INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS

Park City, Utah Lakeside Investment

During 2015, the Company, through a consolidated subsidiary, Lakeside DV Holdings, LLC (“Lakeside JV”), entered into a joint venture with a third party developer, Park City Development, LLC (“PCD”) for the purpose of acquiring, holding and developing certain real property located in Park City, Utah (“Lakeside JV”). Under the Lakeside JV limited liability company agreement, the Company agreed to contribute up to $4.2 million for a 90% interest and PCD agreed to contribute up to $0.5 million for a 10% interest. Equity balances in Lakeside JV were subject to a 12% preferred return, compounded quarterly. PCD’s principal provided a limited performance guaranty to the Company in the case of certain defaults by PCD. In January 2017, the Company purchased PCD’s 10% interest in Lakeside JV for $0.7 million and terminated PCD as manager. Upon purchase of PCD’s interest, Lakeside JV became a consolidated entity of the Company in the first quarter of 2017. Upon formation of Lakeside JV, the Company syndicated $1.7 million of its $4.2 million investment to several investors (“Syndicates”) by selling preferred equity interests in Lakeside JV.

During the year ended December 31, 2018, the Company sold the real estate holdings of Lakeside JV for a gross price $8.2 million resulting in a gain on sale of $3.5 million. A net cash distribution in the amount of $1.9 million was paid to the Syndicates of the Lakeside JV, comprised of their return of capital and allocation of profits, less repayment of promissory notes described above and interest thereon. In connection with the sale of the real estate assets, the Lakeside JV negotiated to retain a 50% interest in anticipated tax increment financing (“TIF”) to be paid by Wasatch County, Utah. Collection of such proceeds is contingent upon the development of the related real estate which has yet to occur. Accordingly, we have not recorded amounts that may be receivable under this arrangement until such time that those contingencies are satisfied.

Equity Interests Acquired through Guarantor Recoveries

In 2015, the Company acquired certain real estate assets and equity interests in a number of limited liability companies and limited partnerships with various real estate holdings and related assets in satisfaction of an outstanding receivable from a court-appointed receiver advanced in connection with certain enforcement and collection efforts against the guarantor of a former borrower. Prior to September 29, 2017, certain of these entities were consolidated in the our consolidated financial statements while others were accounted for under the equity method of accounting, depending on the extent of the Company’s financial interest in and level of control over each such entity.

Effective September 29, 2017, the Company consolidated the accounts of various corporate entities, the full ownership of which was initially granted to the Company under a previous judgment award against a guarantor under certain legacy mortgage loans. The value of the corporate entities was not recorded as a recovery at the time of award since the ownership of those entities remained under the control of a court-appointed receiver from the date the judgment was awarded. The assets of the corporate entities consist primarily of general and limited partnership interests in, and various receivables from (and liabilities to), several of the previously consolidated and unconsolidated entities, as well amounts for other entities pertaining to the guarantor that were administratively dissolved by court order in a receivership wind-up motion. As a result, the Company began to consolidate into its financial statements the accounts of various unconsolidated variable interest entities, whose assets are comprised of real estate holdings, rights to develop water and receivables from other related entities, and liabilities which consisted primarily of various amounts payable to related entities.

The consolidation of the aforementioned entities occurred as a result of the termination of a court-appointed receivership over the corporate entities which maintained the general partner interests and thereby controlled the activities of such entities through that date. During the year ended December 31, 2017, the receiver assigned and delivered to the Company the stock certificates of the corporate entities, including the underlying interest in partnerships. As a result, as of that date, the Company received full possession, custody and control of its awarded interests in the corporate entities and related interest in partnerships. The Company’s ownership interests in the consolidated entities range from 3.4% to 100.0% and were determined to be variable interest entities. The Company determined the partnerships are deemed to be variable interest entities and that through its general and limited partnership interests, the Company is the primary beneficiary of such entities because 1) it has the power to direct the activities of the entities that most significantly impact the economic performance of such entities, and 2) with the financial assistance provided to such entities, the Company has the risk of absorbing losses or rights to receive benefits that could be potentially significant to the entities; as such, they should be consolidated. Intercompany receivables and liabilities have been eliminated in consolidation in the accompanying consolidated financial statements.

In April 2017, the court-appointed receiver over the general partner of one of the partnerships (Recorp New Mexico Limited Partnership LLC (“RNMA I”)) made a capital call to all partners to fund various operating and capital requirements of the partnership. While the Company met its obligation under this request, none of the remaining partners did so, at which point the Company funded those portions as well. As a result of their failure to make the required capital contributions, the general partner declared that all of the limited partners were in default under the terms of the partnership agreement and assigned the limited partnership interests to the Company’s limited partner subsidiary. We have recorded the effects of the ownership of those additional limited partnership interests upon consolidation. As described in Note 17, the transfer of certain of those limited partnership interests is the subject of litigation by one of the RNMA I partners.

Financial data presented for previous periods have not been restated to reflect the consolidation of the entities. The assets and liabilities of the newly consolidated entities were recorded at their estimated fair values. As a result of the assignment of the corporate entity and related general partnership interests and recording of assets and liabilities at fair value for the affected entities, and after elimination of intercompany balances, during the year ended December 31, 2017, the Company recorded the elimination of the investment in unconsolidated entities of $4.0 million, and recorded a decrease in mortgage loans of $0.4 million, a decrease in other receivables of $2.4 million, an increase in other real estate owned of $17.8 million, an increase in other assets of $1.1 million, an increase in liabilities of $0.2 million, and non-controlling interests of $6.5 million at consolidation. In addition, the Company recorded net recovery income of $6.1 million upon consolidation during 2017.

In 2016, a subsidiary of the Company entered into a series of promissory notes and related agreements with five of the partnerships to advance a total of up to $0.7 million for the purposes of funding various operating costs and water well infrastructure development costs. The partnership notes are secured by the assets of the respective partnerships, bear annual interest rates ranging from the JP Morgan Chase prime rate plus 2.0% (7.50% at December 31, 2018) to 8.0% and mature no later than July 31, 2018. During the year ended December 31, 2017, the notes were amended to increase the maximum loan amount to $1.0 million per entity, or $5.0 million in total, and to cross-collateralize the notes. During the year ended December 31, 2018, a total of $4.3 million was advanced to the five partnerships under the terms of the note agreements. The outstanding principal and interest of such notes totaled $5.0 million as of December 31, 2018. As a result of the consolidation of the related entities, the notes receivable and notes payable and related interest amounts have been eliminated in consolidation.

The Company’s consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is deemed to be the primary beneficiary. The interests of the other VIE equity holders are reflected in net income (loss) attributable to non-controlling interests in the accompanying consolidated statements of operations and non-controlling interest in the accompanying consolidated balance sheets.

L’Auberge de Sonoma Hotel Fund

As described in Note 11, in October 2017, the Company, through various subsidiaries, acquired MacArthur Place for a purchase price of $36.0 million. The acquisition of MacArthur Place was funded using $19.4 million in loan proceeds from MidFirst Bank (see Note 9 for description of loan terms) and the balance was contributed by the Company through the Hotel Fund. In November 2017, the Company sponsored and commenced an offering of up to $25.0 million of preferred interests in the Hotel Fund. The net proceeds of this offering will be used to (i) redeem the Company’s initial contributions to the Hotel Fund and (ii) fund certain renovations to MacArthur Place.

Purchasers of the preferred interests in the Hotel Fund (the “Preferred Members”) are entitled to a preferred distribution, payable monthly, accruing at a rate of 7.0% per annum on invested capital, cumulative and non-compounding (the “Preferred Distribution”). Prior to the sale or other disposition of MacArthur Place, if the Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company will provide the funds necessary to pay the Preferred Distribution for such month. Such payment by the Company will be treated as an additional capital contribution and the Company’s capital account in the Hotel Fund will be increased by such amount. As of December 31, 2018, the Company has funded $0.4 million of Preferred Distributions. Moreover, the Company has agreed to fund, in the form of common capital contributions, up to 6.0% of the offering’s gross proceeds as selling commissions and up to 1.0% of the offering’s gross proceeds as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund, which totaled $0.1 million for the year ended December 31, 2018. These portions of our common equity in the Hotel Fund are subordinate to the distribution of capital to Preferred Investors in the event of a sale of the hotel. Additionally, upon the refinance or sale of all or a portion of MacArthur Place, Preferred Members may be entitled to receive certain additional preferred distributions (the “Additional Preferred Distribution”) that will result in an overall return of up to12.0% on the Preferred Interests. Upon a sale of the hotel, the Fund will distribute 10.0% of any cash available after the payment of the Additional Preferred Distribution to the Preferred Members pro rata in proportion to the Preferred Interests owned. Any amounts in excess of this shall be retained by the Company.

As of December 31, 2018 and 2017, the Hotel Fund sold Preferred Interests in the aggregate amount of $15.0 million and $0.7 million, respectively, which is included in non-controlling interests in the accompanying consolidated balance sheets, while the Company’s preferred interest in the Hotel Fund totals $1.7 million. The Hotel Fund made Preferred Distributions of $0.4 million and $0 during the years ended December 31, 2018 and 2017, respectively. Based on the structure of the Hotel Fund, our ability to direct the activities that most significantly impact the economic performance of the Hotel Fund, and the risk of absorbing losses or rights to receive benefits that could be potentially significant to the Hotel Fund, the Company is deemed to be the primary beneficiary of the Hotel Fund, and accordingly we have consolidated and expect to continue to consolidate the Hotel Fund in our consolidated financial statements.

The following table summarizes the carrying amounts of the above referenced entities’ assets and liabilities included in the Company’s consolidated balance sheets at December 31, 2018 and 2017 (in thousands, net of intercompany eliminations):



	December 31, 2018			December 31, 2017
Total assets	$	85,240		$	69,480
Total liabilities	37,770			30,240
Net loss	(2,720		)	(1,480		)

The Company’s maximum exposure to loss consists of its combined equity in those entities which totaled $37.5 million as of December 31, 2018.