Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated audited financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Item 1A. Risk Factors” section of this report. Actual results could differ materially from those set forth in any forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
Our Company
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of December 31, 2023, approximately 62.6% of the operating company. The operating company directly or indirectly owns equity interests in:
• Five Point Land, LLC, which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Valencia, our community in northern Los Angeles County, California;
• The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick and The San Francisco Shipyard, our communities in the City of San Francisco, California;
• Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods, our community in Orange County, California;
• Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns portions of the Five Point Gateway Campus, a commercial office, research and development and medical campus located within the Great Park Neighborhoods; and
• Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which provide development and property management services for the Great Park Neighborhoods and the Five Point Gateway Campus.
The operating company consolidates and controls the management of all of these entities, except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. Please review “Structure and Formation of Our Company”, “Our Communities” and “Commercial” under Part I, Item 1 of this report for a description of our organizational structure, each of our communities and our commercial venture.
Operational Highlights and Outlook
In 2023, we continued to focus on three main priorities: generating revenue and positive cash flow, managing our capital spend to match near-term revenue opportunities, and controlling our selling, general and administrative (“SG&A”) costs. Our execution on these priorities allowed us to have a strong year, notwithstanding the challenging economic environment. In 2023, California’s housing dynamics remained favorable for new home sales, driven in part by California’s housing shortage and compounded by production constraints created by the limited availability of land, labor and materials. Based in part on these continuing dynamics, we believe that we will see strong demand in 2024 for our land from the homebuilders in our markets. We are also cautiously optimistic that improvement in the capital markets will allow for commercial land demand to rebound potentially in the latter half of 2024.
At Valencia, we closed the sale of 729 homesites on approximately 72 acres for an aggregate purchase price of $162.4 million in 2023. With a focus on managing capital spend to optimize the timing and amount of spending in relation to anticipated revenues, we were able to work with our homebuilder partners to shift some of the final land development costs to the builder, and we adjusted our sales pricing accordingly. We will continue to look to minimize our capital spend between revenue opportunities. Valencia guest homebuilders sold 297 homes during 2023, for a total of 1,244 homes sold since sales began in May 2021. By the end of 2023, 12 of our initial 18 neighborhoods had sold out, and our guest homebuilders had also opened three additional neighborhoods at our newest development area. Homes in these neighborhoods consist of a wide mix of attached and detached single family homes that are attracting first time buyers along with trade-up buyers.
At the Great Park Neighborhoods, in which we have a 37.5% percentage interest and manage all aspects of the development cycle, the Great Park Venture recognized land sale revenue of $532.0 million from the sale of 38 acres of commercial land and 798 homesites on approximately 84 acres of land. For the homesite sales, the Great Park Venture recognized $357.8 million in revenue, consisting of $214.7 million paid at closing, plus $143.1 million of additional revenue representing estimated variable consideration
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from future price participation payments expected to be received when homes are sold to homebuyers. The Great Park Venture made distributions and related participating payments with proceeds from the land sales, of which we received approximately $195.8 million for both our ownership interests and incentive management fee compensation. Home sales by guest homebuilders totaled 628 homes in 2023, with very limited inventory available at the end of the year. Our next neighborhood, Luna Park, is comprised of 798 homes across 13 builder collections and is expected to open in phases from March 2024 through December 2024.
At December 31, 2023, we had $353.8 million in cash and $125.0 million available under our revolving credit facility, giving us total liquidity of $478.8 million. In January 2024, we utilized a portion of our cash in completing a senior notes exchange transaction in which we exchanged $623.5 million of our existing 7.875% senior notes due November 2025 for $100.0 million in cash and $523.5 million in new 10.500% initial rate senior notes due January 2028. The new senior notes due January 2028 will accrue interest at a rate of 10.500% until November 2025, at a rate of 11.000% from November 2025 to November 2026, and at a rate of 12.000% from November 2026 through the maturity date.
Factors That May Influence our Results of Operations
Fluctuations in the Economy and Market Conditions
Our results of operations are subject to various risks and fluctuations in value and demand, many of which are beyond our control. Our business could be impacted by, among other things, downturns in economic conditions at the national, regional or local levels, particularly where our communities are located, inflation and increases in interest rates, significant job losses and unemployment levels, and declines in consumer confidence and spending.
Inflation poses a risk to our business due to the possibility that higher prices would increase our development expenditures. In particular, our development expenditures are influenced by the price of oil, which is used in our development activities, including grading and paving roads. However, inflation can also indirectly improve our revenues by increasing the amount that homebuyers and commercial buyers are willing to pay for newly constructed homes and commercial buildings, which in turn, increases the amount that homebuilders and commercial developers are willing to pay for our residential and commercial lots.
Supply and Demand for Residential and Commercial Properties
We generate most of our revenue from land sales, which are dependent on demand from homebuilders, commercial developers and commercial buyers, which is in turn dependent on the prices that homebuyers, commercial buyers and renters are expected to pay. In addition, sales of homesites typically include participation provisions that allow us to share in the profits realized by the homebuilders if the overall profitability of a block of homes exceeds an agreed-upon margin. Because our revenue is influenced by the prices that homebuyers and commercial buyers are willing to pay for homes or commercial buildings in our region, our results of operations may be influenced by, among other things, the overall supply and demand for housing and commercial properties, the prevailing interest rates for mortgages, and the availability of mortgage financing for residential and commercial developers and residential and commercial buyers.
Timing of Obtaining the Necessary Approvals for Development Activities
As a developer of real property in California, we are subject to numerous land use and environmental laws and regulations. Before we can begin developing our communities or development areas within them, we must obtain entitlements, permits and approvals. Depending upon the type of the approval being sought, we may also need to complete an environmental impact report, remediate environmental impacts or agree to finance or develop public infrastructure within the community or applicable development area, each of which would impose additional costs on us. In the event that we materially modify any of our existing entitlements, approvals or permits, we may also need to go through a discretionary approval process before the relevant governmental authority or go through an additional or supplemental environmental review and certification process.
In addition, laws and regulations governing the approval processes provide third parties with the opportunity to challenge our entitlements, permits and approvals. The prospect of these third-party challenges creates additional uncertainty. Third-party challenges in the form of litigation can adversely affect the length of time or the cost required to obtain the necessary governmental approvals to develop, or result in the denial of our right to develop the particular community or development area in accordance with our current development plans. Furthermore, adverse decisions arising from any litigation can increase the cost or length of time to obtain ultimate approval of a project, if such approval is obtained at all, and can adversely affect the design, scope, plans and profitability of a project, which can negatively affect our financial condition and results of operations. See Part I, Item 3, of this report for a discussion of legal proceedings.
As a result of many of the factors described above, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
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Segments
Our four reportable operating segments include our three community segments, Valencia, San Francisco and Great Park, and our Commercial segment:
• Our Valencia segment 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.
• 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
The following tables and related discussions on the results of operations are for the fiscal years ended December 31, 2023 and 2022. Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2022 for financial data and related comparative discussions on results of operations for the fiscal years ended December 31, 2022 and 2021, which is incorporated herein by reference.
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The Company
The following table summarizes our consolidated historical results of operations for the years ended December 31, 2023 and 2022.
Year Ended December 31,
2023 2022
(in thousands)
Statement of Operations Data
REVENUES:
Land sales
$ 160,796 $ 913
Land sales—related party
595 7,512
Management services—related party
47,621 31,433
Operating properties
2,720 2,836
Total revenues
211,732 42,694
COSTS AND EXPENSES:
Land sales
105,651 (996)
Management services
22,170 20,261
Operating properties
6,167 8,230
Selling, general, and administrative
51,495 54,591
Restructuring — 19,437
Total costs and expenses
185,483 101,523
OTHER INCOME (EXPENSE):
Interest income
7,230 826
Miscellaneous
(776) 245
Total other income
6,454 1,071
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 76,595 21,513
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 109,298 (36,245)
INCOME TAX BENEFIT 4,418 1,471
NET INCOME (LOSS) 113,716 (34,774)
LESS NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS 58,322 (19,371)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY $ 55,394 $ (15,403)
Revenues. Revenues increased by $169.0 million, to $211.7 million for the year ended December 31, 2023, from $42.7 million for the year ended December 31, 2022. The increase in revenues was primarily due to land sales at our Valencia segment in 2023 compared to no land sales in 2022 and an increase in management services revenue at our Great Park segment in 2023.
Cost of land sales. The cost of land sales for the year ended December 31, 2023 was attributable to land sales at our Valencia segment.
Cost of management services. Cost of management services increased by $1.9 million, or 9.4%, to $22.2 million for the year ended December 31, 2023, from $20.3 million for the year ended December 31, 2022. The increase was primarily due to an increase in intangible asset amortization expense at our Great Park segment.
Selling, general, and administrative. SG&A expenses decreased by $3.1 million, or 5.7%, to $51.5 million for the year ended December 31, 2023, from $54.6 million for the year ended December 31, 2022. The decrease was mainly attributable to a decrease in employee related and selling and marketing expenses.
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Restructuring. On February 9, 2022, Daniel Hedigan was appointed as our Chief Executive Officer. Preceding Mr. Hedigan’s appointment, Emile Haddad stepped down from his roles as Chairman, Chief Executive Officer and President effective as of September 30, 2021 and transitioned into a senior advisory role pursuant to a three-year advisory agreement. Mr. Haddad remains a member of our board of directors serving as Chairman Emeritus. Concurrent with Mr. Hedigan’s appointment, Lynn Jochim transitioned from her position as President and Chief Operating Officer into an advisory role pursuant to a three-year advisory agreement. Upon the appointment of Mr. Hedigan as our Chief Executive Officer, we accrued a related party liability of $15.6 million attributed to advisory agreement payments due to Mr. Haddad and Ms. Jochim over the term of the respective advisory agreements. In addition, we determined the service condition associated with Mr. Haddad’s and Ms. Jochim’s unvested restricted share awards had been modified. As a result of this modification, we recognized approximately $3.0 million in share-based compensation expense as a restructuring cost during the year ended December 31, 2022.
In addition to our executive management restructuring activities, during the year ended December 31, 2022, we incurred $0.9 million in restructuring costs for severance benefits from layoffs that occurred in March 2022.
Equity in earnings from unconsolidated entities. Our consolidated results reflect our share in the earnings or losses of our interests in our unconsolidated entities, including the Great Park Venture and the Gateway Commercial Venture, within equity in earnings from unconsolidated entities on our consolidated statement of operations. Our segment results for the Great Park segment and the Commercial segment present the results of the Great Park Venture and the Gateway Commercial Venture at the book basis of the ventures within the respective segments.
Equity in earnings from unconsolidated entities increased by $55.1 million, to $76.6 million for the year ended December 31, 2023, from $21.5 million for the year ended December 31, 2022. Equity in earnings for the years ended December 31, 2023 and 2022 was primarily a result of recognizing our share of the net income of the Great Park Venture generated from land sales in 2023 and land and home sales in 2022.
Income taxes. All operations are carried on through our subsidiaries, the majority of which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to the partners, including the partners of the operating company and the San Francisco Venture. We are responsible for income taxes on our allocable share of the operating company's income or gain. Pre-tax income of $109.3 million for the year ended December 31, 2023 resulted in a tax benefit of $4.4 million. The tax benefit was primarily the result of the increase in net deferred tax assets exceeding the net increase in deferred tax liabilities including the $17.6 million release of 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, 2023, it was more likely than not that such net deferred tax assets would be fully realized, and our valuation allowance was released. Pre-tax loss of $36.2 million for the year ended December 31, 2022 resulted in a tax benefit of $1.5 million. The tax benefit was primarily the result of the increase in net deferred tax assets exceeding the net increase in deferred tax liabilities 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, 2022, it was more likely than not that such net deferred tax assets would not be fully realized. Our effective tax rate for the year ended December 31, 2023 decreased from the year ended December 31, 2022 due to the release of the valuation allowance in the current period, net of changes in permanent differences, including executive compensation subject to limitations.
Net income (loss) attributable to noncontrolling interests. Until exchanged for our Class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and other members of the San Francisco Venture. Net income or loss attributable to the noncontrolling interests on the consolidated statement of operations represents the portion of earnings or losses attributable to the interests in our subsidiaries held by the noncontrolling interests.
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Segment Results and Financial Information
The following tables reconcile the results of operations of our segments to our consolidated results for the years ended December 31, 2023 and 2022 (in thousands).
Year Ended December 31, 2023
Valencia San Francisco Great Park Commercial Total reportable segments
Corporate and unallocated Total under management Removal of unconsolidated entities (1)
Total consolidated
REVENUES:
Land sales $ 160,796 $ — $ 538,612 $ — $ 699,408 $ — $ 699,408 $ (538,612) $ 160,796
Land sales—related party 595 — 16,213 — 16,808 — 16,808 (16,213) 595
Management services—related party (2)
— — 47,190 431 47,621 — 47,621 — 47,621
Operating properties 2,066 654 — 8,482 11,202 — 11,202 (8,482) 2,720
Total revenues 163,457 654 602,015 8,913 775,039 — 775,039 (563,307) 211,732
COSTS AND EXPENSES:
Land sales 105,651 — 237,148 — 342,799 — 342,799 (237,148) 105,651
Home sales — — 161 — 161 — 161 (161) —
Management services (2)
— — 22,170 — 22,170 — 22,170 — 22,170
Operating properties 6,167 — — 3,488 9,655 — 9,655 (3,488) 6,167
Selling, general, and administrative 11,577 3,989 10,927 6,406 32,899 35,929 68,828 (17,333) 51,495
Management fees—related party — — 65,395 — 65,395 — 65,395 (65,395) —
Total costs and expenses 123,395 3,989 335,801 9,894 473,079 35,929 509,008 (323,525) 185,483
OTHER INCOME (EXPENSE):
Interest income — 22 7,490 58 7,570 7,208 14,778 (7,548) 7,230
Interest expense — — — (2,531) (2,531) — (2,531) 2,531 —
Miscellaneous 1,012 — — — 1,012 (1,788) (776) — (776)
Total other income (expense) 1,012 22 7,490 (2,473) 6,051 5,420 11,471 (5,017) 6,454
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 562 — 1,926 — 2,488 — 2,488 74,107 76,595
SEGMENT PROFIT (LOSS)/INCOME BEFORE INCOME TAX BENEFIT 41,636 (3,313) 275,630 (3,454) 310,499 (30,509) 279,990 (170,692) 109,298
INCOME TAX BENEFIT — — — — — 4,418 4,418 — 4,418
SEGMENT PROFIT (LOSS)/NET INCOME $ 41,636 $ (3,313) $ 275,630 $ (3,454) $ 310,499 $ (26,091) $ 284,408 $ (170,692) $ 113,716
(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.
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Year Ended December 31, 2022
Valencia San Francisco Great Park Commercial Total reportable segments
Corporate and unallocated Total under management Removal of unconsolidated entities (1)
Total consolidated
REVENUES:
Land sales $ 913 $ — $ 270,882 $ — $ 271,795 $ — $ 271,795 $ (270,882) $ 913
Land sales—related party 7,512 — 12,520 — 20,032 — 20,032 (12,520) 7,512
Home sales — — 40,475 — 40,475 — 40,475 (40,475) —
Management services—related party (2)
— — 31,015 418 31,433 — 31,433 — 31,433
Operating properties 2,146 690 — 8,395 11,231 — 11,231 (8,395) 2,836
Total revenues 10,571 690 354,892 8,813 374,966 — 374,966 (332,272) 42,694
COSTS AND EXPENSES:
Land sales (996) — 155,692 — 154,696 — 154,696 (155,692) (996)
Home sales — — 29,692 — 29,692 — 29,692 (29,692) —
Management services (2)
— — 20,261 — 20,261 — 20,261 — 20,261
Operating properties 8,230 — — 2,645 10,875 — 10,875 (2,645) 8,230
Selling, general, and administrative 13,602 4,087 18,127 4,289 40,105 36,902 77,007 (22,416) 54,591
Restructuring — — — — — 19,437 19,437 — 19,437
Management fees—related party — — 53,298 — 53,298 — 53,298 (53,298) —
Total costs and expenses 20,836 4,087 277,070 6,934 308,927 56,339 365,266 (263,743) 101,523
OTHER INCOME (EXPENSE):
Interest income 1 1 1,532 — 1,534 824 2,358 (1,532) 826
Interest expense — — — (1,541) (1,541) — (1,541) 1,541 —
Loss on extinguishment of debt — — — (89) (89) — (89) 89 —
Miscellaneous 245 — — — 245 — 245 — 245
Total other income (expense) 246 1 1,532 (1,630) 149 824 973 98 1,071
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 1,196 — 354 — 1,550 — 1,550 19,963 21,513
SEGMENT (LOSS) PROFIT/LOSS BEFORE INCOME TAX BENEFIT (8,823) (3,396) 79,708 249 67,738 (55,515) 12,223 (48,468) (36,245)
INCOME TAX BENEFIT — — — — — 1,471 1,471 — 1,471
SEGMENT (LOSS) PROFIT/NET LOSS $ (8,823) $ (3,396) $ 79,708 $ 249 $ 67,738 $ (54,044) $ 13,694 $ (48,468) $ (34,774)
(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.
Valencia Segment
Our Valencia property consists of approximately 15,000 acres in northern Los Angeles County and can include up to approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning. The current communities under development in Valencia complement the neighboring communities that were previously developed by us. We began selling homesites in the first development area at Valencia in 2019, and as of December 31, 2023 we had sold 2,595 homesites for aggregate consideration of approximately $583.7 million. Homebuilders sold 297 homes at Valencia during the year ended December 31, 2023 and have sold a total of 1,244 homes since home sales began in May 2021.
Land sales and related party land sales revenues. Total land sales revenues increased by $153.0 million to $161.4 million for the year ended December 31, 2023, from $8.4 million for the year ended December 31, 2022. The increase in total land sales revenues was attributable to the recognition of revenue from the sale of land entitled for an aggregate of 729 homesites on approximately 72 acres during the year ended December 31, 2023 compared to no land sales during the year ended December 31, 2022. The aggregate base purchase price was $162.4 million for the 2023 sales. In 2023, 583 of the homesites were sold to an
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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 year ended December 31, 2023 was $105.7 million, compared to a credit of $1.0 million to cost of land sales during year ended December 31, 2022. 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.
Selling, general, and administrative. SG&A expenses decreased by $2.0 million, or 14.9%, to $11.6 million for the year ended December 31, 2023, from $13.6 million for the year ended December 31, 2022. The decrease was mainly attributable to a decrease in community related selling and marketing expenses and a decrease in employee related expenses.
Equity in earnings from unconsolidated entity. Equity in earnings from the Valencia Landbank Venture of $0.6 million and $1.2 million for the years ended December 31, 2023 and 2022, respectively, was primarily a result of recognition of our pro-rata share of profits from land sold by the Valencia Landbank Venture to third-party homebuilders.
San Francisco Segment
Located almost equidistant between downtown San Francisco and the San Francisco International Airport, Candlestick and The San Francisco Shipyard consist of approximately 800 acres of bayfront property in the City of San Francisco. Candlestick and The San Francisco Shipyard can include up to approximately 12,000 homesites and approximately 6.3 million square feet of commercial space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning.
In October 2019, we received approval from the City of San Francisco on a revised development plan for the first phase of Candlestick that is currently planned to include approximately 750,000 square feet of office space, 1,600 homes, and 300,000 square feet of lifestyle amenities centered around retail and entertainment. As currently planned, Candlestick ultimately is expected to include approximately 7,000 homes.
Our development at Candlestick and The San Francisco Shipyard is not subject to San Francisco’s Proposition M growth control measure, which imposes annual limitations on office development and is applicable to all other developers with projects in the city. This means the full amount of permitted commercial square footage at Candlestick and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. 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. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. and Tetra Tech EC, Inc. (collectively, “Tetra Tech”), contractors hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans.
We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination at The San Francisco Shipyard and Tetra Tech’s alleged misrepresentations of related sampling work. See Part I, Item 3 of this report for additional information. Given the preliminary nature of the claims to date, we cannot predict the outcome of these matters.
Great Park Segment
We have a 37.5% percentage interest in the Great Park Venture, and we account for our investment using the equity method of accounting. We have a controlling interest in the management company, an entity which performs development management services at Great Park Neighborhoods. We do not include the Great Park Venture as a consolidated subsidiary in our consolidated financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess
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our investment in the Great Park Venture based on the financial information for the Great Park Venture in its entirety, and not just our equity interest in it. As a result, our Great Park segment consists of the operations of both the Great Park Venture and the development management services provided by the management company at the Great Park Venture.
Great Park Neighborhoods consists of approximately 2,100 acres in Orange County and is being built around the approximately 1,300 acre Orange County Great Park, a metropolitan public park that is under construction. Great Park Neighborhoods can include up to approximately 10,500 homesites and approximately 4.9 million square feet of commercial space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning.
The Great Park Venture sold the first homesites in April 2013 and, as of December 31, 2023, had sold 8,124 homesites (including 853 affordable homesites) and 153 acres of commercial land, including the Five Point Gateway Campus, allowing for development of up to approximately 3.5 million square feet of commercial office and research and development space for aggregate consideration of approximately $3.8 billion.
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, 2023, the Great Park Venture made aggregate distributions of $48.2 million to holders of legacy interests and $411.2 million to holders of percentage interests. The Company received $154.2 million for its 37.5% percentage interest. As of December 31, 2021, the Great Park Venture had fully satisfied the $476.0 million priority distribution rights, and the remaining maximum participating legacy interest distribution rights at December 31, 2023 were $18.1 million. The remaining $18.1 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 $271.4 million to $554.8 million for the year ended December 31, 2023, from $283.4 million for the year ended December 31, 2022. In 2023, the Great Park Venture closed 38 acres of commercial land and land entitled for an aggregate of 798 homesites on approximately 84 acres. In 2022, the Great Park Venture sold approximately 42 acres of commercial land and land entitled for an aggregate of 61 homesites on approximately three acres.
Revenue recognized of $357.8 million for the 2023 homesite land sales consisted of $214.7 million paid at closing, plus $143.1 million in estimated variable consideration from future price participation payments expected to be received when homes are sold to homebuyers. The 798 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. The aggregate purchase price was $174.2 million for the 2023 commercial land sales.
The purchase price was $240.0 million for the 2022 commercial land sale. The Great Park Venture recognized approximately $238.0 million in revenue at the close of the land sale and deferred $2.0 million in consideration related to potential development work on the sold land that will be completed by the Great Park Venture at a later date at the buyer’s discretion. The base purchase price was $23.9 million for the 2022 homesite land sales. The Great Park Venture also recognized $0.6 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 2022 homesite sales.
During the years ended December 31, 2023 and 2022, 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, 2023 and 2022, the Great Park Venture recognized $21.0 million and $19.6 million in profit participation revenue, respectively.
Cost of land sales. Cost of land sales during the years ended December 31, 2023 and 2022 were $237.1 million and $155.7 million, 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 had 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 incurred all costs to build, market and sell the residential homes, and the Great Park Venture reimbursed the Fee Builder as construction progressed and paid the Fee Builder certain fees during the construction phase of the homes and when homes were sold to homebuyers. All homes subject to the fee build agreement had been sold and closed escrow as of December 31, 2022. During the year ended December 31, 2022, the Great Park Venture closed the sales of 22 homes to homebuyers generating $40.5 million in home sale revenues.
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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 reimbursed to the Fee Builder and fees paid to the Fee Builder for the services provided. During the year ended December 31, 2022, the Great Park Venture recognized $29.7 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. Previously, the management company received a fixed base fee, reimbursement for certain variable costs and the right to receive certain variable incentive compensation. The initial term of our development management agreement with the Great Park Venture expired on December 31, 2021 but had been extended by mutual agreement of the parties through December 31, 2022 (the “2022 extension”) and further renewed by mutual agreement of the parties through December 31, 2024. In connection with the 2022 extension of the development management agreement, the variable cost reimbursement component was eliminated and the annual fixed base fee was increased to $12.0 million for 2022. For the year ended December 31, 2023, we recognized $12.0 million in revenues attributable to the revised base fee, and as a result of changes in estimates of the amount of variable incentive compensation, we recognized $35.2 million in additional revenue. For the year ended December 31, 2022, we recognized $12.0 million in revenues attributable to the revised base fee, and as a result of changes in estimates of the amount of variable incentive compensation, we recognized $19.0 million in additional revenue.
Management services costs and expenses. Included within management services costs and expenses are general and administrative costs and expenses incurred directly by the management company’s project team that is managing the development of the Great Park Neighborhoods. We also include amortization expense related to the intangible asset attributable to the incentive compensation provisions of the development management agreement with the Great Park Venture. Corporate and non-project team salaries and overhead incurred by us are not allocated to management services costs and expenses or to our reportable segments and are reported in SG&A costs in the consolidated statement of operations. During the year ended December 31, 2023, management services costs and expenses increased by $1.9 million, or 9.4%, to $22.2 million, from $20.3 million for the year ended December 31, 2022. The increase was mainly attributable to an increase in intangible asset amortization expense recognized, partially offset by a decrease in employee related project team expenses during the year ended December 31, 2023.
Selling, general, and administrative. SG&A expenses are comprised of the Great Park Venture’s marketing related costs, property maintenance expenses and other administrative costs. SG&A costs decreased by $7.2 million, or 39.7%, to $10.9 million for the year ended December 31, 2023, from $18.1 million for the year ended December 31, 2022. The lower expense during the year ended December 31, 2023 was mainly attributable to a decrease in marketing expenses and property maintenance expenses and the elimination of the variable cost reimbursement component under the development management agreement that became effective in the second quarter of 2022. Prior to the 2022 extension, project team and certain other administrative costs that were reimbursed to the management company were included in SG&A costs.
Management fees—related party. Management fees increased by $12.1 million, to $65.4 million for the year ended December 31, 2023, from $53.3 million for the year ended December 31, 2022. Management fees incurred by the Great Park Venture were comprised of base development management fees and incentive compensation fees. In general, incentive compensation fees will be paid as a percentage of distributions made to holders of the Great Park Venture’s membership interests. When payments are deemed probable of being made, the Great Park Venture recognizes the expense ratably over the period services are expected to be provided. When estimates of the amount of incentive compensation probable of being paid change, the Great Park Venture records a cumulative adjustment in the period in which the estimate changes. The increase in management fees — related party was mainly attributable to an increased estimate of the amount of incentive compensation fees probable of being paid. The Great Park Venture recognized expense of $53.4 million and $44.0 million for incentive compensation fees during the years ended December 31, 2023 and 2022, respectively.
The table below reconciles the Great Park segment results for the years ended December 31, 2023 and 2022 to the equity in earnings from our investment in the Great Park Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively.
Year Ended December 31,
2023 2022
(in thousands)
Segment profit from operations $ 275,630 $ 79,708
Less net income of management company attributed to the Great Park segment
25,020 10,754
Net income of Great Park Venture 250,610 68,954
The Company’s share of net income of the Great Park Venture 93,979 25,858
Basis difference amortization, net (15,032) (5,414)
Equity in earnings from Great Park Venture $ 78,947 $ 20,444
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Commercial Segment
We have a 75% interest in the Gateway Commercial Venture that is held through a wholly owned subsidiary of the operating company, and we serve as the manager of the Gateway Commercial Venture. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements. However, as a result of our 75% economic interest and our role as manager, we assess our investment in the Gateway Commercial Venture based on the financial information of the Gateway Commercial Venture in its entirety, and we include the Gateway Commercial Venture’s financial results within the Commercial segment. Additionally, the management company has been engaged by the Gateway Commercial Venture to provide property management services to the Five Point Gateway Campus. We include the management company’s results of operations related to these property management services within the Commercial segment.
The Five Point Gateway Campus is a commercial campus consisting of approximately 73 acres of land in the Great Park Neighborhoods acquired by 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. In 2020, the Gateway Commercial Venture sold three of the buildings and approximately 11 acres of land at the campus. Our corporate headquarters are located in the fourth building, which remains owned by the Gateway Commercial Venture. In addition to the fourth building, the Gateway Commercial Venture owns approximately 50 acres of commercial land with additional development rights at the campus.
The table below reconciles the Commercial segment results for the years ended December 31, 2023 and 2022 to the equity in loss from our investment in the Gateway Commercial Venture that is reflected in the consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively.
Year Ended December 31,
2023 2022
(in thousands)
Segment (loss) profit from operations $ (3,454) $ 249
Less net income of management company attributed to the Commercial segment
431 418
Net loss of Gateway Commercial Venture (3,885) (169)
Equity in loss from Gateway Commercial Venture $ (2,914) $ (127)
Liquidity and Capital Resources
At December 31, 2023, we had $353.8 million of consolidated cash and cash equivalents, compared to $131.8 million at December 31, 2022. As of December 31, 2023, no funds had been drawn on and no letters of credit were outstanding on the operating company’s $125.0 million revolving credit facility.
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. In January 2024, we exchanged $623.5 million of our existing 7.875% senior notes due November 2025 for $100.0 million in cash and $523.5 million in new 10.500% initial rate senior notes due January 2028. The new senior notes due January 2028 will accrue interest at a rate of 11.000% starting in November 2025 and at a rate of 12.000% starting from November 2026 through the maturity date. In 2024, we will make aggregate interest payments of $54.1 million on our existing and new senior notes, and $46.1 million in principal payments that were deferred from 2023 and are due under our related party reimbursement obligation. Reimbursement payments may be deferred when our related party receives an extension on the maturity date of the associated EB-5 loan liability. Our related party has a history of receiving maturity date extensions, however, such further extensions are not within our control and there can be no assurance that any such extensions will be obtained in the future.
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 our residential and commercial land with the objective of maintaining an appropriate level of liquidity. We expect to meet our cash requirements for at least the next 12 months with available cash, distributions from our unconsolidated entities, collection of management fees under our development management agreement with the Great Park Venture, proceeds from land sales, reimbursements from public financing in Valencia and access to financing sources, including our revolving credit facility.
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 an income-producing portfolio, along with debt service and
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general and administrative expenses. We budget our cash development costs on an annual basis. Budgeted amounts are subject to change due to delays or accelerations in construction or regulatory approvals, changes in inflation rates and other increases (or decreases) in costs. We may also modify our development plans or change the sequencing of our communities in response to changing economic conditions, consumer preferences and other factors, which could have a material impact on the timing and amount of our development costs. Budgeted amounts are expected to be funded through a combination of available cash, cash flows from our communities and reimbursements from public financing, including community facilities districts, tax increment financing and local, state and federal grants. Cash flows from our communities may occur in uneven patterns as cash is primarily generated by land sales and reimbursements, which can occur at various points over the life cycle of our communities.
We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. The level of capital expenditures in any given year may vary due to, among other things, the number of communities or neighborhoods under development and the number of planned deliveries, which may vary based on market conditions. We may seek to raise additional capital by accessing the debt or equity capital markets or with one or more revolving or term loan facilities or other public or private financing alternatives, including entering into joint ventures. These financings may not be available on attractive terms, or at all.
We are a party to a tax receivable agreement (“TRA”) with current and former holders of Class A units of the operating company and the holders of Class A units of the San Francisco Venture. The TRA provides for payments by us to such investors or their successors in aggregate amounts equal to 85% of the cash savings, if any, in income tax that we realize as a result of (a) increases in tax basis that are attributable to exchanges of Class A units of the operating company for our Class A common shares or cash or certain other taxable acquisitions of equity interests by us, (b) allocations that result from the application of the principles of Section 704(c) of the Code and (c) tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by us as a result of the TRA. We expect the TRA payments to be substantial, however, the actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of exchanges of Class A units of the operating company, the price of our Class A common shares at the time of such exchanges, the extent to which such exchanges are taxable and our ability to use the potential tax benefits, which will depend on the amount and timing of our taxable income and the rate at which we pay income tax. As of December 31, 2023, there were no amounts currently payable under the TRA and based on current projections, we do not expect to make any payments for the next several years.
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 $306.9 million as of December 31, 2023 predominantly related to our Valencia community.
At December 31, 2023, 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 $1.0 million at each of December 31, 2023 and 2022. At both December 31, 2023 and 2022, 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, 2023, no capacity under the revolving credit facility was used to support LOCs.
In 2004, our defined benefit pension plan was amended to cease future benefit accruals for services provided by participants of the plan and to close the plan to new participants. We do not anticipate making material contributions to our pension plan over the next twelve months. We believe the pension plan is currently appropriately funded, however, declines in the value of the plan’s assets could result in increased funding requirements in the long-term.
The following table aggregates certain of our material cash obligations and commitments as of December 31, 2023:
Payment due by period
(in thousands)
Total Less than
1 year 1-3 years 3-5 years More than
5 years
Senior notes payable (1)
$ 625,000 $ 100,000 $ 1,500 $ 523,500 $ —
Interest commitment on senior notes (1)
240,049 54,091 112,669 73,289 —
Operating lease obligations
15,251 2,548 5,933 6,291 479
Water purchase agreement (2)
29,749 1,447 3,037 3,237 22,028
Related party reimbursement obligation (3)
60,810 47,997 12,813 — —
Total
$ 970,859 $ 206,083 $ 135,952 $ 606,317 $ 22,507
(1) In January 2024, we exchanged $623.5 million of our existing 7.875% senior notes due November 2025 for $100.0 million in cash and $523.5 million in new 10.500% initial rate senior notes due January 2028. The new senior notes due January 2028 will
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accrue interest at a rate of 11.000% starting in November 2025 and at a rate of 12.000% starting from November 2026 through the maturity date. The table above reflects our material cash obligations and commitments after giving effect to the January 2024 exchange.
(2) We are subject to a water purchase agreement requiring annual payments in exchange for the delivery of water for our exclusive use. The agreement has an initial 35-year term, which expires in 2039 with an option for a second 35-year term.
(3) Prior to our acquisition of the San Francisco Venture, certain subsidiaries of the San Francisco Venture entered into EB-5 loan agreements with lenders that are authorized by the United States Citizenship and Immigration Services to raise capital from foreign nationals who seek to obtain permanent residency in the United States. Prior to our acquisition, related parties assumed the EB-5 loan liabilities, and the San Francisco Venture entered into reimbursement agreements pursuant to which it agreed to reimburse the related parties for a portion of the EB-5 loan liabilities and related interest. The amounts set forth in the above table include interest based on the weighted average interest rate of 4.6%. 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
The following table outlines the primary components of net cash provided by (used in) operating, investing and financing activities (in thousands):
Year Ended December 31,
2023 2022
Operating activities
$ 154,123 $ (188,302)
Investing activities
77,111 63,990
Financing activities
(9,204) (9,717)
Cash Flows from Operating Activities. Cash flows from operating activities are primarily comprised of cash inflows from land sales, management services and operating property results. Cash outflows are comprised primarily of cash outlays for horizontal development costs, net of reimbursements and recoveries, employee compensation, and SG&A costs. Our operating cash flows may vary significantly each year due to the timing of land sales and the development efforts related to our mixed-use planned communities.
Net cash provided by operating activities was $154.1 million for the year ended December 31, 2023, compared to $188.3 million net cash used in operating activities for the year ended December 31, 2022. Major components of operating cash used in both periods consist of our continued investment in horizontal development at our communities, SG&A costs and the payment of $49.2 million each year for interest due on our senior notes. Our horizontal development costs for the year ended December 31, 2023 were offset by $18.9 million in public financing reimbursements for public infrastructure development costs we incurred in Valencia and a nonrecurring $44.5 million recovery from a third party related to certain project development costs in Valencia. Our horizontal development costs for the year ended December 31, 2022 were offset by $27.7 million in public financing reimbursements for public infrastructure development costs we incurred in Valencia.
During the year ended December 31, 2023, we received $162.4 million from the sale of land at our Valencia segment. We also received incentive compensation payments of $41.6 million under our development management agreement with the Great Park Venture. The payment is net of $4.9 million that we concurrently distributed to the holders of the management company's Class B units. Additionally, we received total distributions of $154.2 million from the Great Park Venture, of which $78.2 million is reflected as a return on our investment (operating activity) in the statement of cash flows with the balance reflected as an investing activity.
During the year ended December 31, 2022, we received incentive compensation payments of $14.2 million under our development management agreement with the Great Park Venture. The payment is net of $1.7 million that we concurrently distributed to the holders of the management company's Class B units. Additionally, we received total distributions of $8.6 million from the Gateway Commercial Venture, of which $0.4 million is reflected as a return on our investment (operating activity) in the statement of cash flows with the balance reflected as an investing activity.
Cash Flows from Investing Activities. Net cash provided by investing activities was $77.1 million for the year ended December 31, 2023, compared to the net cash provided by investing activities of $64.0 million for the year ended December 31, 2022.
During the year ended December 31, 2023, we received total distributions of $154.2 million from the Great Park Venture, of which $76.0 million is reflected as a return of our investment (investing activity) in the statement of cash flows with the balance
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reflected as an operating activity. Additionally, we received total distributions of $1.1 million from the Valencia Landbank Venture, which is reflected as a return of our investment (investing activity) in the statement of cash flows.
For the year ended December 31, 2022, we received distributions of $52.7 million and $3.3 million from the Great Park Venture and Valencia Landbank Venture, respectively, which is reflected as a return of our investment (investing activity) in the statement of cash flows. Additionally, we received total distributions of $8.6 million from the Gateway Commercial Venture, of which $8.3 million is reflected as a return of our investment (investing activity) in the statement of cash flows with the balance reflected as an operating activity.
Cash Flows from Financing Activities. Net cash used in financing activities was $9.2 million for the year ended December 31, 2023, compared to net cash used in financing activities of $9.7 million for the year ended December 31, 2022.
During the years ended December 31, 2023 and 2022, we made tax distributions of $4.0 million and $0.4 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 $4.3 million and $6.5 million to reduce our related party reimbursement obligation during the years ended December 31, 2023 and 2022, respectively. We used $0.2 million and $2.7 million during the years ended December 31, 2023 and 2022, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes. During the year ended December 31, 2022, we borrowed and repaid $15.0 million under our revolving credit facility.
Changes in Capital Structure
During the year ended December 31, 2023, our ownership percentage in the operating company increased slightly to 62.6%, primarily due to our issuance of shared-based compensation in the form of 0.2 million restricted Class A common shares, partially offset by our reacquisition of approximately 0.1 million restricted Class A common shares from employees for income tax withholding purposes upon vesting. 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, 2023 and 2022 held by us and those held by noncontrolling interest members.
2023 2022
Class A units of the operating company:
Held by us 69,199,938 69,068,354
Held by noncontrolling interest members 41,363,271 41,363,271
110,563,209 110,431,625
Class A units of the San Francisco Venture held by noncontrolling interest members 37,870,273 37,870,273
148,433,482 148,301,898
At December 31, 2023, we had 79,233,544 Class B common shares outstanding that were held by the noncontrolling interest members of the operating company and the Class A unitholders of the San Francisco Venture. The Class B common shares will automatically convert to Class A common shares at a ratio of 0.0003 Class A common shares for each Class B common share. The conversions will occur when the holders of Class A units of the operating company, including Class A units that have been issued upon redemption of Class A units of the San Francisco Venture, are redeemed for our Class A common shares or cash, at our election.
Significant Related Party and Third-Party Revenues
In the ordinary course of our business, we have sold and expect to continue to sell homesites to Lennar, which is our largest equity owner, or its affiliates, subsidiaries or joint ventures in which it is a member. We did not sell homesites directly to Lennar during the years ended December 31, 2023, 2022, and 2021 but did recognize revenues related to certain fees or profit participation associated with homes sold by Lennar to homebuyers at Valencia. For the years ended December 31, 2023 and 2022, we recognized $0.6 million and $7.5 million, respectively, of revenue from Lennar, which primarily consisted of profit participation. During the year ended December 31, 2023, we sold homesites to an unaffiliated land banking entity and recognized $101.8 million of such revenue. Lennar has retained the option to acquire these homesites in the future from the unaffiliated land banking entity. We also provide management services to the Great Park Venture pursuant to a development management agreement. In addition to our 37.5% percentage interest in the Great Park Venture, Lennar owns a 25% legacy interest in the Great Park Venture. 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, 2023 and 2022, we recognized $47.2 million and $31.0 million, respectively, of revenue from management services provided to the Great Park Venture. Other than the Great Park Venture, no related party customer accounted for more than 10% of our
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revenue during the year ended December 31, 2023. Other than Lennar and the Great Park Venture, no related party customer accounted for more than 10% of our revenue during the year ended December 31, 2022.
In addition to the related party revenues, during the year ended December 31, 2023, we recognized an aggregate of $21.7 million and $39.4 million of revenue from two third-party home builders, respectively, which primarily consisted of homesites sold to the two third-party home builders and which separately 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 year ended December 31, 2023. No third-party customer accounted for more than 10% of our revenue during the year ended December 31, 2022.
Critical Accounting Estimates
Critical accounting estimates are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. Our critical accounting estimates are discussed below. For a summary of our significant accounting policies, see Note 2 to the notes to the consolidated financial statements in Item 8, Part II of this report.
Cost of Land Sales
Capitalized inventory costs include land, horizontal development, indirect project costs, real estate taxes and interest related to financing development and construction. The allocation of capitalized inventory costs to individual parcels within a project utilizes the relative sales value method. Under the relative sales value method, each parcel in the project under development is allocated costs in proportion to the estimated overall sales price of the project. Since this method requires us to estimate future development costs and the expected sales price for future land sales, the profit margin on subsequent parcels sold will be affected by both changes in the estimated total revenues, as well as any changes in the estimated total cost of the project.
We believe that the accounting estimates related to cost of land sales are critical accounting estimates because of the use of projected cash flows in the estimate. Cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development obligations and the cost of completing development, general and administrative costs, and other factors. In determining these estimates and assumptions, we utilize historical trends from our past development projects, in addition to internal and external market studies and trends, which generally include, but are not 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 making estimates of incentive compensation we expect to be entitled to receive in exchange for providing management services, we make significant assumptions and judgments in evaluating the factors that may determine the amount of consideration we will ultimately receive. In doing so, we typically utilize cash flow projections for the community. We believe that the accounting estimate related to incentive management fees is a critical accounting estimate because when changes in our estimates and assumptions occur, our estimate of the amount of incentive compensation we expect to be entitled to receive may change, resulting in a cumulative adjustment being recorded in the period of the change that may be material.
Investments in Unconsolidated Entities
For investments in entities that we do not control, but over which we exercise significant influence, we use the equity method of accounting. Investments accounted for under the equity method of accounting are recorded at cost and adjusted for our share in the earnings (losses) of the venture and cash contributions and distributions.
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We evaluate our investments in unconsolidated entities for other-than-temporary impairment by reviewing each investment for any indicators of impairment, including the fair value of such investments compared to their carrying amounts. We typically estimate the fair value of our investments using a discounted cash flow of distributions we expect to receive from the venture. Significant input assumptions used in estimating the distributions we expect to receive from the venture include revenue and development cost estimates. The determination of fair value also requires discounting the estimated cash flows at a rate that we believe a market participant would determine to be commensurate with the inherent risks associated with the investment and related estimated cash flow streams. The discount rate used in determining each investment’s fair value generally depends on the investment’s projected life and development stage. If the carrying value of the investment is greater than the estimated fair value, management makes an assessment of whether the impairment is “temporary” or “other-than-temporary.” In making this assessment, management considers (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the entity and (3) our intent and ability to retain our interest long enough for a recovery in market value. If management concludes that the impairment is “other-than-temporary,” we reduce the investment to its estimated fair value.
We believe that the accounting related to investments in unconsolidated entities is a critical accounting estimate because our impairment evaluation uses significant estimates in determining the fair value of our investments, including projected cash flows and the selected discount rate. Changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment losses.