REAL ESTATE HELD FOR SALE AND OTHER REAL ESTATE OWNED

As of December 31, 2019, we held total REO assets of $104.0 million, of which $25.5 million were held for sale, $45.2 million were held as operating properties, and $33.3 million were classified as other real estate owned. At December 31, 2018, we held total REO assets of $75.0 million, of which $7.4 million was held for sale, $33.9 million were held as operating properties and $33.7 million were classified as other real estate owned.

A summary of operating properties and REO assets owned as of December 31, 2019 and 2018, 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
	2019		2018		2019		2018		2019			2018			2019		2018
Real Estate Held for Sale	$	26,065	$	7,418	$	61	$	—	$	(621	)	$	—		$	25,505	$	7,418
Operating Properties	—		—		47,440		34,550		(2,241		)	(684		)	45,199		33,866
Other Real Estate Owned	33,341		33,727		—		—		—			—			33,341		33,727
Total	$	59,406	$	41,145	$	47,501	$	34,550	$	(2,862	)	$	(684	)	$	104,045	$	75,011

A summary of operating properties and REO assets owned as of December 31, 2019 and 2018, respectively, by state, is as follows (dollars in thousands):



	December 31, 2019
	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	$	45,199	1	$	137	1	$	252	3	$	45,588
Texas	—	—		1	2,760		—	—		1	2,760
Arizona	—	—		3	2,971		—	—		3	2,971
Minnesota	—	—		2	1,532		—	—		2	1,532
Missouri	—	—		1	18,105		—	—		1	18,105
New Mexico	—	—		—	—		5	33,089		5	33,089
Total	1	$	45,199	8	$	25,505	6	$	33,341	15	$	104,045



	December 31, 2018
	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	$	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

Following is a roll forward of REO activity for the years ended December 31, 2019 and 2018 (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, 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		)
General and administrative expenses	—			—	(581		)	—		—			—		(581		)
Balances at December 31, 2018	33,866			1	7,418			8		33,727			7		75,011
Additions:
Capital costs additions	33,091			—	—			1		248			—		33,339
Transfer	(19,580		)	—	19,580										—
Reductions:
Cost of properties sold	—			—	(18		)	(1	)	(634		)	(1	)	(652		)
Depreciation and amortization	(2,178		)	—	—			—		—			—		(2,178		)
Impairment of real estate owned	—			—	(1,475		)	—		—			—		(1,475		)
Balances at December 31, 2019	$	45,199		1	$	25,505		8		$	33,341		6		$	104,045

As described in Note 4, on May 29, 2019, we foreclosed on the membership interests of the limited liability company that owned and operated Broadway Tower, and as a result we acquired the membership interests and assumed the related liabilities of Broadway Tower, all of which were recorded at fair value in accordance with GAAP. The acquired assets consisted of a building, land, furniture and fixtures, operating and reserve cash, and tenant receivables totaling approximately $24.1 million. Liabilities assumed consisted of trade accounts payable and accrued liabilities, and accrued interest and principal on the first mortgage loan totaling approximately $16.3 million. In accordance with ASC 842, we recorded a right of use asset and related lease liability of $0.6 million. Subsequent to December 31, 2019, we sold Broadway Tower for $19.5 million at a loss of $1.5 million, which was recorded as an impairment as of December 31, 2019.

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, 2019, the Company sold REO from two projects (in whole or portions thereof), for $0.8 million (net of transaction costs) resulting in a total net gain on sale of $0.2 million. During the year ended December 31, 2018, the Company sold REO from two projects (or portions thereof) for $8.7 million (net of transaction costs and other non-cash adjustments), resulting in a total net gain of $3.9 million.

REO Planned Development and Operations

In the fourth quarter of 2017, we acquired MacArthur Place and undertook a major renovation of the rooms, food and beverage facilities, meeting space, entry and check-in areas, as well as and furniture and fixtures, information technology and landscaping, which was underway during 2018 and 2019 and was substantially completed by the end of 2019. Through December 31, 2019, the Company incurred renovation costs totaling over $28.0 million, of which $12.9 million and $14.1 million was incurred during the years ended December 31, 2019 and 2018, respectively.

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, 2019 and 2018, these costs and expenses were $15.9 million and $9.6 million, 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. Total cash outlays for capitalized development costs totaled $12.2 million and $16.7 million for the years ended December 31, 2019 and 2018, respectively, and consisted primarily of renovation costs for MacArthur Place and well renovation costs incurred at our New Mexico properties’.

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 $1.5 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively. The 2019 impairment charge relates to the Broadway Tower asset and is based on the terms of sale of this asset which closed in January 2020.

Reclassification of Assets from Operating Properties to REO Held for Sale

In the fourth quarter of 2019, we reclassified Broadway Tower from an operating property to REO held for sale as a result of management’s decision and actions to dispose of that property. The property was sold in January 2020 as disclosed in Note 18.