2021 and 2020 was $34.8 million, $19.1 million and $2.0 million, respectively, and is included in management fee in the accompanying consolidated statements of operations.

The amount incurred for the years ended December 31, 2022, 2021 and 2020 represents an estimated amount of incentive compensation attributed to services provided during the periods that are determined to be probable of being paid.

2 unchanged sentences

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.

During the years ended December 31, 2022 and 2021, the Company paid $14.2 million and $20.7 million, respectively, in non-legacy incentive compensation and $1.7 million and $0.6 million, respectively, in legacy incentive compensation to the Management Company.

No amounts were paid in 2020.

As of December 31, 2022 and 2021, $95.9 million and $77.6 million, respectively, was accrued for incentive compensation management fees due to the Management Company, 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, 2022, 2021 and 2020 are $3.1 million, $11.2 million and $11.4 million, respectively, for general and administrative expenses incurred by the Management Company on behalf of the Company that were 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.

In connection with the 2022 Extension of the A&R DMA, the variable cost reimbursement component was eliminated from the A&R DMA, and the annualized base fee was increased to a fixed $12.0 million.

At December 31, 2022, no balance was accrued for general and administrative expense reimbursements.

At December 31, 2021, $2.9 million 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

7 unchanged sentences

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.

During the years ended December 31, 2022 and 2021, the Company paid $3.5 million and $4.6 million in incentive compensation pertaining to the Sub-MA.

No amounts were paid in 2020.

Purchase and Sale and Development Agreements

10 unchanged sentences

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.

At December 31, 2022 and 2021, included in receivables and other assets, net on the accompanying consolidated balance sheets were related party contract assets of $4.9 million and $3.6 million, respectively, for variable land sale consideration attributed to marketing fees expected to be received.

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 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.

Subsequent to the Company’s investment in 2021, 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.

During the years ended December 31, 2022 and 2021, the Company recognized equity in earnings of $0.3 million and equity in loss of $1.4 million, respectively, from the Landbank Venture.

At December 31, 2022 and 2021, the carrying value of the Company’s investment in the Landbank Venture was $2.3 million and $3.0 million, respectively.

COMMITMENTS AND CONTINGENCIES

11 unchanged sentences

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.

In addition to the Great Park Improvements, the ALA II and a memorandum of understanding (“MOU”) regarding funding of Marine Way infrastructure improvements committed HF El Toro to perform on certain other defined items 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, 2022 and 2021, the carrying balance of amounts payable to the City totaled $1.2 million and $2.4 million, respectively, and is included within accounts payable and other liabilities on the consolidated balance sheets.

At December 31, 2022, 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, 2022 and 2021.

Amortization expense, all of which was capitalized to inventories, totaled $0.1 million for each of the years ended December 31, 2022 and 2021.

2 unchanged sentences

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.

In October 2022, the Company and the City entered into the Framework Plan Implementation Agreement (“FPIA”).

The FPIA terminates ALA II, as amended, upon the effective date of the FPIA and restructures the Company’s remaining development obligations to the City.

Additionally, the Company agreed to pay $18.0 million to the City upon the City completing certain administrative steps but no sooner than 2025.

The FPIA will become effective after a series of approvals and administrative actions are completed in connection with the formation of the new City of Irvine Communities Facilities District No.

2013-3B (“CFD 2013-3B”), which is expected to occur in 2023.

CFD 2013-3B will replace the existing CFD for those development districts where development by the Company has not yet occurred.

Due to the fact that the FPIA is not yet effective as of December 31, 2022, the Company has not recorded any obligation for payment to the City on the accompanying consolidated balance sheet as of December 31, 2022.

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

5 unchanged sentences

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