INVESTMENTS

A summary of Barnwell’s non-current investments is as follows:



	September 30,
	2016		2015
Investment in Kukio Resort land development partnerships	$	3,502,000	$	6,238,000
Investment in leasehold land interest – Lot 4C	50,000		50,000
Total non-current investments	$	3,552,000	$	6,288,000

Investment in Kukio Resort land development partnerships

On November 27, 2013, Barnwell, through a wholly-owned subsidiary, entered into two limited liability limited partnerships, KD Kona 2013 LLLP and KKM Makai, LLLP, and indirectly acquired a 19.6% non-controlling ownership interest in each of KD Kukio Resorts, LLLP, KD Maniniowali, LLLP and KD Kaupulehu, LLLP for $5,140,000. These entities own certain real estate and development rights interests in the Kukio, Maniniowali and Kaupulehu portions of Kukio Resort, a private residential community on the Kona coast of the island of Hawaii, as well as Kukio Resort’s real estate sales office operations. KD Kaupulehu, LLLP, which is comprised of KD I and KD II, is the developer of Kaupulehu Lot 4A Increments I and II, the area in which Barnwell has interests in percentage of sales payments. Barnwell’s investment in these entities is accounted for using the equity method of accounting. The partnerships derive income from the sale of residential parcels, of which 25 lots remained to be sold at Kaupulehu Increment I and one ocean front parcel over two acres in size remained to be sold in Kaupulehu Increment II at September 30, 2016, as well as from commissions on real estate sales by the real estate sales office.

In April 2016, the Kukio Resort land development partnerships made a cash distribution to its partners of which Barnwell received $5,320,000, after distributing $40,000 to minority interests.

Equity in income of affiliates was $2,624,000 and $1,580,000 for the years ended September 30, 2016 and 2015, respectively. The equity in the underlying net assets of the Kukio Resort land development partnerships exceeds the carrying value of the investment in affiliates by approximately $351,000 as of September 30, 2016, which is attributable to differences in the value of capitalized development costs and a note receivable. The basis difference for the capitalized development costs will be recognized as the partnerships sell lots and recognize the associated costs. The basis difference for the note receivable will be recognized as the partnerships sell memberships for the Kuki`o Golf and Beach Club for which the receivable relates. The basis difference adjustments of $39,000 and $82,000, for the years ended September 30, 2016 and 2015, respectively, increased equity in income of affiliates.

Barnwell, as well as KD I, KD II and certain other owners of the partnerships, have jointly and severally executed a surety indemnification agreement. Bonds issued by the surety at September 30, 2016 totaled approximately $325,000 and relate to certain construction contracts of KD I. If any such performance bonds are called, we may be obligated to reimburse the issuer of the performance bonds as Barnwell, KD I, and certain other partners are jointly and severally liable, however we believe that it is remote that a material amount of any currently outstanding performance bonds will be called. Performance bonds do not have stated expiration dates. Rather, the performance bonds are released as the underlying performance is completed.

As of September 30, 2016, Barnwell’s maximum loss exposure as a result of its investment in the Kukio Resort land development partnerships was approximately $3,827,000, consisting of the carrying value of the investment of $3,502,000 and $325,000 from the surety indemnification agreement of which we are jointly and severally liable.

Summarized financial information for the Kukio Resort land development partnerships is as follows:



	Year ended		Year ended
	September 30, 2016		September 30, 2015
Revenue	$	33,874,000	$	29,898,000
Gross profit	$	15,332,000	$	13,594,000
Net earnings	$	12,212,000	$	7,500,000

Percentage of sales payments

Kaupulehu Developments has the right to receive payments from KD I and KD II resulting from the sale of lots and/or residential units within approximately 870 acres of the Kaupulehu Lot 4A area by KD I and KD II in two increments (“Increment I” and “Increment II”) (see Note 20).

With respect to Increment I, Kaupulehu Developments is entitled to receive payments from KD I based on the following percentages of the gross receipts from KD I’s sales of single-family residential lots in Increment I: 9% of the gross proceeds from single-family lot sales up to aggregate gross proceeds of $100,000,000; 10% of such aggregate gross proceeds greater than $100,000,000 up to $300,000,000; and 14% of such aggregate gross proceeds in excess of $300,000,000. In fiscal 2016, three single-family lots in Increment I were sold bringing the total amount of gross proceeds from single-family lot sales through September 30, 2016 to $205,000,000. As of September 30, 2016, 25 single-family lots, of the 80 lots developed within Increment I, remained to be sold.

Kaupulehu Developments is entitled to receive payments from KD II resulting from the sale of lots and/or residential units by KD II within Increment II. The payments are based on a percentage of gross proceeds from KD II's sales ranging from 8% to 10% of the price of improved or unimproved lots or 2.60% to 3.25% of the price of units constructed on a lot, to be determined in the future depending upon a number of variables, including whether the lots are sold prior to improvement. Kaupulehu Developments is also entitled to receive up to $8,000,000 in additional payments after the members of KD II have received distributions equal to the capital they invested in the project. Two ocean front parcels approximately two to three acres in size fronting the ocean were developed within Increment II by KD II, and the remaining acreage within Increment II is not yet under development. It is uncertain when or if KD II will develop the other areas of Increment II. As of September 30, 2016, one of the ocean front parcels remained to be sold.

The following table summarizes the Increment I and Increment II percentage of sales payment revenues received from KD I and KD II:



	Year ended September 30,
	2016			2015
Sale of interest in leasehold land:
Proceeds	$	2,255,000		$	3,772,000
Fees	(340,000		)	(528,000		)
Revenues – sale of interest in leasehold land, net	$	1,915,000		$	3,244,000

There is no assurance with regards to the amounts of future payments from Increment I or Increment II to be received.

Investment in leasehold land interest – Lot 4C

Kaupulehu Developments holds an interest in an area of approximately 1,000 acres of vacant leasehold land zoned conservation located adjacent to Lot 4A, which currently has no development potential without both a development agreement with the lessor and zoning reclassification. The lease terminates in December 2025.