NOTES PAYABLE AND SPECIAL ASSESSMENT OBLIGATIONS

As of December 31, 2017 and 2016, our debt, notes payable and special assessment obligations consisted of the following (in thousands):



	December 31,			December 31,
	2017			2016
Note Payables, Net of Discount, Continuing Operations
$32.3 million note payable to MidFirst Bank secured by a first lien on an operating hotel property, interest-only payments due monthly at the 30-day LIBOR (1.56% at December 31, 2017) plus 3.25% to 3.75% depending on compensating balances and meeting certain financial thresholds and terms (5.31% effective rate at December 31, 2017), matures October 1, 2020 with possibility of two one-year extensions, with construction completion and repayment guarantee provided by the Company	$	19,557		$	—
$5.9 million note payable secured by real estate in New Mexico, annual interest only payments based on annual interest rate of prime plus 2.0% through December 31, 2017, and prime plus 3.0% thereafter (5.75% and 5.5% at December 31, 2017 and 2016, respectively), matures December 31, 2019	5,940			5,940
Unsecured note payable under class action settlement, face amount of $10.2 million, net of discount of $1.2 million and $2.1 million at December 31, 2017 and 2016, respectively, 4% annual coupon interest rate (14.6% effective yield), interest payable quarterly, matures April 28, 2019	8,938			8,106
$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022	116			—
Total notes payable, continuing operations	34,551			14,046
Less: deferred financing costs of notes payable, continuing operations	(446		)	—
Total notes payable, continuing operations	$	34,105		$	14,046

Notes Payable and Special Assessment Obligations, Assets Held for Sale
$3.7 million community facility district bonds dated 2005, secured by residential land located in Buckeye, Arizona, annual interest rate ranging from 5%-6%, maturing various dates through April 30, 2030. Obligation assumed by buyer upon sale of Buckeye land in December 2017	$	—		$	3,067
$2.3 million special assessment bonds dated between 2002 and 2007, secured by residential land located in Dakota County, Minnesota, annual interest rate ranging from 6%-7.5%, maturing various dates through 2022. Portions of this obligation have been assumed by buyers upon the sale of land in June and September 2017.	—			514
Total notes payable and special assessment obligations, held for sale	$	—		$	3,581

Note Payables, Net of Discount, Discontinued Operations*
$50.0 million non-recourse note payable secured by first liens on operating hotel properties and related assets, annual interest at the greater of a) 7.25% or b) one-month LIBOR plus 6.75%, actual interest of 7.40% at December 31, 2016, original maturity of February 1, 2018, interest only payable monthly, principal due at maturity, subject to a carve-out guarantee by the Company. Repaid in February 2017 upon sale of the underlying collateral	$	—		$	50,000
Total notes payable, discontinued operations	—			50,000
Less: deferred financing costs of notes payable, discontinued operations	—			(447		)
Total notes payable, discontinued operations, net	$	—		$	49,553

* This note was paid off in connection with the sale of the Sedona assets in February 2017 and has been reclassified into Liabilities of discontinued operations as of December 31, 2016 in the accompanying consolidated balance sheet.

Interest expense for the years ended December 31, 2017 and 2016 was $3.1 million and $9.5 million, respectively, of which $1.1 million and $4.2 million, respectively, is included in income from discontinued operations in the accompanying consolidated statements of operations.

Senior Indebtedness

Sedona Operating Hotel

In January 2015, the Company borrowed $50.0 million from Calmwater Capital 3, LLC. This loan was repaid in full in February 2017.

MacArthur Place

In October 2017, we borrowed $32.3 million from MidFirst Bank in connection with our purchase of MacArthur Place (the “MacArthur Loan”), of which $19.4 million was utilized for the purchase of MacArthur Place, approximately $10.0 million is being set aside to fund planned hotel improvements, and the balance is to fund interest reserves and operating capital. The loan bears floating interest equal to the 30-day LIBOR rate (1.56% at December 31, 2017) plus 3.75%, which may be reduced by up to 0.50% if certain conditions are met. The loan has an initial term of three years subject to the right of the Company to extend the maturity date for two one-year periods, provided that the loan is in good standing and upon satisfaction of certain other conditions, including payment of an extension fee equal to 0.35% of outstanding principal per extension. The Company is required to make interest-only payments during the initial three year term. During the year ended December 31, 2017, the Company made interest draws totaling $0.2 million against the loan. The Company incurred deferred financing fees of $0.5 million which are being amortized over the term of the loan using the effective interest method.

The MacArthur Loan is secured by a deed of trust on all MacArthur Place real property and improvements, and a security interest in all furniture, fixtures and equipment, licenses and permits, and MacArthur Place related revenues. The Company agreed to provide a construction completion guaranty with respect to the planned improvement project which shall be released upon payment of all project costs and receipt of a certificate of occupancy. In addition, the Company provided a loan repayment guaranty equal to 50% of the loan principal along with a guaranty of interest and operating deficits, as well as other customary carve-out matters such as bankruptcy and environmental matters. Under the guarantees, the Company is required to maintain a minimum tangible net worth of $50.0 million and minimum liquidity of $5.0 million throughout the term of the loan. Preferred equity is included as a component of equity with respect to the minimum tangible net worth covenant. The Company was in compliance with these covenants and guarantees at December 31, 2017. In addition, the Company is required to establish various operating and reserve accounts at MidFirst Bank which are subject to a cash management agreement. In the event of default, MidFirst Bank has the ability to take control of such accounts for the allocation and distribution of proceeds in accordance with the cash management agreement.

Land Purchase Financing

During 2015, the Company obtained seller-financing of $5.9 million in connection with the purchase of certain New Mexico real estate for $6.8 million. The note bears interest at the prime rate as published by The Wall Street Journal (the “WSJ Prime Rate”) (recalculated annually) plus 2% through December 31, 2017, and the WSJ Prime Rate plus 3% thereafter. Interest only payments are due on December 31 of each year with the principal balance and any accrued unpaid interest due at maturity on December 31, 2019. The note may be prepaid in whole or in part without penalty.

Exchange Notes

In April 2014, we completed an offering of a five-year, 4%, unsecured notes to certain of our shareholders in exchange for common stock held by such shareholders at an exchange price of $8.02 per share (“Exchange Offering”). Upon completion of the Exchange Offering, we issued Exchange Offering notes (“EO Notes”) with a face value of $10.2 million, which were recorded by the Company at fair value of $6.4 million based on the fair value and the imputed effective yield of such notes of 14.6% (as compared to the note rate of 4%) resulting in an initial debt discount on the EO Notes of $3.8 million, with a balance of $1.2 million at December 31, 2017. This amount is reflected as a debt discount in the accompanying financial statements, and is being amortized as an adjustment to interest expense using the effective interest method over the term of the EO Notes. The amortized discount added to the principal balance of the EO Notes during the years ended December 31, 2017 and 2016 totaled $0.8 million and $0.7 million, respectively. Interest is payable quarterly in arrears each January, April, July, and October. The EO Notes mature on April 28, 2019, and may be prepaid in whole or in part without penalty at the option of the Company. Subject to certain minimum cash and profitability conditions, the Company would be required to prepay fifty percent (50%) of the outstanding principal balance of the EO Notes on April 29, 2018. Such conditions were not met and no prepayment is required.

Notes Payable and Special Assessment Obligations, Assets Held for Sale

As of December 31, 2017 and 2016, obligations arising from our allocated share of certain community facilities district special revenue bonds and special assessments had remaining balances of $0.1 million and $3.6 million, respectively. These obligations are described below.

One of the special assessment obligations had an outstanding balance of zero and $3.1 million as of December 31, 2017 and 2016, respectively, and has an amortization period that extends through April 30, 2030, with an annual interest rate ranging from 5% to 6%. This special assessment obligation was secured by certain real estate consisting of 171 acres of unentitled land located in Buckeye, Arizona which was sold in the fourth quarter of 2017. We made principal payments of $0.2 million on this special assessment obligation during the year ended December 31, 2017. In conjunction with the sale of the related property, the buyer agreed to assume the remaining $2.9 million special assessment obligation.

The other special assessment obligations are comprised of a series of special assessments that collectively had an outstanding balance of $0.1 million and $0.5 million as of December 31, 2017 and 2016, respectively. These special assessment obligations have amortization periods that extend through 2022, with annual interest rates ranging from 6% to 7.5% and secured by certain real estate classified as REO held for sale consisting of 1.5 acres of unentitled land located in Dakota County, Minnesota which had a carrying value of $0.1 million at December 31, 2017. We made principal payments of $0.2 million on this special assessment obligation during the year ended December 31, 2017. During the year ended December 31, 2017, a portion of the related property was sold. In conjunction with the sale, the buyer agreed to assume $0.2 million of the special assessment obligation.

The responsibility for the repayment of each of the foregoing special assessment obligations rests with the owner of the property and will transfer to the buyer of the related real estate upon sale. Accordingly, if the assets to which these obligations arise from are sold before the full amortization period of such obligations, the Company would be relieved of any further liability since the buyer would assume the remaining obligations. Nevertheless, these special assessment obligations are deemed to be obligations of the Company in accordance with GAAP because they are fixed in amount and for a fixed period of time.

Our notes payable and special assessment obligations have the following scheduled maturities as of December 31, 2017 (in thousands):



Year	Amount
2018	$	28
2019	16,130
2020	19,583
2021	26
2022	8
Discounts	(1,224		)
Total	$	34,551