INVESTMENTS

A summary of Barnwell’s investments is as follows:



	December 31, 2016		September 30, 2016
Investment in Kukio Resort land development partnerships	$	5,331,000	$	3,502,000
Investment in leasehold land interest – Lot 4C	50,000		50,000
Total investments	$	5,381,000	$	3,552,000

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 Acquisition, LLLP (“KD I”) and KD Acquisition II, LLLP (“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 remain to be sold at Kaupulehu Increment I as of December 31, 2016, as well as from commission on real estate sales by the real estate sales office.

During the three months ended December 31, 2016, Barnwell received cash distributions in the amount of $443,000, after distributing $54,000 to minority interests, from the Kukio Resort land development partnerships. In January 2017, the Kukio Resort land development partnerships made a cash distribution to its partners of which Barnwell received $2,066,000, after distributing $253,000 to minority interests.

Equity in income of affiliates was $2,326,000 and $163,000 for the three months ended December 31, 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 $332,000 as of December 31, 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 $19,000 and $13,000, for the three months ended December 31, 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 December 31, 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 bond 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 December 31, 2016, Barnwell’s maximum loss exposure as a result of its investment in the Kukio Resort land development partnerships was approximately $5,656,000, consisting of the carrying value of the investment of $5,331,000 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:



	Three months ended December 31,
	2016		2015
Revenue	$	24,874,000	$	3,703,000
Gross profit	$	11,496,000	$	1,357,000
Net earnings	$	10,661,000	$	823,000

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 14).

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



	Three months ended December 31,
	2016			2015
Sale of interest in leasehold land:
Revenues - sale of interest in leasehold land	$	1,678,000		$	150,000
Fees - included in general and administrative expenses	(260,000		)	(21,000		)
Proceeds from sale of interest in leasehold land, net of fees paid	$	1,418,000		$	129,000

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. The lease terminates in December 2025.