COMMITMENTS AND CONTINGENCIES

Construction and Related Guarantees

As described in Note 9, the Company agreed to provide MidFirst Bank with a loan repayment guaranty equal to 50% of the outstanding principal and accrued, unpaid interest on the MacArthur Loan, plus a 50% guaranty of hotel operating expenses, and a construction completion guaranty with respect to the planned renovations of MacArthur Place. The construction completion guaranty will be released upon payment of all project costs and receipt of a certificate of occupancy. The MidFirst Bank loan documents also require that the loan remain “in balance” throughout its term such that the sum of all remaining undisbursed loan funds and the amounts expended by the borrower will be sufficient to meet the approved construction budget and pay the loan interest. If the loan becomes “out of balance”, the Company must fund the difference from its own equity. Management expects that any excess costs not funded by loan funds will be funded using offering proceeds from the Hotel Fund in excess of the reimbursement of our initial investment, and to the extent necessary, Company funds.

Guarantor Recovery

We have pursued and periodically receive favorable judgments against guarantors in connection with their personal guarantees of certain legacy loans on which we previously foreclosed. Similarly, we have filed claims against certain insurance providers and other parties for reimbursement of amounts we believe are due to the Company under such policies. Due to the uncertainty of the nature and extent of the available assets of these guarantors to pay the judgment amounts or amounts collectible under insurance claims, we do not record recoveries for any amounts due under such judgments or claims, except to the extent we have received assets without contingencies.

We continue to pursue, investigate and evaluate the assets available of guarantors to collect all amounts due under judgments received in our favor. However, to the extent that such amounts are not determinable, they have not been recognized as recovery income in the accompanying consolidated statements of operations. Further recoveries under this and other judgments received in our favor will be recognized when realization of the recovery is deemed probable and when all contingencies relating to recovery have been resolved. We did not record any recoveries during the three months ended March 31, 2019 or 2018.

Employee Benefit Plan

The Company, through its human resource provider, participates in a 401(k) retirement savings plan that allows for eligible participants to defer compensation, subject to certain limitations imposed by the Code. The Company may provide a discretionary matching contribution of up to 4% of each participant’s eligible compensation. During each of the three months ended March 31, 2019 and 2018, the Company’s matching contribution was $0.1 million, which is included in general and administrative expenses in the accompanying consolidated statement of operations.

Legal Matters

We may be a party to litigation as the plaintiff or defendant in the ordinary course of business. While various asserted and unasserted claims may exist, resolution of these matters cannot be predicted with certainty. We establish reserves for legal claims when payments associated with the claims become probable and the payments can be reasonably estimated. Given the uncertainty of predicting the outcome of litigation and regulatory matters, it is generally difficult to predict what the eventual outcome will be, and when the matter will be resolved. The actual costs of resolving legal claims may be materially higher or lower than any amounts reserved for the claims.

Partnership Claims

In August 2016, a limited liability company member of Carinos Properties, LLC (“Carinos”) and Unit 6 Partners, LLC (“UP6”), filed a complaint in the United States District Court for the District of Arizona alleging the Company breached its fiduciary duty to plaintiff under ERISA with respect to certain property we own in New Mexico. In April 2018, the court denied the Company’s motion for summary judgment in the case, but stayed any further action in the case pending the results of related litigation before the state trial court (“State Court”) described below. Damages were not specified. Management believes plaintiff’s claims are without merit and intends to vigorously defend against this claim.

In the first fiscal quarter of 2017, Recorp-New Mexico Limited Partnership (“RNMA I”) conducted a capital call pursuant to its organizational documents. As a result of the capital call, certain limited partnership interests in RNMA I were transferred to one

or more subsidiaries of the Company. One of the limited partners in RNMA I whose limited partnership interests were transferred challenged the effectiveness of the transfer and forfeiture of his limited partnership interests in State Court. On January 4, 2019, the State Court issued a minute entry, finding, among other things, that the limited partner’s limited partnership interest in RNMA I was not forfeited. On January 22, 2019, the subsidiary of the Company filed a motion for reconsideration of the minute entry finding. On March 21, 2019, the State Court issued an order staying the court’s January 4, 2019 minute filing and setting a status conference on April 19, 2019 to set an evidentiary hearing on certain factual questions. Based on the advice of counsel, management believes (a) the State Court’s January 4, 2019 minute entry finding was incorrect as to matters of both fact and law, and (b) the transfer of the limited partnership interests by the then-acting general partner was done in accordance with the rights granted to the general partner under the relevant organizational documents, and we believe that it is probable that the court in the above referenced matter will ultimately agree with those conclusions. However, if the State Court were to rule that the limited partner interest transfers were ineffective, this could result in the recording of non-controlling interests in that partnership of approximately $3.1 million as of December 31, 2018. Management does not believe that loss is probable and, accordingly, no amounts have been accrued for this matter in the accompanying condensed consolidated financial statements.

In September 2017, the State Court ordered the termination of the receivership over Stockholder, LLC, a wholly-owned subsidiary of the Company (“Stockholder”). Stockholder is the owner of all of the shares of stock in certain corporations that act as the general partner / limited liability company manager of several entities that own land and/or certain water interests in New Mexico.

In December 2017, the State Court entered an interim “stay” order in the Company’s case against judgment debtor David P. Maniatis and his affiliates (“Maniatis”) enjoining the Company from taking any further collection action against Maniatis, pending an accounting of all previous debt collection activities and a trial on certain limited issues involving the calculation of interest and penalties on the original defaulted debt guaranteed by Maniatis. The stay order also temporarily inhibited the Company from effecting the sale or transfer of all or any part of the property previously acquired by the Company through litigation involving Maniatis, including approximately 7,000 acres of land and related water interests in New Mexico, and 111 acres of land in Texas. Subsequent to March 31, 2019, the State Court lifted the stay on all property previously acquired by the Company through litigation involving Maniatis except for the ownership interests in, and property held by, RNMA I. The ownership interests in, and property of, RNMA I remain subject to the stay until the date that is 30 days after the resolution of the above-described RNMA I dispute. Management does not believe that loss is probable and, accordingly, no amounts have been accrued for this matter in the accompanying condensed consolidated financial statements.

Intercreditor Agreement Claim

The Company and certain of our subsidiaries are defendants in a case that is in the Arizona federal district court. The case arose from claims by a creditor of the Justin 123 receivership alleging breach of contract and other related claims stemming from a Partial Settlement and Intercreditor Agreement entered into among the major creditors, including the claimant and certain of our subsidiaries the a receiving proceeding. The suit seeks damages of $0.3 million, plus attorney fees and punitive damages. The Company believes that the claims are without merit and intends to vigorously defend its position. Management does not believe that loss is probable and the Company believes that any liability it may ultimately incur would not have a material adverse effect on its financial condition or its result of operations.

Hotel Fund Obligations

If the Hotel Fund has insufficient operating cash flow to pay the Preferred Distribution in a given month, the Company is obligated to provide the funds necessary to pay the Preferred Distribution for such month. Such payment will be treated as an additional capital contribution by the Company. During the three months ended March 31, 2019, the Company funded $0.3 million of Preferred Distributions. The Company also has agreed to fund, in the form of common capital contributions, up to 6.0% of the Hotel Fund offering’s gross proceeds as selling commissions and up to 1.0% of the gross proceeds raised in the offering as nonaccountable expense reimbursements to broker-dealers based on the capital raised by them for the Hotel Fund. During the three months ended March 31, 2019, the Company paid $0.1 million to the Hotel Fund pursuant to these obligations.

Other

We are subject to oversight by various state and federal regulatory authorities, including, but not limited to, the Arizona Corporation Commission, the Arizona Department of Financial Institutions (Banking), and the SEC. Our income tax returns have not been examined by taxing authorities and all statutorily open years remain subject to examination.

Lease Commitments

We have operating leases for corporate office space and certain equipment. Our leases have remaining lease terms of one year to four years, one of which includes an option to extend the lease for up to five years. The option to extend the lease relates to our corporate office lease and is not included in the calculation of the ROU assets and lease liabilities because the Company is not reasonably certain that it will exercise the option. Lease expense was $0.1 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively, which is included in general and administrative expenses in the accompanying condensed consolidated statement of operations. Variable lease payments are not included in the calculation of the right-of-use asset and lease liability due to uncertainty of the payment amount and were $0.1 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.

Supplemental cash flow information related to leases for the three months ended March 31, 2019 (in thousands):



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating lease	$	78

Non-cash investing and financing activities:
Right-of-use assets and lease liabilities recorded upon adoption of ASC 842
Right-of-use assets	$	925
Lease liabilities	$	1,044

Supplemental balance sheet information related to leases as of March 31, 2019 was as follows (thousands, except lease term and discount rate):



Operating leases
Operating lease right-of-use assets in other assets	$	865

Operating lease liabilities in accounts payable and other accrued expenses	$	977

Weighted average remaining lease term	3.5 years
Operating leases - Weighted average discount rate	7.1%

The following represents future payments on operating leases as of March 31, 2019 (in thousands):



Years ending	Amount
Remainder of 2019	$	236
2020	316
2021	318
2022	239
Total lease payments	1,109
Less imputed interest	(132		)
Total	$	977

Minimum Annual Rental Commitments as Presented Under previous lease accounting standard

As of December 31, 2018, future minimum lease payments required under these various lease agreements are as follows (in thousands):



Years ending	Amount
2019	$	305
2020	307
2021	308
2022	233
Total	$	1,153