INVESTMENTS IN UNCONSOLIDATED ENTITIES

Challenger

On August 15, 2017, the Company, JBGL Ownership LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“JBGL”), and GB Challenger, LLC, a newly formed Texas limited liability company (“Challenger”) entered into a Membership Interest Purchase and Contribution Agreement (the “Challenger Agreement”) with The Challenger Group, Inc., a Wyoming corporation (“TCGI”), and certain of its affiliates (the “Challenger Entities”) and Brian R. Bahr (“Bahr”), resulting in the Company, through its interest in JBGL, and the Challenger Entities owning a 49.9% and 50.1% ownership interest, respectively, in Challenger, and Challenger owning all of the membership and ownership interests in the subsidiaries of the Challenger Entities named in the Challenger Agreement. As consideration for such interests, the Company agreed to issue to the Challenger Entities, or their designees, 1,497,000 shares of its common stock, par value $0.01 per share, in a private placement, with 20,000 shares of its common stock held back pending satisfactory resolution of indemnification claims (“Holdback Shares”). On March 16, 2018, the Company issued the Holdback Shares; therefore, $0.2 million was recorded in additional paid-in capital on the consolidated balance sheet as of December 31, 2017. The Challenger Entities, at their discretion, may offer to sell and transfer an additional 20.1% or, in certain circumstances, all of the Challenger Entities’ interest in Challenger (“Additional Membership Interests”) to the Company on or after the third anniversary of the Challenger Agreement. The Company is not required to purchase the Additional Membership Interests. The Company incurred $0.3 million in related acquisition costs during the year ended December 31, 2017 which are included in the cost basis of investment in the unconsolidated entity.

The Challenger Entities operate homebuilding operations under the name Challenger Homes. Challenger constructs townhouses, single family homes and luxury patio homes, and is located in Colorado Springs, Colorado. The Company partnered with Challenger in order to expand its business with partners that are complementary to its current builder partner group and to gain a presence in the Colorado Springs market.

The issuance of the common stock by the Company related to the investment in Challenger was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and the safe harbor provided by Rule 506 promulgated thereunder. The Company relied, in part, upon representations from each of the individuals that they are “accredited investors” as such term is defined in Rule 501 of Regulation D.

The Company’s investment in Challenger at August 15, 2017 of $15.1 million was more than its share of the estimated underlying net assets of Challenger, resulting in a preliminary difference in basis of $5.1 million, which was attributed to inventory and intangible assets. The Company’s investment in Challenger on August 15, 2017 was determined as follows (in thousands, except per share data):



Consideration transferred at closing
Green Brick common stock issued	1,477
Price per share of Green Brick common stock⁽¹⁾	$	9.90
Fair value of common stock consideration	$	14,622

Acquisition related costs	$	241
Total fair value of consideration transferred at closing	$	14,863

Subsequent consideration
Holdback Shares	20
Price per share of Green Brick common stock⁽¹⁾	$	9.90
Total fair value of subsequent consideration	$	198

Total fair value of consideration	$	15,061


(1)	Based upon closing price of the Company’s common stock upon the parties’ execution of the Challenger Agreement.

The Company holds two of the five board of managers (the “Managers”) seats of Challenger. Challenger’s six officers, employees of the Challenger Entities, were designated by the Managers for the purpose of managing the day to day operations. The Company does not have a controlling financial interest in Challenger as the Company has less than 50% of the voting interests in Challenger. The Company’s investment in Challenger is treated as an unconsolidated investment under the equity method of accounting and is included in investments in unconsolidated entities in the Company’s consolidated balance sheets.

The Company’s investment in Challenger is carried at cost, as adjusted for the Company’s share of income or losses and distributions received, as well as for adjustments related to basis differences between the Company’s cost and the Company’s underlying equity in net assets recorded in Challenger’s financial statements as of the date of acquisition.

As of December 31, 2018, the carrying value of the investment in Challenger was $19.5 million, whereas the underlying 49.9% equity in net assets of Challenger was $15.0 million. The $4.5 million difference represents the premium paid for the Company’s equity interest in excess of Challenger’s carrying value. This basis difference primarily relates to the estimated fair value of inventory, as well as the Challenger Homes trade name and capitalized acquisition costs. The amortization of the basis differences related to inventory is recorded as a reduction of equity in income of unconsolidated entities as homes are closed on and delivered to homebuyers. The basis difference related to the trade name is amortized over ten years as a reduction of equity in income of unconsolidated entities.

The Company recognized $7.0 million and $2.7 million related to Challenger in equity in income of unconsolidated entities during the years ended December 31, 2018 and 2017, respectively.

Providence Title

In March 2018, the Company formed a joint venture with a title company in Georgia to provide title closing and settlement services to our Atlanta-based builder. The Company, through its controlled builder, The Providence Group of Georgia, L.L.C. (“TPG”), owns a 49% equity interest in Providence Group Title, LLC (“Providence Title”).

Green Brick Mortgage

In June 2018, the Company formed a joint venture with PrimeLending to provide mortgage loan origination services to our builders. The Company owns a 49% equity interest in Green Brick Mortgage, LLC (“Green Brick Mortgage”) which initiated mortgage loan origination activities in September 2018.

A summary of the financial information of the unconsolidated entities that are accounted for by the equity method is as follows (in thousands):



	December 31, 2018		December 31, 2017
Assets:
Cash	$	14,584	$	3,981
Accounts receivable	1,259		1,494
Bonds and notes receivable	5,864		2,850
Loans held for sale, at fair value	3,083		—
Inventory	44,375		57,841
Other assets	3,132		2,248
Total assets	$	72,297	$	68,414
Liabilities:
Accounts payable	$	2,173	$	5,060
Accrued expenses and other liabilities	5,328		2,857
Notes payable	31,402		36,923
Total liabilities	$	38,903	$	44,840
Owners’ equity:
Green Brick	$	15,653	$	11,763
Others	17,741		11,811
Total owners’ equity	$	33,394	$	23,574
Total liabilities and owners’ equity	$	72,297	$	68,414

	Year Ended December 31, 2018		Year Ended December 31, 2017
Revenues	$	166,102	$	58,958
Costs and expenses	148,222		44,969
Net earnings of unconsolidated entities	$	17,880	$	13,989
Company’s share in net earnings of unconsolidated entities	$	7,259	$	2,746