REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

As of December 31, 2018, we held total REO assets of $75.0 million, of which $7.4 million were held for sale, $33.9 million were held as operating properties, and $33.7 million were classified as other real estate owned. At December 31, 2017, we held total REO assets of $64.6 million, of which $5.9 million was held for sale, $20.5 million were held as operating properties and $38.3 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of December 31, 2018 and 2017, 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
	2018		2017		2018		2017		2018			2017			2018		2017
Real Estate Held for Sale	$	7,418	$	1,459	$	—	$	4,394	$	—		$	—		$	7,418	$	5,853
Operating Properties	—		—		34,550		20,655		(684		)	(171		)	33,866		20,484
Other Real Estate Owned	33,727		30,251		—		8,053		—			—			33,727		38,304
Total	$	41,145	$	31,710	$	34,550	$	33,102	$	(684	)	$	(171	)	$	75,011	$	64,641

A summary of operating properties and REO assets owned as of December 31, 2018 and 2017, respectively, by state, is as follows (dollars in thousands):



	December 31, 2018
	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	$	33,866	1	$	137	1	$	252	3	$	34,255
Texas	—	—		1	2,761		1	216		2	2,977
Arizona	—	—		4	2,988		—	—		4	2,988
Minnesota	—	—		2	1,532		—	—		2	1,532
New Mexico	—	—		—	—		5	33,259		5	33,259
Total	1	$	33,866	8	$	7,418	7	$	33,727	16	$	75,011



	December 31, 2017
	Operating Properties			Held For Sale			Other REO			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

Following is a roll-forward of REO activity for the years ended December 31, 2018 and 2017 (dollars in thousands):



	Operating Properties			# of Projects		Held for Sale			# of Projects		Other Real Estate Owned			# of Projects		Total Net Carrying Value
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	—			—		(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
Additions:
Capital costs additions	14,066			—		243			—		2,080			—		16,389
Transfer	—			—		6,657			8		(6,657		)	(8	)	—
Reductions:
Cost of properties sold	—			—		(4,754		)	(2	)	—			—		(4,754		)
Depreciation and amortization	(684		)	—		—			—		—			—		(684		)
Impairment of real estate owned	—			—		(581		)	—		—			—		(581		)
Balances at December 31, 2018	$	33,866		1		$	7,418		8		$	33,727		7		$	75,011

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 2017, we acquired the remaining interest of Park City Development, LLC. 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, 2018, the Company sold the Lakeside JV real estate assets for $8.2 million, resulting in a total gain on sale of $3.5 million of which $0.9 million of gain was allocated to non-controlling interests in the Lakeside JV.

During 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 consolidated the New Mexico Partnerships in 2017 and recorded the related assets, liabilities and non-controlling interests 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 seek 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, 2018, the Company sold REO from 2 projects (in whole or portions thereof), for $8.7 million (net of transaction costs and other non-cash adjustments) resulting in a total net gain on sale of $3.9 million. During the year ended December 31, 2017, the Company sold REO from 10 projects (or portions thereof) for $104.9 million (net of transaction costs and other non-cash adjustments), resulting in a total net gain of $10.7 million of which $6.8 million is included as a component of discontinued operations in the consolidated statement of operations.

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, 2018 and 2017, these costs and expenses were $9.6 million and $9.2 million ($4.0 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 $16.7 million and $3.8 million for the years ended December 31, 2018 and 2017, respectively.

REO Valuation Considerations

Our fair value assessment procedures are more fully described in Note 8. 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 on our REO assets held for sale and other REO assets, we recorded impairment charges of $0.6 million and $0.7 million for the years ended December 31, 2018 and 2017, respectively.

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. The operations and gain on sale of the Sedona hotels is reported as discontinued operations in the accompanying consolidated financial statements. See Note 19, Discontinued Operations, for additional information.