REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

As of December 31, 2017, we held total REO assets of $64.6 million, of which $5.9 million were held for sale, $20.5 million were held as operating properties, and $38.3 million were classified as other real estate owned. At December 31, 2016, we held total REO assets of $122.1 million, of which $17.8 million was held for sale, $88.7 million were held as operating properties (which have been reclassified as assets of discontinued operations on the accompanying consolidated balance sheets), and $15.5 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of December 31, 2017 and December 31, 2016, respectively, by method of acquisition, is as follows (in thousands):



	Acquired Through Foreclosure and/or Guarantor Settlement				Acquired Through Purchase and Costs Incurred				Accumulated Depreciation						Total
	2017		2016		2017		2016		2017			2016			2017		2016
Real Estate Held for Sale	$	1,459	$	17,717	$	4,394	$	917	$	—		$	(797	)	$	5,853	$	17,837
Operating Properties	—		—		20,655		—		(171		)	—			20,484		—
Discontinued Operations	—		83,652		—		14,079		—			(8,997		)	—		88,734
Other Real Estate Owned	30,251		8,355		8,053		7,146		—			—			38,304		15,501
Total	$	31,710	$	109,724	$	33,102	$	22,142	$	(171	)	$	(9,794	)	$	64,641	$	122,072

A summary of operating properties and REO assets owned as of December 31, 2017 and 2016, respectively, by state, is as follows (dollars in thousands):



	December 31, 2017
	Operating Properties			Held For Sale			Other Real Estate Owned			Total
State	# of Projects	Aggregate Net Carrying Value		# of Projects	Aggregate Net Carrying Value		# of Projects	Aggregate Net Carrying Value		# of Projects	Aggregate Net Carrying Value
California	1	$	20,484	—	$	—	2	$	389	3	$	20,873
Texas	—	—		—	—		2	3,557		2	3,557
Arizona	—	—		—	—		5	3,030		5	3,030
Minnesota	—	—		1	1,473		1	149		2	1,622
Utah	—	—		1	4,380		—	—		1	4,380
New Mexico	—	—		—	—		5	31,179		5	31,179
Total	1	$	20,484	2	$	5,853	15	$	38,304	18	$	64,641



	December 31, 2016
	Operating Properties					Held For Sale			Other Real Estate Owned			Total
State	# of Projects		Aggregate Net Carrying Value			# of Projects	Aggregate Net Carrying Value		# of Projects	Aggregate Net Carrying Value		# of Projects		Aggregate Net Carrying Value
California	—		$	—		—	$	—	2	$	689	2		$	689
Texas	—		—			2	4,290		—	—		2		4,290
Arizona	2		88,734			6	10,286		2	1,505		10		100,525
Minnesota	—		—			2	3,261		—	—		2		3,261
New Mexico	—		—			—	—		3	13,307		3		13,307
Total	2		88,734			10	17,837		7	15,501		19		122,072
Less: Discontinued Operations	(2	)	(88,734		)	—	—		—	—		(2	)	(88,734		)
Total	—		$	—		10	$	17,837	7	$	15,501	17		$	33,338

Following is a roll-forward of REO activity for the years ended December 31, 2017 and 2016 (dollars in thousands):



	Operating Properties			# of Projects		Held for Development		# of Projects		Held for Sale			# of Projects		Other Real Estate Owned			# of Projects		Total Net Carrying Value
Balances at December 31, 2015	$	116,156		4		3,664		1		$	5,346		8		$	27,701		14		$	152,867
Additions:
Capital costs additions	8,577			—		45		—		(55		)	—		157			—		8,724
Basis adjustment for TIF receivable and liability forgiveness	—			—		—		—		(4,493		)	—		—			—		(4,493		)
Reductions :
Cost of properties sold	—			—		—		—		(30,903		)	(10	)	(280		)	(1	)	(31,183		)
Depreciation and amortization	(3,843		)	—		—		—		—			—		—			—		(3,843		)
Transfers, net	(32,156		)	(2	)	(3,709	)	(1	)	47,942			12		(12,077		)	(6	)	—
Balances at December 31, 2016	88,734			2		—		—		17,837			10		15,501			7		122,072
Additions:
Capital costs additions	1,673			—		—		—		1,009			—		1,123			—		3,805
REO acquired through purchase	19,630			1		—		—		—			—		—			—		19,630
Consolidation of Lakeside JV	—			—		—		—		—			—		4,062			1		4,062
Consolidation of New Mexico partnerships	—			—		—		—		—			—		18,105			7		18,105
Transfer to held for sale	—			—		—		—		(641		)	(2	)	641			4		—
Reductions:
Cost of properties sold	—			—		—		—		(12,152		)	(6	)	(584		)	(4	)	(12,736		)
Discontinued operations	(89,105		)	(2	)	—		—		—			—		—			—		(89,105		)
Impairment	—			—		—		—		(200		)	—		(544		)	—		(744		)
Depreciation and amortization	(448		)	—		—		—		—			—		—			—		(448		)
Balances at December 31, 2017	$	20,484		1		—		—		$	5,853		2		$	38,304		15		$	64,641

In October 2017, the Company, through the Hotel Fund, acquired MacArthur Place for a purchase price of $36.0 million. The purchase price was allocated to applicable tangible and intangible assets and liabilities based on their relative fair value, with the excess attributed to goodwill. Of the $36.0 million purchase price, $19.6 million was allocated to operating properties. Since we are deemed to be the primary beneficiary and maintain control of the Hotel Fund, we have consolidated this entity in accordance with GAAP.

During the year ended December 31, 2017, we acquired the remaining interest of Park City Development, LLC in Lakeside JV. Following the acquisition of that interest, we were deemed to be the primary beneficiary and obtained control of the entity and changed our accounting for the investment from an unconsolidated equity method investment to a consolidated investment, at which time we recorded the gross values of related real estate, other assets and liabilities. During the year ended December 31, 2017, we obtained control over various interests in which we were deemed to be the primary beneficiary in a group of seven partnerships with real estate assets located in New Mexico (collectively referred to as the “New Mexico Partnerships”), which were previously accounted for under the equity method of accounting. As a result, we have consolidated the New Mexico Partnerships and recorded the related assets and liabilities on a gross basis at their estimated fair values.

REO Sales

We have developed formal plans to actively market REO assets designated as held for sale with the expectation that they will sell within a 12 month time frame as of the reporting date. We intend to dispose of the majority of our other REO assets but those assets did not meet one or more of the GAAP criteria in order to be classified as held for sale as of the reporting date (for example, not presently listed with a broker). We are also periodically approached on an unsolicited basis by third parties expressing an interest in purchasing REO assets that may not be classified as held for sale.

During the year ended December 31, 2017, the Company sold REO from 10 projects (in whole or portions thereof), for $104.9 million (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $10.7 million, of which $6.8 million is included as a component of discontinued operations in the consolidated statement of operations. During the year ended December 31, 2016, we sold 10 REO assets (or portions thereof) for $44.2 million (net of transaction costs and other non-cash adjustments), resulting in a total net gain of $10.8 million.

REO Planned Development and Operations

Costs and expenses related to operating, holding and maintaining our operating properties and REO assets are expensed as incurred and included in operating property direct expenses, and expenses for non-operating real estate owned in the accompanying consolidated statements of operations. For the years ended December 31, 2017 and 2016, these costs and expenses were $9.2 million ($4.0 million of which is included in income from discontinued operations) and $26.4 million ($22.1 million of which is included in loss from discontinued operations), respectively. Costs related to the development or improvements of the Company’s real estate assets are generally capitalized and costs relating to holding the assets are generally charged to expense. Cash outlays for capitalized development costs totaled $3.8 million and $11.9 million for the years ended December 31, 2017 and 2016, respectively.

REO Valuation Considerations

Our fair value assessment procedures are more fully described in Note 6. Certain properties are expected to have minimal development activity until a decision is made whether or not to sell the property. The undiscounted cash flow from these properties is based on current comparable sales for the asset in its current condition, less costs to sell and holding costs. Other properties are expected to be developed more extensively to maximize sale proceeds. The undiscounted cash flow from these properties are based on a build-out scenario that considers both the cash inflows and the cash outflows over the duration of the development, which often includes an estimate for required financing.

In the absence of available financing, our estimates of undiscounted cash flows assume that we will pay development costs from the disposition of current assets or the raising of additional capital. However, the level of planned development for our individual properties is dependent on several factors, including the current entitlement status of such properties, the cost to develop such properties, our financial resources, the ability to recover development costs, and competitive conditions. Generally, vacant, unentitled land is being held for future sale to an investor or developer with no planned development expenditures by us. In certain instances, we may choose to further develop fully or partially entitled land to maximize interest to developers and our return on investment.

Based on our assessment of impairment of operating properties for the year ended December 31, 2017 we did not record any impairment charges.

Based on our assessment of impairment of REO assets held for sale and other REO for the year ended December 31, 2017, we recorded impairment charges of $0.7 million primarily to adjust the fair value of our other REO to reflect current market conditions and management’s plan of disposition. We did not record any impairment charges during the year ended December 31, 2016. See Note 6 for valuation testing results over our REO held for sale and other REO.

Reclassification of Assets from Operating Properties to REO Held for Sale

In the first quarter of 2017, we reclassified our two Sedona hotels from operating properties to REO held for sale as a result of management’s decision and actions to dispose of such assets. The properties were sold in February 2017. As of December 31, 2016, the Sedona hotel represented 60.6% of the Company’s total assets and constituted an individually significant component of the Company’s business. The Sedona assets contributed to net income, net of tax of $3.1 million for the year ended December 31, 2017, and $1.3 million in net loss, net of tax for the year ended December 31, 2016.

The operations and gain on sale of the Sedona hotels is reported as discontinued operations in the accompanying consolidated financial statements. See Note 17, Discontinued Operations, for additional information.