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, 2025, approximately 65.0% 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 previously owned portions of the Five Point Gateway Campus, a commercial office, research and development and medical campus located within the Great Park Neighborhoods;
• Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which provide development management services for the Great Park Neighborhoods; and
• Hearthstone Residential Holdings, LLC (the “Hearthstone Venture”), which is primarily engaged in providing asset management services to land banking funds (the “Hearthstone Funds”) that are primarily focused on acquiring, developing and managing residential lot option programs. We acquired a controlling financial interest in the Hearthstone Venture on July 31, 2025.
The operating company consolidates and controls the management of all of these entities, except for the Great Park Venture, the Gateway Commercial Venture and the Hearthstone Funds. The operating company owns a 37.5% percentage interest in the Great Park Venture and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. The Hearthstone Venture generally has between a 1% and 3% interest in an individual Hearthstone Fund and accounts for such interest using the equity method. Please review “Structure and Formation of Our Company,” “Our Communities” and “Hearthstone” under Part I, Item 1 of this report for a description of our organizational structure, each of our communities and the Hearthstone Venture.
Operational Highlights and Outlook
In 2025, we delivered another record year while continuing to execute on our core operating priorities and growth strategy. Consolidated net income for 2025 was $183.5 million, exceeding our prior record of $177.6 million set in 2024. We ended the year with $425.5 million of cash and cash equivalents and total liquidity of $643.0 million. We also strengthened our balance sheet and capital structure during 2025, including refinancing our senior notes, reducing our outstanding debt by $75.0 million, and extending and expanding our revolving credit facility.
At Valencia, we closed the sale of 13.8 acres of commercial land for a purchase price of $42.5 million in 2025, representing our first significant industrial land sale at Valencia in over 15 years. In 2025, we elected to delay residential land sales to optimize land values and align sales with market conditions, while our guest homebuilders sold 238 homes during the year, for a total of 1,837 homes sold since sales began in May 2021.
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 residential land sale revenue of $781.7 million from the sale of 920 homesites on 75.6 acres of land. The Great Park Venture made distributions and related participating payments with proceeds from the land sales, of which we received approximately $319.9 million for both our ownership interests and incentive management fee compensation. Home sales by guest homebuilders totaled 611 homes in 2025. Our next neighborhood is comprised of 513 homes across eight builder collections and is expected to open in phases throughout 2026.
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In San Francisco, we are finalizing engineering for the next phase of infrastructure at Candlestick and expect to begin construction as early as the first half of 2026.
As part of our growth strategy, we expanded our platform and earnings profile through the acquisition and integration of the Hearthstone Venture, adding a complementary land bank management business that will provide us with an additional fee-based earnings stream. The Hearthstone Venture contributed $11.8 million of management fee revenue and $3.9 million of net income to our consolidated results in 2025, and we believe it will considerably expand our relationships with institutional capital partners and builders and provide a scalable platform for fee-based earnings growth.
As we look at additional growth opportunities, we may pursue acquisitions, investments, joint ventures or other growth alternatives. In particular, we may seek out capital partners to enter into joint ventures for the development of both our existing communities as well as new assets. We believe these joint ventures offer the ability to (i) de-risk and accelerate monetization of our existing communities, (ii) generate additional fee-based revenue streams from new assets and investments and (iii) move to an asset-lighter balance sheet model.
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 reportable operating segments include our three community segments, Valencia, San Francisco and Great Park, and our Hearthstone segment:
• Our Valencia segment includes operating results related to the Valencia community and agricultural operations in Los Angeles and Ventura Counties, California.
• Our San Francisco segment includes operating results for the Candlestick and The San Francisco Shipyard communities.
• 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 Hearthstone segment includes the operating results for the Hearthstone Venture, which owns and operates our residential asset management platform. The operating results for the Hearthstone segment are presented from the acquisition date of July 31, 2025.
Results of Operations
The following tables and related discussions on the results of operations are for the fiscal years ended December 31, 2025 and 2024. 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, 2024 for financial data and related comparative discussions on results of operations for the fiscal years ended December 31, 2024 and 2023, which is incorporated herein by reference.
The Company
The following table summarizes our consolidated historical results of operations for the years ended December 31, 2025 and 2024.
Year Ended December 31,
2025 2024
(in thousands)
Statement of Operations Data
REVENUES:
Land sales
$ 42,450 $ 139,097
Land sales—related party
— —
Management services—related party
65,304 96,404
Operating properties
2,266 2,425
Total revenues
110,020 237,926
COSTS AND EXPENSES:
Land sales
29,719 90,109
Management services
20,389 23,852
Operating properties
6,683 5,134
Selling, general, and administrative
60,617 51,233
Total costs and expenses
117,408 170,328
OTHER INCOME (EXPENSE):
Interest income
17,254 10,858
Loss on debt extinguishment (1,819) —
Miscellaneous
820 (5,977)
Total other income
16,255 4,881
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 203,592 132,617
INCOME BEFORE INCOME TAX PROVISION 212,459 205,096
INCOME TAX PROVISION (28,925) (27,462)
NET INCOME 183,534 177,634
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 112,568 109,337
NET INCOME ATTRIBUTABLE TO THE COMPANY $ 70,966 $ 68,297
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Revenues. Revenues decreased by $127.9 million, to $110.0 million for the year ended December 31, 2025, from $237.9 million for the year ended December 31, 2024. The decrease in revenues was primarily due to lower land sales at our Valencia segment in 2025 compared to 2024 and a decrease in management services revenue at our Great Park segment in 2025, partially offset by management services revenue recognized at our new Hearthstone segment.
Cost of land sales. The cost of land sales decreased by $60.4 million, to $29.7 million for the year ended December 31, 2025, from $90.1 million for the year ended December 31, 2024. The decrease in cost of land sales was attributable to lower land sales at our Valencia segment in 2025 compared to 2024.
Cost of management services. Cost of management services decreased by $3.5 million, or 14.5%, to $20.4 million for the year ended December 31, 2025, from $23.9 million for the year ended December 31, 2024. The decrease was primarily due to a decrease in intangible asset amortization expense at our Great Park segment, partially offset by the cost of management services recognized at our new Hearthstone segment.
Selling, general, and administrative. SG&A expenses increased by $9.4 million, or 18.3%, to $60.6 million for the year ended December 31, 2025, from $51.2 million for the year ended December 31, 2024. The increase was mainly attributable to costs associated with our acquisition of the Hearthstone Venture and an increase in share-based compensation expense.
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 present the results of the Great Park Venture at the book basis of the venture within the segment.
Equity in earnings from unconsolidated entities increased by $71.0 million, to $203.6 million for the year ended December 31, 2025, from $132.6 million for the year ended December 31, 2024. Equity in earnings for the years ended December 31, 2025 and 2024 was primarily a result of recognizing our share of the net income of the Great Park Venture generated from land sales during each period and additionally for the year ended December 31, 2024 from the net income of the Gateway Commercial Venture for the sale of its remaining interests in the Five Point Gateway Campus.
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. We are responsible for income taxes on our allocable share of the operating company’s income or gain. Pre-tax income of $212.5 million for the year ended December 31, 2025 resulted in a tax provision of $28.9 million. Pre-tax income of $205.1 million for the year ended December 31, 2024 resulted in a tax provision of $27.5 million. 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, 2025, it was more likely than not that such net deferred tax asset would be realizable, and we had no valuation allowance recorded. Our effective tax rate for the year ended December 31, 2025 was substantially similar to our effective tax rate for the year ended December 31, 2024.
Net income attributable to noncontrolling interests. Until exchanged for our Class A common shares or, at our election, cash, noncontrolling interests represent interests held by other partners in the operating company and other members of the San Francisco Venture. Redeemable noncontrolling interests that contain features that may result in cash settlement include the interests held by other members in the Hearthstone Venture and its subsidiaries and Class C interests in the San Francisco Venture. Net income 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, 2025 and 2024 (in thousands).
Year Ended December 31, 2025
Valencia San Francisco Great Park Hearthstone Total reportable segments
Corporate and unallocated Total under management Removal of unconsolidated entities (1)
Total consolidated
REVENUES:
Land sales $ 42,450 $ — $ 825,659 $ — $ 868,109 $ — $ 868,109 $ (825,659) $ 42,450
Land sales—related party — — — — — — — — —
Management services—related party (2)
— — 53,512 11,792 65,304 — 65,304 — 65,304
Operating properties 1,567 699 — — 2,266 — 2,266 — 2,266
Total revenues 44,017 699 879,171 11,792 935,679 — 935,679 (825,659) 110,020
COSTS AND EXPENSES:
Land sales 29,719 — 195,900 — 225,619 — 225,619 (195,900) 29,719
Management services (2)
— — 12,058 8,331 20,389 — 20,389 — 20,389
Operating properties 6,683 — — — 6,683 — 6,683 — 6,683
Selling, general, and administrative 11,142 5,435 9,621 — 26,198 44,040 70,238 (9,621) 60,617
Management fees—related party — — 43,013 — 43,013 — 43,013 (43,013) —
Total costs and expenses 47,544 5,435 260,592 8,331 321,902 44,040 365,942 (248,534) 117,408
OTHER INCOME (EXPENSE):
Interest income — 25 7,354 24 7,403 17,205 24,608 (7,354) 17,254
Loss on extinguishment of debt — — — — — (1,819) (1,819) — (1,819)
Miscellaneous 820 — — — 820 — 820 — 820
Total other income 820 25 7,354 24 8,223 15,386 23,609 (7,354) 16,255
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 460 — — 397 857 1,446 2,303 201,289 203,592
SEGMENT (LOSS) PROFIT/INCOME BEFORE INCOME TAX PROVISION (2,247) (4,711) 625,933 3,882 622,857 (27,208) 595,649 (383,190) 212,459
INCOME TAX PROVISION — — — — — (28,925) (28,925) — (28,925)
SEGMENT (LOSS) PROFIT/NET INCOME $ (2,247) $ (4,711) $ 625,933 $ 3,882 $ 622,857 $ (56,133) $ 566,724 $ (383,190) $ 183,534
(1) Represents the removal of the Great Park Venture operating results, which are included in the Great Park segment operating results at 100% of the venture’s historical basis but are not included in our consolidated results as we account for our investment in the venture using the equity method of accounting.
After the sale of the Gateway Commercial Venture’s commercial operating assets in December 2024, our commercial segment is no longer operating. The equity in earnings from our investment in the Gateway Commercial Venture is reported within the corporate and unallocated column in the table above.
(2) For the Great Park segment, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture as applicable.
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Year Ended December 31, 2024
Valencia San Francisco Great Park Total reportable segments
Corporate and unallocated Total under management Removal of unconsolidated entities (1)
Total consolidated
REVENUES:
Land sales $ 139,097 $ — $ 590,170 $ 729,267 $ — $ 729,267 $ (590,170) $ 139,097
Land sales—related party — — 22,636 22,636 — 22,636 (22,636) —
Management services—related party (2)
— — 95,955 95,955 449 96,404 — 96,404
Operating properties 1,747 678 — 2,425 — 2,425 — 2,425
Total revenues 140,844 678 708,761 850,283 449 850,732 (612,806) 237,926
COSTS AND EXPENSES:
Land sales 90,109 — 144,876 234,985 — 234,985 (144,876) 90,109
Management services (2)
— — 23,852 23,852 — 23,852 — 23,852
Operating properties 5,134 — — 5,134 — 5,134 — 5,134
Selling, general, and administrative 10,356 4,883 11,033 26,272 35,994 62,266 (11,033) 51,233
Management fees—related party — — 113,934 113,934 — 113,934 (113,934) —
Total costs and expenses 105,599 4,883 293,695 404,177 35,994 440,171 (269,843) 170,328
OTHER (EXPENSE) INCOME:
Interest income — 69 6,221 6,290 10,789 17,079 (6,221) 10,858
Miscellaneous (49) — — (49) (5,928) (5,977) — (5,977)
Total other (expense) income (49) 69 6,221 6,241 4,861 11,102 (6,221) 4,881
EQUITY IN EARNINGS FROM UNCONSOLIDATED ENTITIES 483 — — 483 12,347 12,830 119,787 132,617
SEGMENT PROFIT (LOSS)/INCOME BEFORE INCOME TAX PROVISION 35,679 (4,136) 421,287 452,830 (18,337) 434,493 (229,397) 205,096
INCOME TAX PROVISION — — — — (27,462) (27,462) — (27,462)
SEGMENT PROFIT (LOSS)/NET INCOME $ 35,679 $ (4,136) $ 421,287 $ 452,830 $ (45,799) $ 407,031 $ (229,397) $ 177,634
(1) Represents the removal of the Great Park Venture operating results, which are included in the Great Park segment operating results at 100% of the venture’s historical basis but are not included in our consolidated results as we account for our investment in the venture using the equity method of accounting.
After the sale of the Gateway Commercial Venture’s commercial operating assets in December 2024, our commercial segment is no longer operating. We have recast the segment presentation for the full year to report the equity in earnings from our investment in the Gateway Commercial Venture within the corporate and unallocated column in the table above.
(2) For the Great Park segment, represents the revenues and expenses attributable to the management company for providing services to the Great Park Venture as applicable.
Valencia Segment
Our Valencia property consists of approximately 15,000 acres in northern Los Angeles County and can currently include up to approximately 21,000 homesites and approximately 9.3 million square feet of commercial space. The actual commercial square footage and number of homesites are subject to change as we further refine our development plans to optimize land values. 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, 2025 we had sold 3,088 homesites for aggregate consideration of approximately $721.6 million. Homebuilders sold 238 homes at Valencia during the year ended December 31, 2025 and have sold a total of 1,837 homes since home sales began in May 2021.
Land sales and related party land sales revenues. Total land sales revenues decreased by $96.6 million to $42.5 million for the year ended December 31, 2025, from $139.1 million for the year ended December 31, 2024. The decrease in total land sales revenues was attributable to the recognition of revenue from the sale of 13.8 acres of commercial land for $42.5 million during the year ended December 31, 2025 compared to the recognition of revenue from the sale of residential land entitled for an aggregate of 493 homesites on 54.4 acres during the year ended December 31, 2024. The aggregate base purchase price was $137.9 million for the 2024 sales, and 179 of the homesites were sold to an unaffiliated land banking entity whereby Lennar retained the option to acquire the homesites in the future from the land bank entity.
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Cost of land sales. Cost of land sales during the year ended December 31, 2025 was $29.7 million, compared to $90.1 million during year ended December 31, 2024. 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.
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 November 2024, we received approvals from the City and County of San Francisco to (among other things) transfer approximately two million square feet of research and development and office space to Candlestick from The San Francisco Shipyard. Candlestick now has the potential to include up to approximately 2.8 million square feet of research and development and office space, approximately 7,200 homesites, and approximately 550,000 square feet of retail, hotel, entertainment and community uses. We have commenced engineering for the next phase of infrastructure at Candlestick and expect to begin construction in the first half of 2026.
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.
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. 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 have further material impacts on 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.
Hearthstone Segment
We have a 75% controlling financial interest in the Hearthstone Venture, which operates our residential asset management platform providing capital solutions to the U.S. homebuilding industry, primarily through land banking. The Hearthstone Venture’s operations include managing funds that acquire fully entitled residential land parcels and enter into option and development agreements with U.S. homebuilders. The funds then engage the homebuilders to complete the horizontal development of the land, after which the homebuilders acquire the fully developed homesites from the funds pursuant to the option agreements. The Hearthstone Venture manages these lot option programs across multiple U.S. markets, working with capital partners consisting of state employee pension plans and institutional and private equity. The Hearthstone Venture sources projects mainly from large U.S. publicly-traded homebuilders. The Hearthstone Venture receives asset management fees and under some arrangements may also receive performance fees upon achievement of stipulated investor returns. We completed our acquisition of the Hearthstone Venture on July 31, 2025. As of December 31, 2025, the Hearthstone Venture had $3.4 billion in assets under management, which consisted of 30,647 lots with 13 separate homebuilders across 16 states.
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
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financial statements. However, because of the relationship between the management company and the Great Park Venture, we assess 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 11,800 homesites and approximately 4.1 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, 2025, had sold 9,603 homesites (including 853 affordable homesites) and 166 acres of commercial land, including the Five Point Gateway Campus, allowing for development of up to approximately 3.6 million square feet of commercial office, industrial and research and development space for aggregate consideration of approximately $5.2 billion.
During the year ended December 31, 2025, the Great Park Venture made aggregate distributions of $672.0 million to holders of percentage interests. The Company received $252.0 million for its 37.5% percentage interest.
Land sales and related party land sales revenues. Land sales and related party land sales revenues increased by $212.9 million to $825.7 million for the year ended December 31, 2025, from $612.8 million for the year ended December 31, 2024. In 2025, the Great Park Venture sold land entitled for an aggregate of 920 homesites on 75.6 acres at the Great Park Neighborhoods. In 2024, the Great Park Venture sold 12.8 acres of commercial land planned for retail uses and land entitled for an aggregate of 559 homesites on 56.1 acres at the Great Park Neighborhoods.
For the 2025 land sales, the base purchase price was $781.7 million, and 308 of the homesites were sold to an unaffiliated land banking entity whereby Lennar retained the option to acquire the homesites in the future from the land bank entity. The base purchase price was $25.4 million and $480.0 million for the 2024 commercial land sales and homesite land sales, respectively.
During the years ended December 31, 2025 and 2024, revenues also included changes in estimates of variable consideration, including profit participation and price participation, from those amounts previously recorded by the Great Park Venture. During the years ended December 31, 2025 and 2024, the Great Park Venture recognized $24.5 million and $39.8 million, respectively, in profit participation revenues related to prior year residential land sales. During the years ended December 31, 2025 and 2024, the Great Park Venture recognized additional estimated variable consideration of $19.4 million and $66.6 million, respectively, for price participation related to a residential land sale that closed in 2023. As of December 31, 2025, substantially all of the homes related to the 2023 land sale have been sold to homebuyers.
Cost of land sales. Cost of land sales during the years ended December 31, 2025 and 2024 were $195.9 million and $144.9 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.
Management fee revenues. Management fee revenues are revenues generated by the management company from development management services provided to the Great Park Venture. The decrease in management services related party revenue was mainly attributable to a decrease in variable incentive compensation revenue recognized during the year ended December 31, 2025, partially offset by the increase in the annual fixed base fee that began in 2025. In September 2024, the development management agreement with the Great Park Venture was renewed by mutual agreement of the parties through December 31, 2026 (the “second renewal term”). In connection with the extension under the second renewal term, the annual fixed base fee was increased to $13.5 million beginning in 2025, which reflects an increase from the $12.0 million annual fixed base fee for 2024. The incentive compensation provisions of the development management agreement remain unchanged through the second renewal term. For the years ended December 31, 2025 and 2024, we recognized $40.0 million and $84.0 million, respectively, attributable to variable incentive compensation, which reflects changes in the estimate of the amount of incentive compensation we expected to be entitled to receive and changes in constraints on the estimate.
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, 2025, management services costs and expenses decreased by $11.8 million, or 49.4%, to $12.1 million, from $23.9 million for the year ended December 31, 2024. The decrease was mainly attributable to a decrease in intangible asset amortization expense recognized during the year ended December 31, 2025.
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Selling, general, and administrative. SG&A expenses decreased by $1.4 million, or 12.8%, to $9.6 million for the year ended December 31, 2025, from $11.0 million for the year ended December 31, 2024. The decrease was mainly attributable to a decrease in marketing expenses and property maintenance expenses.
Management fees—related party. Management fees decreased by $70.9 million, to $43.0 million for the year ended December 31, 2025, from $113.9 million for the year ended December 31, 2024. 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 decrease in management fees — related party was mainly attributable to changes in the estimate of the amount of incentive compensation fees probable of being paid that resulted in a cumulative adjustment recognized during the year ended December 31, 2025 that was lower than the cumulative adjustment recognized during the year ended December 31, 2024, partially offset by the increase in base development management fees that began in 2025. The Great Park Venture recognized expense of $29.5 million and $101.9 million for incentive compensation fees during the years ended December 31, 2025 and 2024, respectively.
The table below reconciles the Great Park segment results for the years ended December 31, 2025 and 2024 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, 2025 and 2024, respectively.
Year Ended December 31,
2025 2024
(in thousands)
Segment profit from operations $ 625,933 $ 421,287
Less net income of management company attributed to the Great Park segment
41,454 72,103
Net income of Great Park Venture 584,479 349,184
The Company’s share of net income of the Great Park Venture 219,180 130,944
Basis difference amortization, net (17,891) (11,157)
Equity in earnings from Great Park Venture $ 201,289 $ 119,787
Liquidity and Capital Resources
At December 31, 2025, we had $425.5 million of consolidated cash and cash equivalents, compared to $430.9 million at December 31, 2024. As of December 31, 2025, no funds had been drawn on and no letters of credit were outstanding on the operating company’s $217.5 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 September 2025, we issued $450.0 million in new 8.000% senior notes due October 2030. We used the net proceeds from the issuance of the new senior notes, together with cash on hand, to (i) purchase $471.5 million in principal amount of the $523.5 million outstanding 10.500% initial rate senior notes due 2028 (“2028 Notes”) that were validly tendered pursuant to a cash tender offer (the “Concurrent Tender Offer”) and (ii) redeem $52.0 million in principal amount of the remaining 2028 Notes that were not purchased in the Concurrent Tender Offer by concurrently delivering and irrevocably depositing amounts with the indenture trustee (the “Trust Amounts”) sufficient to fund the payment of the principal amount and interest due on November 15, 2025, the redemption date. After the deposit of such Trust Amounts, the indenture governing the 2028 Notes was satisfied and discharged in accordance with its terms. Pursuant to a reimbursement deferral agreement, principal and interest payments under our related party reimbursement obligation were deferred through December 31, 2025 and resumed in January 2026. Reimbursement payments may be further 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, 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. At Hearthstone, we expect to make co-investment contributions to our existing and new lot option funds as we invest in growing the Hearthstone management platform over the next 12 months. We typically contribute a 1% co-investment alongside our capital partners. We expect to meet our cash requirements for at least the next 12 months with available cash, distributions from our unconsolidated entities, collection of development management fees, including incentive compensation, under our development management agreement with the Great Park Venture, asset management fees at the
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Hearthstone Venture, proceeds from land sales, reimbursements from public financing and access to financing sources, including our revolving credit facility.
Our long-term cash needs relate primarily to future horizontal development expenditures and new investments and acquisitions, along with debt service and 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 land sales at 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 and to pursue our growth strategies 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 or Class A units of the San Francisco Venture, 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, 2025, there were no amounts currently payable under the TRA. However, TRA payments associated with California state taxes may become payable between 2026 and 2028 as a result of the passage in June 2024 of California Senate Bill 167, which, in part, suspends the usage of California net operating loss deductions for tax years 2024 through 2026. The majority of TRA payments, however, are not expected to begin 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 $344.9 million as of December 31, 2025 predominantly related to our Valencia community.
At December 31, 2025, 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 $198.9 million.
Outstanding LOCs totaled $1.0 million at each of December 31, 2025 and 2024. At both December 31, 2025 and 2024, 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, 2025, no capacity under the revolving credit facility was used to support LOCs.
Several of the funds that the Hearthstone Venture manages utilize financing arrangements to partially fund the acquisition of land. The debt is non-recourse to the Hearthstone Venture other than in the case of customary “bad act” exceptions or bankruptcy or insolvency events.
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.
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The following table aggregates certain of our material cash obligations and commitments as of December 31, 2025:
Payment due by period
(in thousands)
Total Less than
1 year 1-3 years 3-5 years More than
5 years
Senior notes payable $ 450,000 $ — $ — $ 450,000 $ —
Interest commitment on senior notes 180,600 36,600 72,000 72,000 —
Operating lease obligations
11,141 3,361 7,107 673 —
Water purchase agreement (1)
26,808 1,543 3,237 3,451 18,577
Related party reimbursement obligation (2)
65,227 65,227 — — —
Total
$ 733,776 $ 106,731 $ 82,344 $ 526,124 $ 18,577
(1) We are subject to a water purchase agreement requiring annual payments in exchange for the delivery of water for our exclusive use. The agreement has an initial 35-year term, which expires in 2039 with an option for a second 35-year term.
(2) 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%. Pursuant to a reimbursement deferral agreement, principal and interest payments under our related party reimbursement obligation were deferred through December 31, 2025 and resumed in January 2026. Reimbursement payments may be further 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,
2025 2024
Operating activities
$ 105,230 $ 115,986
Investing activities
(6,552) 70,064
Financing activities
(104,007) (108,976)
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, 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 $105.2 million for the year ended December 31, 2025, compared to $116.0 million net cash provided by operating activities for the year ended December 31, 2024.
During the year ended December 31, 2025, we received $42.5 million from the sale of land at our Valencia segment. We also received incentive compensation payments of $68.0 million under our development management agreement with the Great Park Venture. Additionally, we received total distributions of $252.0 million from the Great Park Venture, of which $201.3 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, a distribution of $1.6 million from the Gateway Commercial Venture, of which $1.4 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 and total distributions of $5.2 million mostly from funds managed by the Hearthstone Venture, of which $0.6 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, 2024, we received $137.9 million from the sale of land at our Valencia segment. We also received incentive compensation payments of $49.1 million under our development management agreement with the Great Park Venture. The payment is net of $1.8 million that we concurrently distributed to the holders of the management company’s Class B units. As of December 31, 2024, the holders of the management company’s Class B units had no further distribution rights. Additionally, we received total distributions of $181.9 million from the Great Park Venture, of which $119.8 million is reflected as a
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return on our investment (operating activity) in the statement of cash flows, with the balance reflected as an investing activity and a distribution of $17.2 million from the Gateway Commercial Venture, of which $9.4 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.
Major components of operating cash used in both periods consisted of our continued investment in horizontal development at our communities, SG&A costs and management services costs. Our horizontal development costs for the years ended December 31, 2025 and 2024 were partially offset by $1.2 million and $9.1 million in public financing reimbursements for public infrastructure development costs we incurred in Valencia, respectively.
During the year ended December 31, 2025, we paid $47.4 million for interest due on our existing 7.875% senior notes due November 2025 and 10.500% initial rate senior notes due January 2028. During the year ended December 31, 2024, we paid $8.3 million for interest accrued through the settlement date on our existing 7.875% senior notes due November 2025 that were exchanged in January 2024. The exchange of $523.5 million of our existing senior notes for new senior notes was accounted for as a debt modification under ASC 470-50. Under debt modification accounting, third party costs are expensed as incurred and reported as operating cash flows. Included in operating cash outflows during the year ended December 31, 2024 is $7.7 million in third party transaction and advisory costs incurred in connection with the senior notes exchange. During the year ended December 31, 2024, an additional $45.8 million was paid for interest due on our existing 7.875% senior notes and 10.500% initial rate senior notes.
Cash Flows from Investing Activities. Net cash used in investing activities was $6.6 million for the year ended December 31, 2025, compared to the net cash provided by investing activities of $70.1 million for the year ended December 31, 2024.
During the year ended December 31, 2025, we received total distributions of $252.0 million from the Great Park Venture, of which $50.7 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, a distribution of $1.6 million from the Gateway Commercial Venture, of which $0.2 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 and total distributions of $5.2 million mostly from funds managed by the Hearthstone Venture, of which $4.6 million is reflected as a return of our investment (investing activity) in the statement of cash flows. During the year ended December 31, 2025, we paid $55.3 million, net of cash acquired, to acquire a 75% controlling financial interest in the Hearthstone Venture, and subsequent to the acquisition, we co-invested $6.5 million to funds managed by the Hearthstone Venture.
During the year ended December 31, 2024, we received total distributions of $181.9 million from the Great Park Venture, of which $62.1 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 and a distribution of $17.2 million from the Gateway Commercial Venture, of which $7.8 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. Additionally, we received total distributions of $1.0 million from other equity method investments, which is reflected as a return of our investment (investing activity) in the statement of cash flows.
Cash Flows from Financing Activities. Net cash used in financing activities was $104.0 million for the year ended December 31, 2025, compared to net cash used in financing activities of $109.0 million for the year ended December 31, 2024.
During the year ended December 31, 2025, we issued $450.0 million in new 8.000% senior notes due October 2030 and paid debt issuance costs of $6.7 million. Using the net proceeds of the issuance, together with cash on hand, we used $528.6 million to either purchase or redeem and satisfy and discharge all of the existing 10.500% initial rate senior notes. Additionally, during the year ended December 31, 2025, we repaid the remaining $1.5 million of our existing 7.875% senior notes due November 2025 and paid $1.8 million transaction costs in connection with the extension and expansion of our revolving credit facility. During the year ended December 31, 2024, we repaid $100.0 million of our existing 7.875% senior notes due November 2025 in connection with our exchange transaction.
During the years ended December 31, 2025 and 2024, we made tax distributions of $12.6 million and $7.7 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 used $2.4 million and $0.8 million during the years ended December 31, 2025 and 2024, respectively, to net settle certain share-based compensation awards with employees for tax withholding purposes.
Changes in Capital Structure
During the year ended December 31, 2025, our 65.0% ownership percentage in the operating company increased primarily due to a unit holder’s exchange of 3.1 million Class A units of the operating company into 1.1 million Class A common shares, our issuance of share-based compensation in the form of 0.1 million restricted Class A common shares and 0.9 million restricted share units that were settled for Class A common shares, partially offset by our reacquisition of approximately 0.4 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.
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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, 2025 and 2024 held by us and those held by noncontrolling interest members.
2025 2024
Class A units of the operating company:
Held by us 71,100,768 69,369,234
Held by noncontrolling interest members 38,226,137 41,363,271
109,326,905 110,732,505
Class A units of the San Francisco Venture held by noncontrolling interest members 37,870,273 37,870,273
147,197,178 148,602,778
At December 31, 2025, we had 76,096,410 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.
On October 13, 2025, Emile Haddad exchanged 3,137,134 Class A units of the operating company, and in exchange therefor, received 1,109,172 Class A common shares of the holding company. The remaining 2,027,962 Class A units tendered for redemption by Mr. Haddad were returned to the operating company in accordance with the dilution provisions of the operating company's partnership agreement and were canceled.
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, 2025, 2024, and 2023 but did recognize revenues related to certain fees or profit participation associated with homes sold by Lennar to homebuyers at Valencia. For the year ended December 31, 2023, we recognized $0.6 million of revenue from Lennar, which primarily consisted of profit participation. During the years ended December 31, 2024 and 2023, we sold homesites to unaffiliated land banking entities and recognized $76.9 million and $101.8 million of such revenue, respectively. Lennar has retained the option to acquire these homesites in the future from the unaffiliated land banking entities and has historically exercised its options to acquire such homesites.
We also provide management services to the Great Park Venture pursuant to a development management agreement. For the years ended December 31, 2025 and 2024, we recognized $53.5 million and $96.0 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 revenue during the years ended December 31, 2025 and 2024.
In addition to the related party revenues, during the year ended December 31, 2025, we recognized $42.5 million of revenue from a third-party commercial builder, which primarily consisted of commercial land sold to the third-party commercial builder and accounted for more than 10% of total consolidated revenues. Other than the third-party commercial builder, no third-party customer accounted for more than 10% of our revenue during the year ended December 31, 2025.
In addition to the related party revenues, during the year ended December 31, 2024, we recognized an aggregate of $31.2 million of revenue from a third-party home builder, which primarily consisted of homesites sold to the third-party home builder and accounted for more than 10% of total consolidated revenues. Other than the third-party home builder and the unaffiliated land bank entity, no third-party customer accounted for more than 10% of our revenue during the year ended December 31, 2024.
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
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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.
Management Services - Related Party - Incentive Compensation
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 are 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 utilize cash flow projections for the community. These cash flows are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, projected pricing over the estimated selling period, the length of the estimated development and selling periods, remaining development, general and administrative costs, the contract period, and other factors. 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 are 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.
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 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.
Impairment of Our Community Assets
We review for impairment our long-lived assets, including our Valencia and San Francisco communities, when events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. If indicators of impairment exist,
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and the undiscounted cash flows expected to be generated by a long-lived asset are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such long-lived asset to its estimated fair value. Impairment indicators for long-lived inventory assets include, but are not limited to, significant increases in horizontal development costs, significant decreases in the pace and pricing of home sales within our communities and surrounding areas, political and societal events that may negatively affect the local economy, and changes in development strategies, such as the contribution of an asset into a joint venture, that would result in acceleration of the realization of the value of such assets. We generally estimate the fair value of our long-lived assets using a discounted cash flow model or sales comparison approach of the underlying property or a combination thereof.
Our projected cash flows for each long-lived inventory asset are significantly affected by estimates and assumptions related to market supply and demand, the local economy, projected pace of sales of homesites, pricing and price appreciation over the estimated selling period, the length of the estimated development and selling periods, remaining development costs, and other factors. 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, unemployment rates and interest rates.
Using all available information, we calculate an estimate of projected cash flows for each long-lived 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. In some instances, there may be various potential outcomes for future cash flows. In these instances, the future cash flow models used to assess recoverability are probability-weighted based on our best estimates as of the date of evaluation.
The determination of fair value also requires discounting the estimated cash flows at a rate that we believe a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams. The discount rate used in determining each asset’s fair value generally depends on the asset’s projected life and development stage.
We believe that the accounting related to the impairment of our community assets is a critical accounting estimate because projected cash flows used in our impairment evaluation use significant estimates. Changes in these estimates can have a significant impact on the undiscounted cash flows that are used to test recoverability.
Business Combinations
We account for businesses we acquire in accordance with Accounting Standards Codification Topic 805, Business Combinations . This methodology requires that assets acquired, liabilities assumed, and noncontrolling interests of the acquiree be recorded at their respective fair values on the date of acquisition. Goodwill is recorded with regard to acquisitions of businesses when the purchase price of the business plus the fair value of noncontrolling interests of the acquiree exceeds the value of the identifiable assets acquired and liabilities assumed.
The estimated fair value of the acquired assets, assumed liabilities, and noncontrolling interests requires significant judgments by management and are determined primarily by a discounted cash flow model. In forming such estimates, we make assumptions about revenue growth rates, including assets under management, margins and customer attrition. In determining these assumptions, we utilize historical trends and data from the acquiree in addition to external market studies and trends, which generally include analysis of job and wage growth, mortgage interest rates and home prices. The determination of fair value also requires discounting the estimated cash flows at a rate that we believe a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams.
We believe that the accounting related to business combinations is a critical accounting estimate because our determination of fair value uses significant judgments and estimates, including projected cash flows and selected discount rates.