0001574197-19-000005.txt : 20190314 0001574197-19-000005.hdr.sgml : 20190314 20190314171934 ACCESSION NUMBER: 0001574197-19-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 122 CONFORMED PERIOD OF REPORT: 20181231 FILED AS OF DATE: 20190314 DATE AS OF CHANGE: 20190314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Five Point Holdings, LLC CENTRAL INDEX KEY: 0001574197 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 270599397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-38088 FILM NUMBER: 19681945 BUSINESS ADDRESS: STREET 1: 15131 ALTON PARKWAY, 4TH FLOOR CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: (949) 349-1000 MAIL ADDRESS: STREET 1: 15131 ALTON PARKWAY, 4TH FLOOR CITY: IRVINE STATE: CA ZIP: 92618 FORMER COMPANY: FORMER CONFORMED NAME: Newhall Holding Company, LLC DATE OF NAME CHANGE: 20130411 10-K 1 fph-123118x10k.htm 10-K Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38088
Five Point Holdings, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
27-0599397
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
15131 Alton Parkway, Suite 400
Irvine, California
(Address of Principal Executive Offices)
 

92618 
(Zip code)
(949) 349-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of each exchange on which registered
Class A common shares
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of common shares held by non-affiliates of the registrant as of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was approximately $646.0 million.
As of February 28, 2019, 68,746,555 Class A common shares and 79,275,234 Class B common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2018.
 



FIVE POINT HOLDINGS, LLC

TABLE OF CONTENTS

FORM 10-K

 
 
Page
PART I.
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III.
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV.
 
 
ITEM 15.
ITEM 16.
 
 
 
Signatures
Financial Statement Schedule



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to risks and uncertainties. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. This report may contain forward-looking statements regarding: our expectations of our future revenues, costs and financial performance; future demographics and market conditions in the areas where our communities are located; the outcome of pending litigation and its effect on our operations; the timing of our development activities; and the timing of future real estate purchases or sales.
We caution you that any forward-looking statements presented in this report are based on our current views and information currently available to us. Forward-looking statements are subject to risks, trends, uncertainties and factors that are beyond our control. We believe these risks and uncertainties include, but are not limited to, the following:
risks associated with the real estate industry;
downturns in economic conditions or demographic changes at the national, regional or local levels, particularly in the areas where our properties are located;
uncertainty and risks related to zoning and land use laws and regulations, including environmental planning and protection laws;
risks associated with development and construction projects;
adverse developments in the economic, political, competitive or regulatory climate of California;
loss of key personnel;
uncertainties and risks related to adverse weather conditions, natural disasters and climate change;
fluctuations in interest rates;
the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
exposure to liability relating to environmental and health and safety matters;
exposure to litigation or other claims;
insufficient amounts of insurance or exposure to events that are either uninsured or underinsured;
intense competition in the real estate market and our ability to sell properties at desirable prices;
fluctuations in real estate values;
changes in property taxes;
risks associated with our trademarks, trade names and service marks;
conflicts of interest with our directors;
general volatility of the capital and credit markets and the price of our Class A common shares; and
risks associated with public or private financing or the unavailability thereof.
Please see the “Risk Factors” under Part I, Item 1A of this report for a more detailed discussion of these and other risks.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law.

DEFINITIONS
In this report:
“acquired entities” refers, collectively, to the San Francisco Venture, the Great Park Venture and the management company, entities in which we acquired interests in the formation transactions;

“acres” refers to gross acres, which includes unsaleable land, such as land on which major roads will be constructed, public parks, water quality basins, school sites and open space;

“Castlelake” refers to Castlelake, L.P.;

“company,” “our company,” “us,” “we,” and “our” refer to Five Point Holdings, LLC, together with its consolidated subsidiaries;
 
“EB-5” refers to the Immigrant Investor Program under which employment-based visas are set aside for participants who invest in commercial enterprises associated with regional centers approved by the United States Citizenship and Immigration Services based on proposals for promoting economic growth;
 
“Five Point Gateway Campus” refers to approximately 73 acres of commercial land in the Great Park Neighborhoods, on which four buildings have been newly constructed with an aggregate of one million square feet of research and development and office space;
 
“formation transactions” refers to the transactions effected on May 2, 2016, in which, among other things, (1) we acquired an interest in, and became the managing member of, the San Francisco Venture, (2) the limited liability company agreement of the San Francisco Venture was amended and restated to provide for the possible future exchange of the remaining interests in the San Francisco Venture for interests in our operating company, (3) we acquired a 37.5% percentage interest in the Great Park Venture, and became the administrative member of the Great Park Venture, and (4) we acquired the management company. See “Part I, Item 1. Business—Structure and Formation of Our Company”;
 
“FP LP” refers to Five Point Communities, LP, a Delaware limited partnership;

“FP LP Class B partnership interests” or “Class B partnership interests in FP LP” refer to partnership interests in FP LP owned by Lennar and FPC-HF that are entitled to receive distributions equal to the amount of any incentive compensation payments under the amended and restated development management agreement that are attributable to payments on legacy interests in the Great Park Venture;
 
“FP Inc.” refers to Five Point Communities Management, Inc., a Delaware corporation, which is the general partner of, and owns a 0.5% Class A limited partnership interest in, FP LP;
 
“FPC-HF” refers to FPC-HF Venture I, LLC, a Delaware limited liability company, which is owned, directly or indirectly, by an affiliate of Castlelake, an affiliate of Lennar and certain employees of the management company;
 
“FPL” refers to our subsidiary, Five Point Land, LLC, a Delaware limited liability company, which owns Newhall Land & Farming;
 
“fully exchanged basis” assumes (1) the exchange of all outstanding Class A units of the operating company for our Class A common shares on a one-for-one basis, (2) the exchange of all outstanding Class A units of the San Francisco Venture for our Class A common shares on a one-for-one basis and (3) the conversion of all of our outstanding Class B common shares into Class A common shares;
 
“Gateway Commercial Venture” refers to Five Point Office Venture Holdings I, LLC, a Delaware limited liability company, which owns the Five Point Gateway Campus;
 
“Great Park Venture” refers to Heritage Fields LLC, a Delaware limited liability company, which is developing Great Park Neighborhoods;
 
“homes” includes single-family detached homes, single-family attached homes and apartments for rent;
 
“homesite” refers to a residential lot or a portion thereof on which a home will be built;
 
“legacy interests” refers to membership interests in the Great Park Venture, which are currently held by the entities that owned the Great Park Venture immediately prior to the formation transactions, and entitle them to receive priority distributions from the Great Park Venture in an aggregate amount equal to $565 million ($355 million of which has been paid);
 
“Lennar” refers to Lennar Corporation and its subsidiaries;
 
“Lennar-CL Venture” refers to a joint venture between Lennar and an affiliate of Castlelake, which acquired certain assets, and assumed certain liabilities, from the San Francisco Venture immediately prior to the formation transactions;
 
“management company” refers, collectively, to FP LP and FP Inc., which have historically managed the development of Great Park Neighborhoods and Newhall Ranch;
 
“Newhall Land & Farming” refers to The Newhall Land and Farming Company, a California limited partnership, which is developing Newhall Ranch;

“operating company” refers to Five Point Operating Company, LP, a Delaware limited partnership;

“our communities” refers to the communities that we are developing, including Newhall Ranch in Los Angeles County, Candlestick Point and The San Francisco Shipyard in the City of San Francisco, and Great Park Neighborhoods in Orange County, but excluding the Treasure Island community in the City of San Francisco and the Concord community in the San Francisco Bay Area, for which we are or have provided development management services, but in which we do not own any interest.
 
“percentage interests” refers to membership interests in the Great Park Venture that entitle the holders to receive all distributions from the Great Park Venture after priority distributions have been paid to the holders of the legacy interests in the Great Park Venture;
 
“San Francisco Agency” refers to the Office of Community Investment and Infrastructure, the successor to the Redevelopment Agency of the City and County of San Francisco;
 
“San Francisco Venture” refers to The Shipyard Communities, LLC, a Delaware limited liability company, which is developing Candlestick Point and The San Francisco Shipyard; and

“San Francisco Venture transactions” refers to the transactions effected on May 2, 2016, in which the San Francisco Venture agreed to transfer certain assets and liabilities to the Lennar-CL Venture. See “Part I, Item 1. Business—Our Communities—Candlestick Point and The San Francisco Shipyard.”






PART I


ITEM 1.    Business

We are an owner and developer of mixed-use, master-planned communities in California. Our three existing communities have the general plan and zoning approvals necessary for the construction of thousands of homesites and millions of square feet of commercial space, and they represent a significant portion of the real estate available for development in three major markets in California—Los Angeles County, San Francisco County and Orange County.

Structure and Formation of Our Company
 
In 2009, our company was formed as a limited liability company (under the name “Newhall Holding Company, LLC”) to acquire ownership of Newhall Land & Farming. Our management company was originally formed in 2009 as a joint venture between our Chairman and Chief Executive Officer, Emile Haddad, and Lennar Corporation to manage the properties owned by Newhall Land & Farming and to pursue similar development opportunities. Our management team was an integral part of the team in charge of developing and implementing land strategies on the west coast for Lennar prior to the formation of our management company. Key members of our management team have led the acquisition, entitlement, planning and development of all three of our communities since their inception. Our management team also has long-standing relationships with our principal equityholders, including Lennar.
 
In May 2016, we completed the formation transactions to combine the management company with ownership of our three California communities. In the formation transactions, among other things:
 
we acquired an interest in, and became the managing member of, the San Francisco Venture;
 
we acquired a 37.5% percentage interest in the Great Park Venture, and we became the administrative member of the Great Park Venture; and
 
we acquired the management company, which has historically managed the development of Great Park Neighborhoods and Newhall Ranch.

In August 2017, we acquired a 75% interest in the Gateway Commercial Venture, the entity that owns the Five Point Gateway Campus.

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The diagram below presents a simplified depiction of our current organizational structure.
org10k.jpg
(1) Through a wholly owned subsidiary, we serve as sole managing general partner of the operating company and, as of December 31, 2018, we owned approximately 61.7% of the outstanding Class A units of the operating company. We conduct all of our businesses in or through the operating company, which owns, directly or indirectly, equity interests in, and controls the management of, FPL, the San Francisco Venture and the management company. Class A units of the operating company can be exchanged, on a one-for-one basis, for our Class A common shares, subject to certain holding periods. Based on the closing price of our Class A common shares on February 28, 2019, our market capitalization on a fully exchanged basis was approximately $1.2 billion.
(2) The operating company owns all of the outstanding Class B units of the San Francisco Venture. The Class A units of the San Francisco Venture, which the operating company does not own, are intended to be substantially economically equivalent to Class A units of the operating company. As the holder of all outstanding Class B units, the operating company is entitled to receive 99% of available cash from the San Francisco Venture after the holders of Class A units have received distributions equivalent to the distributions, if any, paid on Class A units of the operating company. Class A units of the San Francisco Venture can be exchanged, on a one-for-one basis, for Class A units of the operating company.
(3) We hold our interest in FPL directly and indirectly through the operating company and the management company.
(4) Through a wholly owned subsidiary, the operating company owns a 37.5% percentage interest in the Great Park Venture. Holders of legacy interests in the Great Park Venture are entitled to receive priority distributions in an amount equal to $565.0 million, of which $355.0 million has been distributed as of December 31, 2018. We are the administrative member of the Great Park Venture. Management of the venture is vested in the four voting members, who have a total of five votes. Major decisions generally require the approval of at least 75% of the votes of the voting members. We have two votes, and the other three voting members each have one vote, so we are unable to approve any major decision without the consent or approval of at least two of the other voting members. We do not include the Great Park Venture as a consolidated subsidiary in our consolidated financial statements.
(5) Through a wholly owned subsidiary, the operating company owns a 75% interest in the Gateway Commercial Venture and serves as its manager. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by

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all of the members of the Gateway Commercial Venture. We do not include the Gateway Commercial Venture as a consolidated subsidiary in our consolidated financial statements.

Tax Classification

We have elected to be treated as a corporation for U.S. federal income tax purposes. As a result, an owner of our shares will not report our items of income, gain, loss and deduction on its U.S. federal income tax return, nor will an owner of our shares receive a Schedule K-1. Our shareholders also will not be subject to state income tax filings in the various states in which we conduct operations as a result of owning our shares. Distributions on our shares will be treated as dividends on corporate stock for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits and will be reported on Form 1099, to the extent applicable.

Our Competitive Strengths
We believe the following strengths will provide us with a competitive advantage in implementing our business strategy:
 
Attractive locations in desirable and supply constrained California coastal markets
Significant scale with favorable zoning and entitlements
Experienced and proven leadership
Expertise in partnering with governmental entities
Significant discretion in timing and amount of land development expenditures
Flexible capital structure with a conservative operating philosophy

Overview of Business Segments
Our four reportable segments are Newhall, San Francisco, Great Park and Commercial:

Our Newhall segment includes the Newhall Ranch community, as well as other land historically owned by FPL, including 16,000 acres in Ventura County and approximately 500 acres of remnant commercial, residential and open space land in Los Angeles County.
Our San Francisco segment includes the Candlestick Point and The San Francisco Shipyard communities, as well as development management services that we provide to Lennar with respect to the Concord community in the San Francisco Bay Area.
Our Great Park segment includes the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.
Our Commercial segment includes the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.
For financial results and operating performance of our reportable segments, review Note 15 of our consolidated financial statements included under Part II, Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of this report.

Our Business
 
We are primarily engaged in the business of planning and developing our three mixed-use, master-planned communities, and our principal source of revenue is the sale of residential and commercial land sites to homebuilders, commercial developers and commercial buyers. We may also retain a portion of the commercial and multi-family properties in our communities as income-producing assets.

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Our planning and development process involves the following components:
 
Master planning.    We design all aspects of our communities, creating highly desirable places to live, work, shop and enjoy an active lifestyle. Our designs include a wide range of amenities, such as high quality schools, parks and recreational areas, entertainment venues and walking and biking trails. Each community is comprised of several villages or neighborhoods, each of which offers a range of housing types, sizes and prices. In addition to the master land planning we undertake for each community, we typically create the floorplans and elevations for each home, as well as the landscape design for each neighborhood, considering each neighborhood’s individual character within the context of the overall plan for the community. For the commercial aspects of our communities, we look for commercial enterprises that will best add value to the community by providing needed services, additional amenities or local jobs. In designing the overall program at each community, we consider the appropriate balance of housing and employment opportunities, access to transportation, resource conservation and enhanced public open spaces and wildlife habitats. We continually evaluate our plans for each community, and make adjustments that we deem appropriate based on changes in local economic factors and other market dynamics.
 
Entitlements.    We typically obtain all discretionary entitlements and approvals necessary to develop the infrastructure within our communities and prepare our residential and commercial lots for construction. We also typically obtain all discretionary entitlements and approvals that the homebuilder or commercial builder will need to build homes or commercial buildings on our lots, although we may from time to time allocate responsibility for obtaining certain discretionary entitlements to a homebuilder or commercial builder. Although we have general plan and zoning approvals for our communities, individual development areas within our communities are at various stages of planning and development and have received different levels of discretionary entitlements and approvals. For additional information, see “—Our Communities” below.
 
Horizontal development (infrastructure).    We refer to the process of preparing the land for construction of homes or commercial buildings as “horizontal development.” This involves significant investments in a community’s infrastructure and common improvements, including grading and installing roads, sidewalks, gutters, utility improvements (such as storm drains, water, gas, sewer, power and communications), landscaping and shared amenities (such as community buildings, neighborhood parks, trails and open spaces) and other actions necessary to prepare residential and commercial lots for vertical development.
 
Land sales.    After horizontal development for a given phase or parcel is completed, graded lots are typically sold to homebuilders, commercial builders or commercial buyers. We typically sell homesites to a diverse group of high-quality homebuilders in a competitive process, although in some cases we may negotiate directly with a single homebuilder. In addition to the base purchase price, our residential land sales typically involve participation provisions that allow us to share in the profits realized by the homebuilders. We sell commercial lots to developers through a competitive process or negotiate directly with the buyer. We also regularly assess our development plan and may retain a portion of the commercial and multi-family properties within our communities as income-producing assets.
 
Vertical development (construction).    We refer to the process of building structures (buildings or houses) and preparing them for occupancy as “vertical development.” Single-family residences in our communities are built by third-party homebuilders. Commercial buildings in our communities are usually built by a third-party developer or the buyer. For commercial or multi-family properties that we retain, we may construct the building ourselves or enter into a joint venture with an established developer to construct a particular property (such as a retail development).
 
Community programming.    Our community building efforts go beyond development and construction. We offer numerous community events, including music, food and art festivals, outdoor movies, educational programs, health and wellness programs, gardening lessons, cooking lessons, food truck events, bike tours and various holiday festivities. We plan and program all of our events with a goal of building a community that transcends the physical features of our development and connects neighbors through their interests. We believe community building efforts create loyal residents that can become repeat customers within our multi-generational communities.

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Sequencing.    In order to balance the timing of our revenues and expenditures, we typically sequence the development of individual neighborhoods or villages within our communities. As a result, many of the master planning, entitlement, development, sales and other activities described above may occur at the same time in different locations within a single community. Further, depending on the specific plans for each community and market conditions, we may vary the timing of certain of these phases. Throughout this process, we continually analyze each community relative to its market to determine which portions to sell, which portions to build and then sell, and which portions to retain as part of our portfolio of commercial and multi-family properties.

Our Communities
 
Newhall Ranch
 
Newhall Ranch is a mixed-use, master-planned community in Los Angeles County that spans approximately 15,000 acres and is designed to include approximately 21,500 homesites, approximately 11.5 million square feet of commercial space, approximately 50 miles of trails, approximately 275 acres of community parks and approximately 10,000 acres of protected open space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning. The land at Newhall Ranch is not subject to any material liens or encumbrances.
Newhall Ranch is located in an unincorporated portion of Los Angeles County along the Santa Clara River in the western portion of the Santa Clarita Valley. The property is located approximately 35 miles northwest of downtown Los Angeles, 15 miles north of the San Fernando Valley and is adjacent to the City of Santa Clarita. Newhall Ranch is adjacent to Interstate 5 and State Highway 126. Newhall Ranch is also approximately 45 miles north of the Los Angeles International Airport (LAX) and 21 miles northwest of the Bob Hope Airport (BUR) in Burbank.
The County of Los Angeles has approved the general plan and zoning for Newhall Ranch. Additionally, we have vesting tentative tract maps for two development areas within Newhall Ranch - Mission Village and Landmark Village. We commenced horizontal development activities for our first development area, Mission Village, in October 2017. We continued horizontal development activities throughout 2018 and expect to start delivering homesites to builders in late 2019. Mission Village is approved to include 4,055 homesites, including a mix of single-family detached homes, single-family attached homes, apartments and for rent affordable units, and approximately 1.6 million square feet of commercial development.
Candlestick Point and The San Francisco Shipyard
  
Candlestick Point and The San Francisco Shipyard, located on approximately 800 acres of bayfront property in the City of San Francisco, is designed to include approximately 12,000 homesites, approximately 6.3 million square feet of commercial space, approximately 100,000 square feet of community space, artist studios and approximately 355 acres of parks and open space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning. The land owned by us at Candlestick Point and The San Francisco Shipyard is not subject to any material liens or encumbrances.
 
Candlestick Point and The San Francisco Shipyard is located almost equidistant between downtown San Francisco and the San Francisco International Airport (SFO). It consists of two distinct, but contiguous, parcels of real estate. Candlestick Point, the southern parcel, consists of approximately 280 acres on San Francisco’s waterfront. This nationally recognized site was the location of Candlestick Park stadium, former home of the San Francisco 49ers and the San Francisco Giants. The San Francisco Shipyard, the northern parcel, consists of approximately 495 acres on the former site of the Hunters Point Navy Shipyard.

The City and County of San Francisco have approved the general plan and zoning for Candlestick Point and The San Francisco Shipyard. We have vesting tentative tract maps for the remaining development areas within Candlestick Point, and we commenced horizontal development activities there in 2015. We do not yet have vesting tentative tract maps for The San Francisco Shipyard or final maps for any of the remaining development areas.

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At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. (“Tetra Tech”), a contractor hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans. Accordingly, our immediate development focus is on our Candlestick Point community that is not subject to land transfers from the U.S. Navy. For additional information about the finding of suitability to transfer process, see “—Regulation—FOST Process.”

The San Francisco Venture previously entered into a project with a joint venture (the “Mall Venture”) between an affiliate of The Macerich Company (“Macerich”) and a venture between Lennar and Castlelake to construct an urban retail outlet shopping district at Candlestick Point (the “Retail Project”). Construction of the Retail Project commenced in 2015 with the demolition of the Candlestick Park stadium and other infrastructure work. In early 2019, however, we and the members of the Mall Venture decided not to proceed with the Retail Project. Accordingly, on February 13, 2019, transactions related to the termination of the Retail Project were consummated, which resulted in the termination of the obligation of the San Francisco Venture to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. The San Francisco Venture was also released from certain development obligations. In return, the San Francisco Venture repaid Macerich a $65.1 million obligation related to a promissory note in the same principal amount, plus approximately $5.5 million of accrued interest associated with the promissory note. The San Francisco Venture also issued an aggregate of 436,498 of its Class A units (while we concurrently issued 436,498 Class B common shares) to affiliates of Lennar and Castlelake. The San Francisco Venture can now redevelop these parcels for alternative uses.

Great Park Neighborhoods
 
Great Park Neighborhoods, located in Irvine, California, is an approximately 2,100 acre mixed-use, master-planned community that is being developed on the former site of the U.S. Marine Corp’s El Toro Air base (“El Toro Base”) in Orange County. Great Park Neighborhoods is designed to include approximately 9,500 homesites (including up to 1,056 affordable homesites), approximately 4.9 million square feet of commercial space, approximately 61 acres of parks and approximately 138 acres of trails and open space. The actual commercial square footage and number of homesites are subject to change based on ultimate use and land planning. The land at Great Park Neighborhoods is not subject to any material liens or encumbrances.

Great Park Neighborhoods is approximately seven miles from the Pacific Ocean, approximately nine miles from the University of California, Irvine (UCI) and approximately 17 miles from Disneyland. It is adjacent to the Orange County Great Park, a metropolitan public park that will be nearly twice the size of New York’s Central Park upon completion. Great Park Neighborhoods is close to Interstate 5, Interstate 405, State Route 133 and John Wayne Airport (SNA) in Orange County.
 
The City of Irvine has approved the general plan and zoning for Great Park Neighborhoods. We have vesting tentative tract maps for almost all development areas within Great Park Neighborhoods and final maps for many of the development areas. The first homesites were sold in April 2013 and, as of December 31, 2018, the Great Park Venture had sold 5,409 homesites (including 544 affordable homesites) and commercial land allowing for

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development of up to 2 million square feet of commercial (research and development) space. For additional information about the commercial land sale, see “—Commercial” below.

Commercial

In August 2017, the Gateway Commercial Venture, in which we own a 75% interest, acquired the Five Point Gateway Campus, consisting of approximately 73 acres of commercial land in the Great Park Neighborhoods containing four newly constructed buildings, two of which were leased back to the seller, Broadcom Limited (together with its subsidiaries, “Broadcom”). The Five Point Gateway Campus includes approximately one million square feet consisting of research and development and office space across the four buildings designed to accommodate thousands of employees. Broadcom is the largest tenant, leasing approximately 660,000 square feet of research and development space pursuant to a 20-year triple net lease. We and Lennar have entered into separate 130-month full service gross leases to occupy approximately 135,000 aggregate square feet.

We currently expect to develop and operate certain commercial properties within our existing master-planned communities. We may develop and operate these properties on our own, or we may choose from time to time to develop and/or operate a particular property or properties in a strategic joint venture or other financing or entity structure with a third-party

Factors we consider in determining whether or not to proceed with a particular commercial investment include (1) our existing knowledge of the master-planned communities we are currently developing and understanding their respective needs, (2) whether, in our judgment, a particular commercial property or investment will create additional value for our remaining land within the community, in addition to achieving desired investment returns on such property or investment on a stand-alone basis, (3) existing entitlements and our ability to change them, (4) compatibility of the physical site with our proposed uses, and (5) environmental considerations, traffic patterns and access to the site.

Other Properties
 
We own approximately 16,000 acres in Ventura County that are primarily used for agriculture and energy operations. We also own approximately 500 acres of remnant commercial, residential and open space land in Los Angeles County that is planned to be sold or deeded to third parties over the next five years.

Development Management Services
 
Through the management company, we receive fees for providing development management services for Great Park Neighborhoods and for providing property management services to the Gateway Commercial Venture.
Additionally, we provide certain (but not all) development management services to other ventures in which Lennar is an investor and to the Lennar-CL Venture in connection with their involvement in real estate activities at The San Francisco Shipyard. We also provided certain development management services to the Lennar-CL Venture related to the Retail Project at the Candlestick Point community until early 2019.

Competition
 
We compete with other residential, retail and commercial property developers in the development of properties in the Northern and Southern California markets. Significant factors that we believe allow us to compete effectively in this business include:
 
the size and scope of our mixed-use, master-planned communities;
 
the recreational and cultural amenities available within our communities;
 
the commercial centers in our communities;

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our relationships with homebuilders; and
 
the proximity of our communities to major metropolitan areas.

Seasonality
Our business and results of operations are not materially impacted by seasonality.

Regulation
 
Entitlement Process
 
Land use and zoning authority is exercised by local municipalities through the adoption of ordinances, regulations or zoning codes to direct the use and development of private property by controlling the use, size, density and location of and access to developments on private land. Such ordinances, regulations or codes typically divide uses of land into two categories—permitted uses and discretionary uses. Permitted uses are presumptively permitted, while discretionary uses are subject to a discretionary approval process, usually involving an application, an environmental review and a public hearing with input from other locally affected property owners and stake holders. In order to grant a discretionary use entitlement, the municipality must find that the use does not negatively impact surrounding properties and may condition such an entitlement with special requirements or limitations unique to each individual case. We typically obtain all discretionary entitlements and approvals necessary to develop the infrastructure within our communities and prepare our residential and commercial lots for construction. We also typically obtain all discretionary entitlements and approvals that the homebuilder or commercial builder will need to build homes or commercial buildings on our lots, although we may from time to time allocate responsibility for obtaining certain discretionary entitlements to a homebuilder or commercial builder.

We have incurred significant costs and expenses over the last 10 to 15 years in order to obtain the primary entitlements (general plan and zoning approvals) for our communities. Once these primary entitlements are obtained, we continue to refine the master plan for each community by planning specific development areas and obtaining the necessary governmental approvals for a development area. Among other things, we typically need to obtain the following approvals for each development area: (1) approval of the subdivision maps (such as vesting tentative tract maps and parcel maps) that allow the land to be divided into separate legal lots for residential, commercial and other improvements; (2) approval of the improvement plans that set forth certain design, engineering and other elements of infrastructure, parks, homes, commercial buildings and other improvements; (3) approval of the final map that allows for the conveyance of individual homesites and commercial lots; and (4) any other discretionary approvals needed to construct, finance, sell, lease or maintain the homes or commercial buildings within a development area.
 
We may also need to obtain state and federal permits for land development activities in certain development areas, including, for example, permits and approvals issued by state and federal resource agencies authorizing impacts to species covered by endangered species acts or impacts to state and federal waters or wetlands.
 
Development areas within our communities are at various stages of planning and development and, therefore, have received different levels of discretionary entitlements and approvals. In some cases, development areas have obtained entitlements and approvals allowing homes and commercial buildings to be built and sold, and in other cases development areas require further discretionary entitlements or approvals prior to the commencement of construction. In still other cases, our approvals have been challenged by third parties. For additional information on current legal challenges, see “Item 3. Legal Proceedings.”
 
Environmental Matters
 
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge

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of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating from such property, including costs to investigate and clean up such contamination and liability for damage to natural resources. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines or other costs could exceed the value of the property or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation or personal or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Such remaining contamination encountered during our construction and development activities also may require investigation or remediation, and we could incur costs or experience construction delays as a result of such discoveries.
 
Some of our properties were used in the past for commercial or industrial purposes, or are currently used for commercial purposes, that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. As a result, some of our properties have been or may be impacted by contamination arising from the releases of such substances. For example, oil and gas wells have formerly operated or are currently operating at Newhall Ranch. In certain cases, prior owners or operators have in the past investigated or remediated, or are currently investigating or remediating, such conditions, but contamination may continue to be present at these sites, and future remedial activities could delay or otherwise impede property development on sites where contamination is present.

In addition, The San Francisco Shipyard and Great Park Neighborhoods properties were formerly operated by the U.S. Navy as defense plants. As a result of these historic operations, portions of these properties have been or currently are listed on the U.S. Environmental Protection Agency’s (“USEPA”) National Priorities List as sites requiring cleanup under federal environmental laws. While investigation and cleanup activities have been substantially completed for Great Park Neighborhoods, significant work is contemplated over the next few years for certain parcels within The San Francisco Shipyard, which will delay the transfer of such parcels to us for development.
 
The National Environmental Policy Act (“NEPA”) requires federal agencies to integrate environmental values into their decision making processes by considering the environmental impacts of their proposed actions and reasonable alternatives to those actions. To meet NEPA requirements federal agencies prepare a detailed statement known as an Environmental Impact Statement (“EIS”). Additionally, all Department of Defense installations (such as The San Francisco Shipyard and the El Toro Base) selected for closure or realignment pursuant to the Base Closure and Realignment Acts of 1988 or 1990 and being considered for transfer by deed, and where a release or disposal of hazardous substances or petroleum products has occurred, are subject to an environmental review process and may not be transferred until a finding of suitability for transfer (“FOST”) is documented. In addition, our development projects are subject to the California Environmental Quality Act (“CEQA”), which is similar in scope to NEPA, and requires potential environmental impacts of projects subject to discretionary governmental approval to be studied by the California governmental entity approving the proposed projects. Projects with significant expected impacts require an Environmental Impact Report (“EIR”) while more limited projects may be approved based on a Mitigated Negative Declaration. All of our development sites and projects have either been or continue to be investigated, remediated or reviewed (with documented EISs, FOSTs and EIRs, as applicable) in accordance with the above-described and other applicable environmental laws to determine the suitability of their proposed uses and to protect human health and the environment.
 
New or additional permitting requirements, new interpretations of requirements, changes in our operations or litigation or community objections over the adequacy of conducted reviews and other response and mitigation actions could also trigger the need for either amended or new reviews or actions, which could result in increased costs or delays of, modification of, or denial of rights to conduct, our development programs. For additional information on legal challenges to our projects under environmental laws see “Item 3. Legal Proceedings.”

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When we identify conditions that require a response under environmental laws, we endeavor to address identified contamination or mitigate risks associated with such contamination as required (or ensure that such actions are taken by other parties, such as prior owners and operators); however, we cannot assure you that we will not need to take additional action, incur additional costs, or delay or modify our development plans to address these conditions or other environmental conditions that may be discovered in the future. As a result of the foregoing, we could potentially incur material liabilities.
 
We are also subject to a variety of other local, state, federal and other laws and regulations concerning the environment, including those governing air emissions, wastewater discharges and use and disposal of hazardous or toxic substances. The particular environmental laws that apply to any given property vary according to multiple factors, including the property’s location, its environmental conditions and the present and former uses of the property, as well as adjoining properties. These issues may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development activity in environmentally sensitive regions or areas. For example, in those cases where wetlands or an endangered or threatened species are impacted by proposed development, environmental rules and regulations can result in the restriction or elimination of development in such identified environmentally sensitive areas.
 
Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials (“ACM”), and may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability (such as liability for personal injury associated with exposure to asbestos). Such laws require that owners or operators of buildings containing ACM (and employers in such buildings) properly manage and maintain the asbestos, adequately notify or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. In addition, soils at Candlestick Point and The San Francisco Shipyard are known to contain naturally occurring asbestos, which must be managed, including through dust management plans. In the past, we have been subject to penalties for failure to monitor asbestos dust during development activities at The San Francisco Shipyard, and, although we endeavor to maintain (and to cause our contractors to maintain) compliance, we could incur such fines or penalties in the future.
 
FOST Process
 
The U.S. Navy is implementing its cleanup program at The San Francisco Shipyard pursuant to various federal laws and authorities. The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) requires the U.S. Navy to remediate The San Francisco Shipyard in accordance with a federal facilities agreement entered into with the USEPA and the State of California, which sets forth procedures and timeframes for remedial decisions and deliverables. In accordance with the federal facilities agreement, the National Contingency Plan, 40 C.F.R. Part 300 and Department of Defense procedures, the U.S. Navy’s cleanup process involves (1) preparation of a series of reports documenting various investigative and remedial activities and (2) securing approval of those reports from the USEPA and the State of California. The remedial steps and related reports, each of which is subject to review, comment and approval, are as follows:
 
Preliminary assessment/site inspection.    This is an initial review of the site, including review of historical records and visual inspections. Limited sampling and analysis of soil, surface water and groundwater may also occur.
 
Remedial investigation.    The remedial investigation involves a closer look into each of the areas of concern identified in the preliminary assessment/site inspection, and involves collecting and analyzing samples of multiple media (soil, soil gas, sediment, groundwater, etc.). The remedial investigation addresses the nature and extent of contamination at each area of concern identified in the parcel. The remedial investigation also includes preparation of a Human Health Risk Assessment and an Ecological Risk Assessment, as appropriate. The Human Health Risk Assessment identifies the contaminants that could pose a health risk under different exposure scenarios and identifies potential numeric remediation goals.

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Feasibility study.    The feasibility study evaluates the effectiveness, implementability and cost of various alternative remedial technologies that could be used to reduce site risk to acceptable levels, based on the results of the risk assessment and other data collected during the remedial investigation.
 
Proposed plan.    The proposed plan summarizes the findings of the remedial investigation and proposes a preferred remedial approach for each area of concern in the parcel based on the options evaluated in the feasibility study. This step includes a public meeting to provide the public with relevant information and an opportunity to comment on the preferred cleanup alternative.
 
Record of decision.    Once the U.S. Navy, the USEPA and the State of California select and approve the remedy for the parcel, the U.S. Navy documents and publishes the decision in the record of decision, which responds to all comments on the proposed plan.
 
Remedial design.    The remedial design sets forth details of how the remedies identified in the record of decision will be carried out. The remedial design includes a detailed engineering design for implementing, operating and maintaining the selected cleanup alternative. The U.S. Navy also distributes a fact sheet to the public before beginning work on the cleanup.
 
Remedial action work plan/remedial action implementation.    The U.S. Navy conducts remedial action in accordance with an approved remedial action work plan, which is based on the remedial design.
 
Remedial action completion report.    Once complete, the cleanup is documented in a remedial action completion report.
 
FOST.    Prior to conveyance of real property, CERCLA requires the U.S. Navy to remediate hazardous substances to a level consistent with the protection of human health and the environment. Following the completion and approval of the remedial action completion report, the U.S. Navy documents its findings that such remediation has occurred, and that the property is suitable for transfer, consistent with all applicable laws and authorities, in a FOST.
 
Investment Policies

Investments in Real Estate or Interests in Real Estate

We are a real estate development and operating company that specializes in the development and operation of mixed-use, master-planned communities. Our goal is to create sustainable, long-term growth and value for our shareholders. We do not currently have an investment policy; however, our board of directors may adopt one in the future.

We expect to pursue our investment objectives primarily through the ownership, development, operation and disposition of our communities: (1) Newhall Ranch; (2) Candlestick Point and The San Francisco Shipyard; and (3) Great Park Neighborhoods. Although we currently have no definitive agreements to acquire other properties, we may do so in the future. Our future investment or development activities will not necessarily be limited to any geographic area, product type or to a specified percentage of our assets.

We may also participate with third parties in property ownership, development and operation, through joint ventures, private equity real estate funds or other types of co-ownership. We also may acquire real estate or interests in real estate in exchange for the issuance of our Class A common shares, our preferred shares, options to purchase shares or Class A units of the operating company. These types of investments may permit us to own interests in larger assets without unduly restricting our diversification and, therefore, provide us with flexibility in structuring our portfolio.


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We will limit our investment in any securities so that we do not fall within the definition of an “investment company” under the Investment Company Act of 1940, as amended.

Investments in Real Estate Mortgages

We may, at the discretion of our board of directors, invest in mortgages and other types of real estate interests, but we do not currently, nor do we currently intend to, engage in these activities. If we choose to invest in mortgages, we would expect to invest in mortgages secured by real property interests. The Company does not have a policy that restricts the proportion of our assets that may be invested in a type of mortgage or any single mortgage or type of mortgage loan.

Securities of, or Interests in, Persons Primarily Engaged in Real Estate Activities and Other Issuers

We do not currently intend to invest in securities of other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. However, we may do so in the future.

Investments in Other Securities

Other than as described above and for short-term securities pending long-term commitment, we do not currently intend to invest in any additional securities such as bonds, preferred shares or common shares.

Employees

At December 31, 2018, we had approximately 180 employees.

Available Information

Our website is www.fivepoint.com.  We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after being filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this annual report on Form 10-K. In addition, you may obtain the documents that we file with the SEC from the SEC’s website at www.sec.gov.

    
ITEM 1A.     Risk Factors
You should carefully consider the following material risks, as well as the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes. If any of the following risks actually occur, our business, financial condition, results of operations or prospects could be materially and adversely affected. In such an event, the trading price of our Class A common shares could decline and you could lose part or all of your investment.
Risks Related to Real Estate
Our performance is subject to risks associated with the real estate industry.
Our economic performance is subject to various risks and fluctuations in value and demand, many of which are beyond our control. Certain factors that affect real estate generally and our properties specifically may adversely affect our revenue from land sales or leasing of retail or other commercial space. The following factors, among others, may adversely affect the real estate industry, including our properties, and could therefore adversely impact our financial condition and results of operations:

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downturns in economic conditions or demographic changes at the national, regional or local levels, particularly in the areas where our properties are located;
significant job losses and unemployment levels, which may decrease demand for our properties;
competition from other residential communities, retail properties, office properties or other commercial space;
inflation or increases in interest rates;
limitations on the availability, or increases in the cost, of financing for homebuilders, commercial builders or commercial buyers or mortgage financing for homebuyers;
limitations, reductions or eliminations of tax benefits for homeowners;
reductions in the level of demand for homes or retail or other commercial space in the areas where our properties are located;
fluctuations in energy costs;
decreases in the underlying value of properties in the areas where our properties are located;
increases in the supply of homes or retail or other commercial space in the areas where our properties are located;
declines in consumer confidence and spending; and
public perception that any of the above events may occur.
There are significant risks associated with our development and construction projects that may prevent completion on budget and on schedule.
At our projects, we are engaged in extensive construction activity to develop each community’s infrastructure, including grading and installing roads, sidewalks, gutters, utility improvements (such as storm drains, water, gas, sewer, power and communications), landscaping and shared amenities (such as community buildings, neighborhood parks, trails and open spaces) and other actions necessary to prepare each residential and commercial lot for construction. In addition, although we primarily rely on homebuilders to purchase homesites at our communities and construct homes, we may in the future construct a portion of the homes ourselves. For commercial or multi-family properties that we retain or acquire in the future, we may also construct the buildings ourselves. Our development and construction activities entail risks that could adversely impact our financial condition and results of operations, including:
construction costs, which may exceed our original estimates due to increases in materials, labor or other costs, which could make the project less profitable;
permitting or construction delays, which may result in increased debt service expense and increased project costs, as well as deferred revenue;
unavailability of raw materials when needed, which may result in project delays, stoppages or interruptions, which could make the project less profitable;
federal, state and local grants to complete certain highways, interchange, bridge projects or other public improvements may not be available, which could increase costs and make the project less profitable;
claims for warranty, product liability and construction defects after a property has been built;
claims for injuries that occur in the course of construction activities;
poor performance or nonperformance by, or disputes with, any of our contractors, subcontractors or other third parties on whom we rely;
health and safety incidents and site accidents;

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unforeseen engineering, environmental or geological problems, which may result in delays or increased costs;
labor stoppages, slowdowns or interruptions;
compliance with environmental planning and protection regulations and related legal proceedings;
liabilities, expenses or project delays, stoppages or interruptions as a result of challenges by third parties in legal proceedings;
delay or inability to acquire property, rights of way or easements, which may result in delays or increased costs; and
weather-related and geological interference, including landslides, earthquakes, floods, drought, wildfires and other events, which may result in delays or increased costs.
At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Allegations that Tetra Tech, a contractor hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels.
At Newhall Ranch, we are party to royalty-based lease agreements with oil and gas operators. Pursuant to the terms of these leases, the oil and gas operators are required to remediate certain environmental impacts caused by their operations following expiration of such leases. In the event that they take longer than expected to complete such remediation or default in their obligation, such that we are required to complete such remediation, we may be forced to delay development of Newhall Ranch until such remediation is complete or incur additional costs that are currently obligations of the oil and gas operators.
We cannot assure you that projects will be completed on schedule or that construction costs will not exceed budgeted amounts. Failure to complete development or construction activities on budget or on schedule may adversely affect our financial condition and results of operations.
Zoning and land use laws and regulations may increase our expenses, limit the number of homes or commercial square footage that can be built or delay completion of our projects and adversely affect our financial condition and results of operations.
Although there are agreements with the City of Irvine for Great Park Neighborhoods and the City and County of San Francisco for Candlestick Point and The San Francisco Shipyard that protect existing entitlements, our communities are subject to numerous local, state, and federal laws and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters that impose restrictive zoning and density requirements in order to limit the number of homes or commercial square feet that can eventually be built within the boundaries of a particular area, as well as governmental taxes, fees and levies on the acquisition and development of land parcels. These regulations often provide broad discretion to the administering governmental authorities as to the conditions for our projects being approved, if approved at all. Further, if the terms and conditions of the development agreements with the Cities of Irvine and San Francisco are not complied with, existing entitlements under those agreements could be lost, including (in the case of San Francisco) the right to acquire certain portions of the land on which development activity is expected. New housing and commercial developments are often subject to determinations by the administering governmental authorities as to the adequacy of water and sewage facilities, roads and other local services, and may also be subject to various assessments for schools, parks, streets, affordable housing and other public improvements. As a result, the development of properties may be subject to periodic delays in certain areas due to the conditions imposed by the administering governmental authorities. Due to building moratoriums, zoning changes or “slow-growth” or “no-growth” initiatives that could be implemented in the future in the areas in which our properties are located, our communities may also be subject to

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periodic delays, or we could be precluded entirely from developing in certain communities or otherwise restricted in our business activities. Such moratoriums or zoning changes can occur prior or subsequent to commencement of our development operations, without notice or recourse. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdictions. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development. As a result, revenue from land sales or leasing of retail or other commercial space may be adversely affected, or costs may increase, which could negatively affect our financial condition and results of operations.
In addition, laws and regulations governing the approval processes provide third parties the opportunity to challenge proposed plans and approvals. Certain of our plans and approvals have been challenged by third parties, such as environmental groups, and are currently the subject of ongoing legal proceedings. These and any future third-party challenges to our planned developments provide additional uncertainties in real estate development planning and entitlements. Third-party challenges in the form of litigation could result in the denial of our right to develop in accordance with our current development plans or could adversely affect the length of time or the cost required to obtain the necessary governmental approvals to develop. In addition, adverse decisions arising from any litigation could increase the cost and length of time to obtain ultimate approval of a project and could adversely affect the design, scope, plans and profitability of a project, which could negatively affect our financial condition and results of operations.
We incur significant costs, and may be subject to delays, in obtaining entitlements, permits and approvals before we can begin development or construction of our projects and begin to recover our costs.
Before any of our projects can generate revenues, we make material expenditures to obtain entitlements, permits and development approvals. It generally takes several years to complete this process and completion times vary based on complexity of the project and the community and regulatory issues involved. We could also be subject to delays in construction, which could lead to higher costs and adversely affect our results of operations. Changing market conditions during the entitlement and construction periods could negatively impact our revenue from land sales or leasing of retail or other commercial space. Historically, certain of our entitlements, permits and development approvals have been challenged by third parties, such as environmental groups. Future entitlements, permits and development approvals that we will need to obtain for development areas within our communities may be similarly challenged.
As a result of the time and complexity involved in construction and obtaining approvals for our projects, we face the risk that demand for residential and commercial properties may decline and we may be forced to sell or lease properties at prices or rates that generate lower profit margins than we anticipated, or would result in losses. If values decline, we may be required to make material write-downs of the book value of our real estate assets or real estate investments.
We will have to make significant investments at our properties before we realize significant revenues.
We currently plan to spend material amounts on horizontal development at our communities. Those expenditures primarily reflect the costs of developing the infrastructure at our properties, including grading and installing roads, sidewalks, gutters, utility improvements (such as storm drains, water, gas, sewer, power and communications), landscaping and shared amenities (such as community buildings, neighborhood parks, trails and open spaces) and other actions necessary to prepare each residential and commercial lot for construction. We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. However, we may experience cost increases, our plans may change, new regulations and regulatory plan modifications or court rulings may affect our ability to develop or the cost to develop the project or circumstances may arise that result in our needing additional capital to execute our development plan. If we are not successful in obtaining additional financing to enable us to complete our projects, we may experience further delays or increased costs, and our financial condition and results of our operations may be adversely affected.

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Our projects are subject to environmental planning and protection laws and regulations that require us to obtain permits and approvals that may be delayed, withheld or challenged by third parties in legal proceedings.
Our projects are subject to various environmental and health and safety laws and regulations. These laws and regulations require us to obtain and maintain permits and approvals, undergo environmental review processes and implement environmental and health and safety programs and procedures to mitigate the physical impact our communities will have on the environment (such as traffic impacts, health and safety impacts, impacts on public services and impacts on endangered, threatened or other protected plants and species) and to control risks associated with the siting, development, construction and operation of our projects, all of which involve a significant investment of time and expense. The particular environmental requirements that apply to a project vary depending on, among other things, location, environmental conditions, current and former uses of a property, the presence or absence of certain wildlife or habitats, and nearby conditions. We expect that increasingly stringent environmental requirements will be imposed on developers in the future.
These future environmental requirements could affect the timing or cost of our development. In addition, future environmental requirements could reduce the number of homesites or amount of commercial square feet we are able to develop, increase our financial commitments to local or state agencies or organizations or otherwise reduce the profitability of the project. Failure to comply with these laws, regulations and permit requirements may result in delays, administrative, civil and criminal penalties, denial or revocation of permits or other authorizations, other liabilities and costs, the issuance of injunctions to limit or cease operations and the imposition of additional requirements for future compliance as a result of past failures.
Certain of our environmental permits and approvals have been challenged in the past by third parties, such as environmental groups. Future environmental permits and approvals that we will need to obtain for development areas within our communities may be similarly challenged.
We could incur significant costs related to regulation of and litigation over the presence of asbestos-containing materials at our properties.
Environmental laws govern the control, presence, maintenance and removal of ACM. Such laws may impose fines and penalties, and, on occasion, we have had such penalties imposed against us, for failure to comply with these requirements. Such laws require that owners or operators of buildings or properties containing ACM properly manage and maintain it, adequately notify or train those who may come into contact with it, and undertake special precautions including asbestos dust monitoring, removal or other abatement if asbestos would be disturbed during construction, renovation or demolition activities. Certain buildings on our properties that are being and will be demolished (or have already been demolished) in connection with our development plans, and the soil at certain of our properties, contain ACM which must be handled in accordance with these laws. Such laws may increase our development costs, and subject us to fines and penalties and other liabilities and costs in the event compliance is not maintained. We have also been exposed to legal proceedings initiated by third parties and may in the future be exposed to third party liability (such as liability for personal injury associated with exposure to asbestos).
As an owner and operator of real property, we could incur liability for environmental contamination issues.
We have incurred costs and expended funds, and may do so again in the future, to comply with environmental requirements, such as those relating to discharges or threatened discharges to air, water and land, the handling and disposal of solid and hazardous waste and the cleanup of properties affected by hazardous substances. Under these and other environmental requirements, as a property owner or operator, we may be required to investigate and clean up hazardous or toxic substances or chemical releases at our communities or properties currently or formerly owned or operated by us, including as a result of the current and former oil and gas leasing operations at Newhall Ranch or as a result of prior activities conducted at the El Toro Base or The San Francisco Shipyard. Some of our properties have been or may be impacted by contamination arising from these or other prior uses of these properties, or adjacent properties. In this regard, certain portions of the El Toro Base and The San Francisco Shipyard have been or currently are listed on the USEPA’s National Priorities List as sites requiring cleanup under federal environmental law. Although the U.S. Navy has been primarily responsible for investigation and cleanup activities at these properties and will continue to have liability for future contamination that is

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discovered, we also may incur costs for investigation or cleanup of contamination that is discovered or disturbed during the course of our future development activities or otherwise. Similarly, in the event that oil and gas operators at Newhall Ranch do not fully remediate contamination resulting from such operations, we may incur such costs. As an owner and operator of real property, we could be held responsible to a governmental entity or third parties for property damage, personal injury and investigation and cleanup costs incurred by them in connection with any contamination at or from such real property. We may also be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances or waste at such facilities, without regard to whether we comply with environmental laws in doing so.
Environmental laws and requirements typically impose cleanup responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. The liability under the laws related to such requirements has been interpreted to be joint and several, meaning a governmental entity or third party may seek recovery of the entire amount from us even if there are other responsible parties, unless the harm is divisible and there is a reasonable basis for allocation of the responsibility. The costs of investigation, remediation or removal of those substances, or fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, may be substantial, and the presence of those substances, or the failure to remediate a property properly, may impair our ability to sell, lease or otherwise use our property. While we currently have and may maintain insurance policies from time to time to mitigate some or all of these risks, insurance coverage for such claims may be limited or nonexistent. In addition, to the extent that we have indemnification rights against third parties relating to any such environmental liability or remediation costs (such as, for example, the U.S. Navy under certain federal laws as a former owner and operator of the El Toro Base and The San Francisco Shipyard, and former oil and gas lessees under certain settlement agreements relating to portions of Newhall Ranch), the indemnification may not fully cover such costs or we may not be able to collect the full amount of the indemnification from the third party. While investigation and cleanup activities have been substantially completed for the Great Park Neighborhoods, significant work is contemplated over the next few years for certain of The San Francisco Shipyard parcels, which will delay transfer of such parcels to us for development.
Although most of our properties have been subjected to environmental assessments by independent environmental consultants or in the case of Great Park Neighborhoods and The San Francisco Shipyard, extensive environmental assessments by the U.S. government, these environmental assessments may not include or identify all potential environmental liabilities or risks associated with the properties. We cannot assure you that these or other environmental assessments identified all potential environmental liabilities, or that we will not incur material environmental liabilities in the future. We cannot predict with any certainty the magnitude of our future expenditures relating to environmental compliance or the long-range effect, if any, of environmental laws on our operations. Compliance with such laws could have a material adverse effect on our results of operations and competitive position in the future.
Our communities are all located in California, which makes us susceptible to risks in that state.
Our communities, as well as the Concord community for which we provide development management services, are all located in California. We have no current plans to acquire any additional properties or operations outside of California and we expect, at least for a number of years, to be dependent upon our existing projects for all of our cash flow. As a result, we are susceptible to greater risks than if we owned a larger or more geographically diverse portfolio. California also continues to suffer from severe budgetary constraints, which may result in the layoff or furlough of government employees, and is regarded as more litigious and more highly regulated and taxed than many other states. Any adverse change in the economic, political, competitive or regulatory climate in California, or the counties and cities where our properties are located, could adversely affect our real estate development activities and have a negative impact on our financial condition and results of operations.
In addition, historically, California has been subject to natural disasters, including earthquakes, droughts, floods, wildfires and severe weather, and coastal locations may be particularly susceptible to climate stress events or adverse localized effects of climate change, such as sea-level rise and increased storm frequency or intensity. We therefore have greater exposure to the risks of natural disasters, which can lead to power shortages, shortages of labor and materials and delays in development. The occurrence of natural disasters may also negatively impact the

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demand for new homes in affected areas. If our insurance does not fully cover losses resulting from these events, our financial condition and results of operations could be adversely affected.
Drought conditions in California may, from time to time, cause us to incur additional costs and delay or prevent construction within our communities, which could have a material adverse impact on our financial condition and results of operations.
In recent years, California has faced persistent drought conditions. In 2014, the Governor of California proclaimed a Drought State of Emergency warning that drought conditions may place drinking water supplies at risk in many California communities. In May 2016, the prior Governor of California issued an executive order that, among other things, directs the State Water Resources Control Board (the “SWRCB”) and the Department of Water Resources (the “DWR”) to require urban water suppliers to report monthly information regarding water use, conservation and enforcement on a permanent basis. In response to this executive order, the DWR and the SWRCB were required to engage in a public process and work with urban water suppliers, local governments and environmental groups to develop new water use efficiency targets as part of a long-term conservation framework for urban water agencies. Further, drought emergency reduction targets and other measures that are instituted to respond to drought conditions could cause us to incur additional costs to develop each community’s infrastructure, as well as cause homebuilders and commercial builders to incur additional costs, which could reduce the price that they are willing to pay for our residential and commercial lots. Although the Governor of California rescinded the Drought State of Emergency in April 2017, if drought conditions were to return, there could be additional restrictions or moratoriums on building permits and access to utilities, such as water and sewer taps, which could delay or prevent our construction activities, as well as the construction of homes and commercial buildings, even when we have obtained water rights for our communities.
Simultaneous development projects may divert management time and resources.
Since all of our communities, and the Concord community for which we provide development management services, are being developed simultaneously, members of our senior management will be involved in planning and developing these projects, which may divert management resources from the construction, sale, lease or opening of any of these projects. Management’s inability to devote sufficient time and attention to a project may delay the construction or opening of such project. This type of delay could adversely affect our financial condition and results of operations.
We are highly dependent on homebuilders.
We are highly dependent on our relationships with homebuilders to purchase lots at our residential communities. Our business will be adversely affected if homebuilders do not view our residential communities as desirable locations for homebuilding operations. Also, some homebuilders may be unwilling or unable to close on previously committed land parcel purchases due to factors outside of our control. As a result, we may sell fewer land parcels and may have lower revenues from sales, which could adversely affect our financial condition and results of operations.
We may from time to time be subject to litigation, which could have a material adverse effect on our financial condition and results of operations.
We may from time to time be subject to various claims and routine litigation arising in the ordinary course of business. Among other things, we are, and are likely to continue to be, affected by litigation against governmental agencies related to environmental and similar approvals that we receive or seek to obtain or relating to historical contamination at our properties that have had prior industrial uses, such as The San Francisco Shipyard. For additional information on recent litigation relating to our properties, see “Item 3. Legal Proceedings.”
Litigation and other claims may result in potentially significant defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured or that exceed our insurance limits could have an adverse impact on our financial

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condition and results of operations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage and adversely affect our results of operations, expose us to increased risks that would be uninsured or adversely impact our ability to attract officers and directors. Such litigation could adversely affect the length of time and the cost required to obtain the necessary governmental approvals. In addition, adverse decisions or publicity arising from any litigation could increase the cost and length of time to obtain ultimate approval of a project, could require us to abandon all or portions of a project and could adversely affect the design, scope, plans and profitability of a project, any of which could negatively affect our financial condition and results of operations.
We may be subject to increased costs of insurance or limitations on coverage.
We maintain comprehensive insurance coverage for general liability, property, workers’ compensation and other risks on all of our properties and operations, including insurance covering certain environmental risks and liabilities. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with certain environmental risks or liabilities, floods, landslides, earthquakes and other weather-related or geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. In addition, there is no assurance that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis, and we may discontinue certain insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies in our judgment exceeds the value of the coverage discounted for the loss. If an uninsured loss or a loss in excess of insured limits occurs, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property. We might also remain obligated for any financial obligations related to the property, even if the property is irreparably damaged. Future changes in the insurance industry’s risk assessment approach and pricing structure could increase the cost of insuring our properties and operations or decrease the scope of insurance coverage, either of which could adversely affect our financial condition and results of operations.
Moreover, we carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at unfavorable rates and the potential of uncollectible claims due to carrier insolvency could adversely affect our financial condition and results of operations.
Title to our property may be impaired by title defects.
We cannot give any assurance that title to our properties will not be challenged or impugned, and cannot be certain that we have or will acquire valid title to our properties. Further, we cannot give any assurance that there are not any liens, encumbrances, mortgages, impositions, fines, violations, levies, superior title claims or other title defects or title issues (collectively, “title defects”) with respect to our properties. The lack of good, marketable fee title, or the existence of any existing title defects with respect to our properties, could materially and adversely affect our properties, including by resulting in: (1) chain of title issues (such as impediments to the potential sale, transfer, assignment or grant of any fee or leasehold interests in all or any portion of our properties); (2) financing issues (such as impediments to qualifying for a line of credit, mortgage or private equity financing); (3) development issues (such as impediments to qualifying for governmental licenses and permits or construction financing, delays in operations, or additional costs incurred in connection with any required corrective measures); (4) foreclosure, forfeiture and loss of fee title (such as resulting from a mortgage foreclosure, tax levy or rescission rights); (5) reduction of asset value; or (6) loss of revenue, capital or anticipated profits.
Although the San Francisco Venture holds title insurance on the portions of Candlestick Point and The San Francisco Shipyard that it currently owns, and the Great Park Venture holds title insurance on Great Park Neighborhoods, we do not hold title insurance on Newhall Ranch. In any event, an owner’s title insurance policy only provides insurance coverage as of the issuance date of such policy and does not protect against transfers or other title defects that impact the properties from and after the title policy issuance dates. Accordingly, for all of our

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properties, whether or not we hold title insurance, it is possible that there may be title defects for which we will have no title insurance coverage.
In addition, the title insurance policies we do hold may not insure for the current aggregate market value of our properties, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases. As a result, we may not have sufficient coverage against all losses that we may experience, including from adverse title claims.
Inflation may adversely affect us by increasing costs that we may not be able to recover.
Inflation can adversely affect us by increasing costs of materials and labor. In addition, inflation is often accompanied by higher interest rates, which could have a negative impact on demand for homes and the cost of debt financing. In a highly inflationary environment, depending on industry and other economic conditions, we may be unable to raise prices enough to keep up with the rate of inflation, which would reduce our profit margins. Although the overall rate of inflation has been low for the last several years, we have been experiencing increases in the prices of labor and materials, especially at Candlestick Point and The San Francisco Shipyard, and there could be a significant increase in inflation in the future.
Significant competition could have an adverse effect on our business.
We compete with other residential, retail and commercial property developers in the development of properties in the Northern and Southern California markets. We compete with a number of residential, retail and commercial developers, some with greater financial resources, in seeking resources for development and prospective purchasers. Competition from other real estate developers may adversely affect our ability to attract purchasers and sell or lease residential, retail and commercial properties, attract and retain experienced real estate development personnel or obtain construction materials and labor. These competitive conditions could make it difficult to sell properties at desirable prices and could adversely affect our financial condition and results of operations.
We may be unable to obtain suitable bonding for the development of our communities.
We provide performance bonds and letters of credit in the ordinary course of business to governmental authorities and others to ensure the completion of our projects or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities. We may also be required to provide performance bonds or letters of credit to secure our performance under various escrow agreements, financial guarantees and other arrangements. If we are unable to obtain performance bonds or letters of credit when required or the cost or operational restrictions or conditions imposed by issuers to obtain them increases significantly, we may be significantly delayed in developing our communities or may incur significant additional expenses and, as a result, our financial condition and results of operations could be materially and adversely affected.
Fluctuations in real estate values may require us to write down the carrying value of our real estate assets or real estate investments.
Our industry is subject to significant variability and fluctuations in real estate values. The valuation of our real estate assets or real estate investments is inherently subjective and based on the individual characteristics of each asset. Factors such as competitive market supply and demand for inventory, changes in laws and regulations, political and economic conditions and interest and inflation rate fluctuations subject our valuations to uncertainty. Our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. If the real estate market deteriorates, we may reevaluate the assumptions used in our analysis. As a result, adverse market conditions may require us to write down the book value of certain real estate assets or real estate investments and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our financial condition and results of operations. Also, a material write-down of assets could adversely affect our ability to meet specified financial ratios or satisfy financial condition tests under the terms of our indebtedness and could adversely affect our ability to utilize certain exceptions from various debt covenants that impose operating restrictions on us, including limitations on our ability to: pay dividends, redeem or repurchase

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capital stock or make other restricted payments; make certain investments; incur additional indebtedness or issue preferred stock; create certain liens; or consolidate, merge or transfer all or substantially all of our assets. See “—Risks Related to Our Organization and Structure—Our substantial indebtedness may have a material adverse effect on our business, our financial condition and results of operations and our ability to secure additional financing in the future.”
Changes in global or regional climatic conditions and governmental actions in response to such changes may adversely affect us by restricting, or increasing the costs of, our planned development activities.
There is growing concern from many members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities could cause significant changes in weather patterns and increase the frequency and severity of natural disasters. Government mandates, standards or regulations intended to reduce greenhouse gas emissions or ameliorate projected climate change impacts could result in restrictions on land development in certain areas, higher costs resulting from green building codes and increased energy, transportation and raw material costs, or cause us to incur compliance expenses that we will be unable to fully recover, which could reduce our gross profit margins and adversely affect our financial condition and results of operations.
For example, in response to challenges to certain approvals for our planned development at Newhall Ranch, the Supreme Court of California issued a ruling that required CDFW to reassess certain analyses and determinations related to the project’s greenhouse gas emissions in connection with approving the related EIR. Although the final environmental analysis was ultimately approved, the Supreme Court’s ruling resulted in the need to reassess certain elements of the project’s potential impacts and to modify certain aspects (such as specific mitigation measures and project design features) related to the development plan for Newhall Ranch, which in turn increased our costs and caused delays in construction. Future environmental permits and approvals that we will need to obtain for development areas within our communities may be similarly challenged and could result in similar impacts or other obstacles to our development plans.
Our property taxes could increase due to rate increases or reassessments or the imposition of new taxes or assessments, which may adversely impact our financial condition and results of operations.
We will be required to pay state and local real property taxes and assessments on our properties. The real property taxes and assessments on our properties may increase as property or special tax rates increase or if our properties are assessed or reassessed at a higher value by taxing authorities. If we are obligated to pay new taxes or if there are increases in the property taxes and assessments that we currently pay, our financial condition and results of operations could be adversely affected.
Our trademarks, trade names and service marks may infringe other names and marks, or become diluted or invalidated.
We believe that our name and the names that we will be using to brand our communities, and their neighborhoods, are important to our business. However, we are aware of a number of other companies that use names that consist of or contain one or more of our names. As a result, there could be potential trade name, trademark or service mark infringement claims brought against us by the users of these names and marks, and such users may have rights that are senior to ours. If another company were to successfully challenge our right to use one or more of our names or marks, our business could be adversely impacted. In addition, to the extent third parties use similar names or marks, the value of our names and marks could be diminished.
Negative publicity could adversely affect our reputation as well as our business, financial results and share price.
Negative publicity related to our industry, company, brands, marketing, personnel, operations, business performance or customers may generate negative sentiment regarding our company, potentially affecting our share price and the performance of our business, regardless of its accuracy or inaccuracy. Our success in maintaining,

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extending and expanding our brand image and reputation depends on our ability to adapt and respond to such publicity in a rapidly changing environment. Negative sentiment resulting from adverse publicity or unfavorable public commentary could damage our brand image and reputation, reduce the demand for homes, homesites, and commercial and multi-family properties in our communities, or adversely affect our ability to acquire additional landholdings and plan and develop new communities, any of which could adversely affect our business, financial condition, results of operations and share price.

Risks Related to Our Organization and Structure
We depend on key personnel.
Our success depends to a significant degree upon the contributions of certain key personnel, including Mr. Haddad, our Chairman and Chief Executive Officer. These key personnel would be difficult to replace because of their experience in identifying, acquiring, developing, financing and managing real estate assets and their long-term relationships across, and strong reputation in, the real estate industry generally and for our communities specifically. If any of our key personnel were to cease employment with us, our results of operations could suffer. Our ability to retain our key personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key personnel or a limitation in their availability could materially and adversely impact our financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets.
As a holding company, we are entirely dependent upon the operations of the operating company and its ability to make distributions to provide cash flow to us or to pay taxes and other expenses.
We are a holding company and our only investment is our interest in the operating company. The operating company conducts all of our operations and owns all of our assets. As a result, our cash flow depends upon the cash flow of the operating company and its ability to provide funds to us in the form of distributions, loans or otherwise. The distributions that we receive from the operating company are based on our ownership interest in it, which was 61.7%, as of December 31, 2018. The operating company is treated as a partnership for U.S. federal income tax purposes and, as such, is generally not subject to U.S. federal income tax. Instead, taxable income is allocated to the operating company’s partners, including us. Accordingly, we incur income taxes on our proportionate share of any net taxable income of the operating company. Under the terms of the limited partnership agreement for the operating company, the operating company is obligated to make tax distributions to its partners, including us, subject to the restrictions described below. These tax distributions generally will be made on a pro rata basis. In addition to tax expenses, we also incur expenses related to our operations, including expenses under the tax receivable agreement (“TRA”), which we expect could be significant.
The ability of the operating company to make distributions in an amount sufficient to allow us to pay our taxes and operating expenses, including any payments under the TRA, is subject to the obligations of the operating company and its subsidiaries to their respective creditors. In addition, future financing arrangements may contain negative covenants limiting the ability of the operating company to make distributions to us. Furthermore, the ability of the operating company’s subsidiaries and the Great Park Venture to pay distributions to the operating company may be limited by their obligations to their respective creditors and other investors. For example, the distribution rights of the holders of legacy interests in the Great Park Venture and the Class B partnership interests in Five Point Communities, LP will reduce the cash available for distribution to the operating company. Similarly, we may be limited in our ability to move capital among the operating company and its subsidiaries as a result of future financing arrangements and obligations to creditors.
As an equity investor in the operating company and, indirectly, in our other subsidiaries and the Great Park Venture and the Gateway Commercial Venture, our right (and, therefore, the rights of our shareholders) to receive assets upon the liquidation or reorganization of the operating company and its subsidiaries, or the Great Park Venture or the Gateway Commercial Venture, will be structurally subordinated to the claims of their creditors. Even if we are recognized as a creditor of the operating company, our claims may still be subordinated to any security interest in or other lien on its assets and any debt or other obligations. Therefore, in the event of our bankruptcy, liquidation or

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reorganization, our consolidated assets will be available to satisfy the claims of our shareholders only after all of our liabilities and the liabilities of the operating company have been paid in full.
Recent U.S. tax legislation may adversely affect our operations.
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017, made significant changes to the taxation of U.S. business entities, including by, among other things, reducing the corporate income tax rate from 35% to 21%, eliminating the corporate alternative minimum tax, restricting deductions allowed for net operating losses to 80% of current year taxable income, permitting net operating losses to be carried forward indefinitely and allowing immediate deductions for certain new investments instead of recovering the expense over time though depreciation. Although we expect the Tax Act to be beneficial to us overall, particularly by reducing our obligations under the tax receivable agreement, as described in a risk factor below, some aspects of the Act could potentially have a negative effect on our operations. For example, certain changes in the Tax Act applicable to individuals could have a negative effect on the housing market and, consequently, our operations. Among the possible changes that could negatively impact the perceived affordability of homeownership are new limitations on the ability to deduct (i) property taxes, (ii) mortgage interest and (iii) state and local income taxes. In addition, it is unclear how the Tax Act will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. We continue to work with our tax advisors and auditors to determine the full impact that the Tax Act will have on us.
Some of our directors are involved in other businesses including real estate activities and public or private investments and, therefore, may have competing or conflicting interests with us.
Certain of our directors have and may in the future have interests in other real estate business activities, and may have control or influence over these activities or may serve as investment advisors, directors or officers of other real estate companies. These interests and activities, and any duties to third parties arising from such interests and activities, could divert the attention of such directors from our operations. Additionally, some of our directors are engaged in investment and other activities in which they may learn of real estate and other related opportunities. Our operating agreement and our code of business conduct and ethics expressly provide that our non-employee directors are not obligated to limit their interests or activities in their non-director capacities or to notify us of any opportunities that may arise in connection therewith, even if the opportunities are complementary to, or in competition with, our businesses. Accordingly, we have no expectation that we will be able to learn of or participate in such opportunities and it is possible that our directors, in their capacity as investment advisors, directors or officers of other real estate companies, may compete with us with respect to these opportunities. For example, three of our directors are senior officers of Lennar (a national homebuilder), one of our directors is a partner and portfolio manager of Castlelake (an investment firm), one of our directors is the lead independent director at William Lyon Homes (a regional homebuilder), one of our directors is a director at Tejon Ranch Company (a real estate development and agribusiness), and one of our directors is the chairman and chief executive officer of Shorenstein Properties, LLC (an owner and operator of office and multi-family properties), each of which may compete with us or make investments in entities that compete with us for development opportunities or otherwise.
Lennar is our largest equity owner and will be engaging in transactions with us and may compete with us.
As of December 31, 2018, Lennar owned Class A common shares and Class B common shares representing approximately 40% of our outstanding voting interests. Three of our directors are also senior officers of Lennar. Lennar is one of the nation’s largest homebuilders and has in the past purchased properties from us. In the future, we expect that we will sell additional properties to Lennar. Transactions between Lennar and us must be approved by our conflicts committee. Transactions between the Great Park Venture and Lennar must be approved by a majority of the members of the Great Park Venture (excluding us). Nonetheless, Lennar’s relationship with us could give it an advantage in bidding for properties that we own.
Lennar may also compete with us. Lennar owns an interest in a joint venture that owns the Treasure Island community, located in San Francisco, which may compete with Candlestick Point and The San Francisco Shipyard. Lennar also has a right to acquire the first phase of the Concord community, located in the San Francisco Bay Area,

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which may compete with Candlestick Point and The San Francisco Shipyard. We provide development management services to Lennar with respect to the Concord community. Lennar may in the future bid for, and acquire for itself, properties that we may seek to acquire. Our operating agreement contains provisions that will permit Lennar to engage in such activities and transactions.
Lennar and Castlelake and their respective affiliates control approximately 57% of the voting power of our outstanding common shares and, as a result, are able to exercise significant influence over all matters requiring shareholder approval.
Holders of our Class A common shares and our Class B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, with a share of each class entitling the holder to one vote. As of December 31, 2018, Lennar and Castlelake and their respective affiliates beneficially owned, in the aggregate, Class A common shares and Class B common shares representing approximately 40% and 17%, respectively, of the voting power of our outstanding common shares. As a result, if these shareholders act together (which they have not agreed to do), they and their affiliates are able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, which may have the effect of delaying or preventing a third party from acquiring control of us. These transactions may include those that other shareholders deem to be in their best interests and in which those other shareholders might otherwise receive a premium for their shares over their current prices.
We may have assumed unknown liabilities in connection with the formation transactions, which, if significant, could adversely affect our financial condition and results of operations.
In the formation transactions, we acquired equity interests in entities which have existing liabilities, some of which may be unknown or unquantifiable. In a contribution and sale agreement that we entered into in connection with the formation transactions, we received representations and warranties regarding the entities in which we acquired interests, but these representations and warranties did not survive the closing. If we discover new or additional liabilities, we may have no recourse for such liabilities. Any such liabilities could adversely affect our financial condition and results of operations.
We did not receive appraisals or fairness opinions in connection with the formation transactions.
The value of the equity interests and other assets acquired by us in the formation transactions, and the value of the securities and other consideration provided in exchange for such equity interests and other assets, were determined based on negotiation among the parties. We did not obtain any third-party appraisals of these equity interests and other assets, and the valuation implied by the consideration received for some of the assets could exceed their fair market value.
We will be required to pay certain investors for certain expected tax benefits.
Holders of Class A units of the operating company may exchange their units for, at our option, either Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or cash in an amount equal to the market value of such shares at the time of exchange. This exchange right is currently exercisable by all holders of outstanding Class A units of the operating company. We expect that basis adjustments resulting from these transactions, if they occur, will reduce the amount of income tax we would otherwise be required to pay in the future.
Moreover, Section 704(c) of the Internal Revenue Code of 1986, as amended (the “Code”), and the U.S. Treasury regulations promulgated thereunder, require that items of income, gain, loss and deduction that are attributable to the operating company’s directly and indirectly held property, including property contributed to the operating company pursuant to the formation transactions, must be allocated among the partners of the operating company to take into account the difference between the fair market value and the adjusted tax basis of such assets

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on the date the formation transactions are consummated. As a result, the operating company will be required to make certain special allocations of its items of income, gain, loss and deduction that are attributable to such assets. These allocations, like the increases in tax basis described above, are likely to reduce the amount of income tax we would otherwise be required to pay.
Simultaneously with the completion of the formation transactions, we entered into a TRA with the holders of Class A units of the operating company and the holders of Class A units of the San Francisco Venture. These investors include Mr. Haddad and entities affiliated with Lennar and Castlelake. The TRA provides for payments by us to such investors or their successors equal to 85% of the amount of cash savings, if any, in income tax we realize as a result of (1) increases in tax basis that are attributable to exchanges of Class A units of the operating company for our Class A common shares or cash or certain other taxable acquisitions of equity interests by the Company, (2) allocations that result from the application of the principles of Section 704(c) of the Code and (3) tax benefits related to imputed interest or guaranteed payments deemed to be paid or incurred by us as a result of the TRA. The TRA also makes certain assumptions intended to equalize the treatment of (A) holders who exchange their Class A units and provide us with tax benefits attributable to an increase in tax basis and (B) those who retain their Class A units and provide us with tax benefits attributable to special allocations of the operating company’s items of income and gain pursuant to Section 704(c) of the Code.
We expect that during the expected term of the TRA, the payments that we make to the parties to the TRA could be substantial. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of exchanges of Class A units of the operating company, the price of our Class A common shares at the time of such exchanges, the extent to which such exchanges are taxable and our ability to use the potential tax benefits, which will depend on the amount and timing of our taxable income and the rate at which we pay income tax.
Due to the various factors that will affect the amount and timing of the tax benefits we will receive, it is not possible to determine the exact amount of payments that will be made under the TRA. If the TRA had been terminated on December 31, 2018, we estimate that the termination payment would have been approximately $106.8 million, assuming no material changes to the relevant tax law, that the aggregate value of our properties is equal to the value implied by such per share price and that LIBOR is 3.01%. However, this is merely an estimate, and the actual payments made under the TRA in the event that it is terminated or otherwise could be significantly greater.
In certain circumstances, payments under the tax receivable agreement could exceed the actual tax benefits we realize.
The TRA provides that, upon a merger, asset sale or other form of business combination or certain other changes of control or if, at any time, we materially breach any of our obligations under the TRA or elect an early termination, our (or our successor’s) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control, early termination or breach) will be based on certain assumptions, including that (1) we will have sufficient taxable income to fully utilize the increased tax deductions and other benefits anticipated by the TRA, (2) all of our properties will be disposed of ratably over a 15 year period for fair market value and (3) any Class A units of the operating company that have not been exchanged will be deemed exchanged for the market value of our Class A common shares at the time of such change of control, early termination or breach. Consequently, it is possible in these circumstances that the actual cash tax savings realized by us may be significantly less than the corresponding TRA payments.
We will not be able to recover payments made under the tax receivable agreement if the related tax benefits are subsequently disallowed.
The Internal Revenue Service (the “IRS”) may challenge all or part of the tax basis increases or the special allocations upon which we calculate payments under the TRA, and a court might sustain such a challenge. Although we are not aware of any issue that would cause the IRS to challenge potential tax basis increases or other tax benefits covered under the TRA, if such basis increases or other benefits are subsequently disallowed (in whole or in part), the parties to the TRA will not be required to return any payments made in respect of such disallowed basis or

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other tax benefit. Consequently, it is possible in these circumstances that the actual tax savings realized by us may be significantly less than the corresponding TRA payments. However, because payments under the TRA in a year are based upon the amount by which 85% of the Company’s cumulative net tax savings exceed the payments previously made under the TRA, disallowance of basis increases or other tax benefits would reduce payments under the TRA in years after the disallowance.
The obligations associated with being a public company require significant resources and management attention.
As a public company with our Class A common shares listed on the New York Stock Exchange (the “NYSE”), we are subject to laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the SEC and requirements of the NYSE. The Exchange Act requires, among other things, that we file annual, quarterly and current reports and proxy statements with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.
Section 404 of the Sarbanes-Oxley Act requires our management and independent registered public accounting firm to attest annually on the effectiveness of our internal control over financial reporting. However, because we are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we will take advantage of certain exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Once we are no longer an emerging growth company or if, prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.
These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources and may cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function and hire additional legal, accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to operate successfully as a public company could have a material adverse effect on our financial condition and results of operations.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our investors could lose confidence in our financial results, which could materially and adversely affect us.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continues to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we cannot assure you that our disclosure controls and procedures or internal control over financial reporting will be effective in accomplishing all control objectives all of the time.
Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate, and management may not be able to remediate in a timely manner any such material weakness or significant deficiency. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could materially and adversely affect our financial condition and results of operations.

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We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States. These provisions include:
an exemption to include fewer than five years of selected financial data;
an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting; and
reduced disclosure about the emerging growth company’s executive compensation arrangements.
As a result, the information that we provide shareholders in our filings with the SEC may be different than what is available with respect to many other public companies. If some investors find our Class A common shares less attractive as a result of our reliance on these exemptions, there may be a less active trading market for our Class A common shares and our share price may be adversely affected. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.
Certain provisions in the operating company’s limited partnership agreement may delay or prevent acquisitions of us.
Provisions in the operating company’s limited partnership agreement may delay, or make more difficult, an acquisition or change of control of us. These provisions could discourage third parties from making proposals involving an acquisition or change of control of us, although some holders of our Class A common shares might consider such proposals, if made, desirable. These provisions include:
a requirement that the partners consent to a merger, consolidation or other combination involving the company or any sale, lease, exchange or other transfer of all or substantially all of our assets or all or any portion of our interest in the operating company unless certain criteria are satisfied; and
our ability, as sole managing general partner, to cause the operating company to issue units with terms that could delay, defer or prevent a merger or other change of control without the consent of the other partners.
Anti-takeover provisions in our operating agreement or provisions of Delaware law could prevent or delay a change in control, even if a change of control would benefit our shareholders.
Provisions of our operating agreement, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control, even if a change in control would benefit our shareholders. These provisions include the following:
there is no cumulative voting in the election of directors;
our board of directors is classified so that approximately one-third of the directors are elected at each annual meeting of shareholders;
our board of directors is authorized to issue “blank check” preferred shares to increase the number of outstanding shares without shareholder approval;
shareholder action by written consent is not permitted; and
there are advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings.

In addition, our operating agreement provides that Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”) will be deemed to apply to us as if we were a Delaware corporation. Section 203 of the DGCL may affect the ability of an “interested shareholder” to engage in certain business combinations, including

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mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the shareholder becomes an “interested shareholder.” An “interested shareholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting shares of a company.
We do not control the Great Park Venture.
Through a wholly owned subsidiary of the operating company, we own a 37.5% percentage interest in the Great Park Venture and serve as its administrative member. However, the administrative member’s authority is limited. Major decisions generally require approval by at least 75% of the votes held by the voting members of the Great Park Venture. We have two votes out of a total of five votes held by all voting members. Thus, any decision will require the additional approval of at least two of the other voting members. These approval rights could prevent actions at the Great Park Venture that would otherwise be in our best interests.
We do not control the Gateway Commercial Venture.
Through a wholly owned subsidiary of the operating company, we own a 75% interest in the Gateway Commercial Venture, the joint venture that acquired the Five Point Gateway Campus, and serve as its manager. However, the manager’s authority is limited. Major decisions by the Gateway Commercial Venture generally require unanimous approval by an executive committee composed of two people designated by us and two people designated by another investor. Some decisions require approval by all of the members of the Gateway Commercial Venture. These approval rights could prevent actions at the Gateway Commercial Venture that would otherwise be in our best interests.
We may need additional capital to execute our development plan, and we may be unable to raise additional capital on favorable terms.
We currently expect to have sufficient capital to fund the horizontal development of our communities in accordance with our development plan for several years. However, we may need additional capital to execute our development plan with respect to vertical development. There can be no assurance that we will be able to obtain new debt or equity financing on favorable terms, or at all, including as a result of volatility in the credit and capital markets, increases in interest rates or a decline in the value of our properties or portions thereof.
In addition, we currently expect to obtain a portion of our capital from forms of public financing, including Community Facilities District (“CFD”) bond issuances, tax increment financing, and state and federal grants, which depend, in part, on factors outside of our control. CFDs are established when local government agencies impose a special property tax on real estate located within a specific district for the purpose of financing public improvements, including streets, water, sewage, drainage, electricity, schools, parks and fire and police protection. Our ability to obtain funds from CFDs is dependent on the value of developed property in the specific district, the collection of general property taxes from property owners in the specific district, collection of special taxes from property owners in the specific district and market interest rates at the time the CFD bonds are issued. For tax increment financing, the amount of property tax that a specific district generates is set at a base amount and as property values increase, property tax growth above that base amount, net of property taxes retained by the municipal agencies, can be used to fund redevelopment projects within the district. Our ability to obtain funds from tax increment financing is dependent on the value of developed property in the specific district, the collection of general property taxes from property owners in the specific district, the time it takes the tax assessor to update the tax rolls and market interest rates at the time the tax increment bonds are issued.
If we need to obtain additional financing, and such financing is not available in a timely manner or on terms substantially similar to our existing financing, it could increase our cost of capital and we may experience delays or increases in costs, and our financial condition and results of operations could be adversely affected.

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Our substantial indebtedness may have a material adverse effect on our business, our financial condition and results of operations and our ability to secure additional financing in the future.
As of December 31, 2018, we had approximately $565.0 million of total indebtedness, including $500.0 million aggregate principal amount of 7.875% senior notes due 2025 (the “senior notes”). We also had $124.0 million available to be borrowed under our revolving credit facility as of December 31, 2018. Our indebtedness could subject us to many risks that, if realized, would adversely affect us, including the following:
our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt, and a failure to pay would likely result in acceleration of such debt and could result in cross accelerations or cross defaults on other debt;
our debt may increase our vulnerability to adverse economic and industry conditions;
to the extent that we use a portion of our cash flow from operations to make payments on our debt, it reduces our funds available for operations, development, capital expenditures and future investment opportunities or other purposes;
debt covenants may limit our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, executing our development plan or other purposes;
restrictive debt covenants may limit our flexibility in operating our business, including limitations on our ability to make certain investments; incur additional indebtedness; create certain liens; incur obligations that restrict the ability of our subsidiaries to make payments to us; consolidate, merge or transfer all or substantially all of our assets; or enter into transactions with affiliates;
to the extent that our indebtedness bears interest at a variable rate (such as our revolving credit facility), we are exposed to the risk of increased interest rates;
debt covenants may limit our subsidiaries’ ability to make distributions to us; and
if any debt is refinanced, the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.
In August 2017, the Gateway Commercial Venture, in which we own a 75% interest, entered into a debt facility with a total capacity of approximately $339.0 million to fund the purchase price for the Five Point Gateway Campus and the cost of future tenant improvements and certain capital expenditures at the Five Point Gateway Campus. The risks described above with respect to leverage are applicable to the Gateway Commercial Venture’s borrowings. In addition, we have provided guaranties of the Gateway Commercial Venture’s indebtedness that obligate us to (i) pay losses of the lender arising out of or in connection with fraud, intentional misrepresentation, gross negligence, willful misconduct, illegal acts and other customary “bad act” recourse exceptions by the Gateway Commercial Venture or its affiliates, and (ii) repay the indebtedness of the Gateway Commercial Venture upon the occurrence of certain bankruptcy or insolvency events, or other customary “bad act” recourse exceptions, involving the Gateway Commercial Venture or its affiliates.
A breach of any of our debt covenants could result in an event of default under that indebtedness. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders to terminate commitments to extend further credit under that facility.
If we do not have sufficient funds to repay our debt at maturity or upon an earlier acceleration, it may be necessary to refinance the debt through additional debt or equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in a higher interest rate on such refinancing, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, postpone investments in the development of our properties or default on our debt. In addition, to the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that are pledged to secure such obligations.

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We may increase leverage in executing our development plan, which could further exacerbate the risks associated with our substantial indebtedness.
We may decide to increase leverage to execute our development plan. Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. Although the indenture relating to our senior notes limits our ability to incur additional indebtedness, our operating agreement does not limit the amount of debt we may incur, and our board of directors may change our target debt levels at any time without the approval of our shareholders. We may incur additional indebtedness from time to time in the future to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our indebtedness could intensify.
Future debt financings, which would rank senior to our Class A common shares upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our Class A common shares for the purposes of liquidating or other distributions, may adversely affect the market price of our Class A common shares.
In the future, we may attempt to increase our capital resources by obtaining additional debt financing (including by offering debt securities) or making additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt and our preferred shares and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our Class A common shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our Class A common shares, or both. Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A common shares and may result in dilution to the holders of our Class A common shares. Holders of our Class A common shares are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating or other distributions that could limit our ability to make distributions to the holders of our Class A common shares. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and holders of our Class A common shares bear the risk of our future offerings reducing the market price of our Class A common shares and diluting their ownership interest in our company.
We do not expect to be able to generate sufficient cash flow from operations to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations, including the senior notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. Until such time as we can service our indebtedness with cash flow from operations, we intend to service our indebtedness, including interest on the senior notes and the revolving credit facility, from cash on hand.
If our cash flows, cash on hand and other capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing the revolving credit facility and the indenture relating to the senior notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise indebtedness or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

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Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.
If we cannot make scheduled payments on our indebtedness, we will be in default and holders of the senior notes could declare all outstanding principal and interest to be due and payable, the lenders under the revolving credit facility could terminate their commitments to loan money, other indebtedness could be accelerated and we could be forced into bankruptcy or liquidation.
Uncertainty about the future of the London Interbank Offer Rate ("LIBOR") may adversely affect our business and financial results.
Borrowings under our revolving credit facility bear interest at LIBOR plus an applicable margin. In July 2017, the UK’s Financial Conduct Authority, which regulates LIBOR, announced its intent to phase out LIBOR by the end of 2021. It is not possible to predict the effect of this announcement, including whether LIBOR will continue in place, and if so what changes will be made to it, what alternative reference rates may replace LIBOR in use going forward, and how LIBOR will be determined for purposes of loans, securities and derivative instruments currently referencing it if it ceases to exist. If the method for calculation of LIBOR changes, if LIBOR is no longer available or if lenders have increased costs due to changes in LIBOR, we may suffer from potential increases in interest rates on our revolving credit facility. Further, we may need to renegotiate our revolving credit facility to replace LIBOR with the new standard that is established. These uncertainties or their resolution also could negatively impact our borrowing costs and other aspects of our business and financial results.
Risks Related to Ownership of Our Class A Common Shares
An active trading market for our Class A common shares may not be sustained and the price of our Class A common shares may be volatile.
Although our Class A common shares are listed on the NYSE, an active trading market for our Class A common shares may not be sustained. Accordingly, no assurance can be given as to the following:
the likelihood that an active trading market for our Class A common shares will be sustained;
the liquidity of any such market;
the ability of our shareholders to sell their Class A common shares; or
the price that our shareholders may obtain for their Class A common shares.
The trading price of our Class A common shares may fluctuate widely as a result of a number of factors, many of which are outside of our control. Historically, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many companies. These broad market fluctuations could negatively affect the market price of our Class A common shares. A significant decline in our share price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.
Some of the factors that could negatively affect or result in fluctuations in the market price of our Class A common shares include:
actual or anticipated variations in our quarterly results of operations;
changes in market valuations of similar companies;
announcements by us or our competitors of significant acquisitions or dispositions;
the market’s reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act;
the operation and share price performance of other comparable companies;
our ability to implement our development plan;

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changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to us;
additions or departures of key personnel;
actions by shareholders;
speculation in the press or investment community regarding us or factors or events that may directly or indirectly affect us;
general or specific market, economic and political conditions, including supply and demand factors in our markets, an economic slowdown or dislocation in the global credit markets;
general economic trends and other external factors, including those resulting from war, incidents of terrorism or responses to such events;
our operating performance, including changes in the status of our communities;
changes in accounting principles;
publication of research reports about us or the real estate industry;
future equity issuances;
our ability to raise capital on favorable terms;
a loss of any major funding source; and
the realization of any of the other risk factors presented in this report.
Securities markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common shares. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our common shares. Any broad market fluctuations may adversely affect the trading price of our Class A common shares.
We may issue additional Class A common shares in the future in lieu of incurring indebtedness, which may dilute existing shareholders, or we may issue securities that have rights and privileges that are more favorable than the rights and privileges accorded to holders of our Class A common shares.
We may issue additional securities, including Class A common shares, options, rights and warrants, for any purpose and for such consideration and on such terms and conditions as our board of directors may determine. Our board of directors will be able to determine the class, designations, preferences, rights, powers and duties of any additional securities, including any rights to share in our profits, losses and distributions, any rights to receive assets upon dissolution or liquidation and any redemption, conversion and exchange rights. Our board of directors may use such authority to issue additional securities exchangeable for our Class A common shares, such as the Class A units of the operating company, which would dilute existing holders of our Class A common shares, or to issue securities with rights and privileges that are more favorable than those of our Class A common shares. You will not have any right to consent to or otherwise approve the issuance of any such securities or the terms on which any such securities may be issued.
Substantial amounts of our Class A common shares could be sold in the near future, which could depress our share price and result in dilution of your shares.
The sale or issuance of a substantial number of Class A common shares or other equity-related securities in the public markets, or the perception that such sales could occur, could depress the market price of our Class A common shares and impair our ability to raise capital through the sale of additional equity securities.
As of December 31, 2018, we had outstanding 66,810,980 Class A common shares. In addition, 78,862,387 Class A common shares are reserved for issuance upon exchange of Class A units of the operating company

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(including 37,433,775 Class A units of the operating company issuable upon exchange of Class A units of the San Francisco Venture) and conversion of our Class B common shares, and 4,077,493 Class A common shares are available for future issuance under the Incentive Award Plan (including 1,089,004 Class A common shares that may be issued in settlement of outstanding vested RSUs).
From time to time, we may issue up to 78,862,387 Class A common shares upon conversion of Class B common shares or in exchange for outstanding Class A units of the operating company (including Class A units of the operating company issued in exchange for Class A units of the San Francisco Venture). Holders of Class A units of the operating company may exchange their units for, at our option, either Class A common shares on a one-for-one basis (subject to adjustment for share splits and similar events) or cash in an amount equal to the market value of such shares at the time of exchange. This exchange right is currently exercisable by all holders of outstanding Class A units of the operating company. Holders of Class A units of the San Francisco Venture may exchange their units for Class A units of the operating company on a one-for-one basis (with no holding period), subject to certain exceptions.
We have an effective shelf registration statement on Form S-3 under which we registered with the SEC the resale of Class A common shares held by certain of our existing shareholders and the Class A common shares that we may issue in exchange for Class A units of the operating company or Class A units of the San Francisco Venture. We are required to use our reasonable efforts to keep the Form S-3 registration statement (or a successor registration statement) effective until there are no longer any registrable securities other than Class A common shares that can be sold under Rule 144 without any limitation as to volume or manner of sale.
We cannot predict whether future issuances or sales of our Class A common shares or the availability of shares for resale in the open market will decrease the per share trading price of our Class A common shares. The per share trading price of our Class A common shares may decline significantly when the restrictions on resale by certain of our shareholders lapse or upon the registration of additional Class A common shares pursuant to registration rights granted to certain shareholders.
We do not intend to pay distributions on our Class A common shares for the foreseeable future.
We have no current plans to pay distributions on our Class A common shares in the foreseeable future. We intend to retain our earnings, if any, to use in our ongoing operations. Any decision to declare and pay distributions in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, because we are a holding company and our only investment is our interest in the operating company, we will only be able to pay distributions from funds we receive from the operating company. Our board of directors has the authority to issue one or more series of preferred shares without action of our shareholders. The issuance of preferred shares could have the effect of limiting distributions on our Class A common shares. Accordingly, you may need to sell your Class A common shares to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.
If security or industry analysts do not publish, or cease publishing, research reports about us, our business or our market, or if such analysts make adverse recommendations regarding our Class A common shares, our share price and trading volume could decline.
The trading market for our Class A common shares is influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts who do cover us may make adverse recommendations regarding our shares, adversely change their recommendations from time to time, or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

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Cyber-attacks or acts of cyber-terrorism could disrupt our business operations and information technology systems or result in the loss or exposure of confidential or sensitive employee or Company information.
Our business operations and information technology systems, and the information technology systems we use that are provided or managed by third-party service providers, may be attacked by individuals or organizations intending to disrupt our business operations and information technology systems and those of our third-party service providers, whether through cyber attacks or cyber-intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber attacks or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. We rely on information technology systems to conduct important operational activities and to maintain our business and employee records and financial data. Disruption of those systems could adversely impact our ability to conduct development activities and to otherwise operate our business. Accordingly, if such an attack or act of terrorism were to occur, our operations and financial results could be adversely affected. In addition, we use our information technology systems to protect confidential or sensitive employee and Company information developed and maintained in the normal course of our business. Any attack on such systems that would result in the unauthorized release or loss of employee or other confidential or sensitive data could have a material adverse effect on our business reputation, increase our costs and expose us to additional material legal claims and liability. As a result, if such an attack or act of terrorism were to occur, our operations and financial results and our share price could be adversely affected.

ITEM 1B.    Unresolved Staff Comments

None.


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Executive Officers of Five Point Holdings, LLC

The following individuals are our executive officers as of February 28, 2019:
 
Name
  
 
Age
 
  
Position
Emile Haddad
  
 
60

 
  
Chairman, President and Chief Executive Officer
Erik R. Higgins
  
 
51

 
  
Chief Financial Officer and Vice President
Michael Alvarado
  
 
53

 
  
Chief Legal Officer, Vice President and Secretary
Lynn Jochim
  
 
55

 
  
Co-Chief Operating Officer
Kofi Bonner
  
 
63

 
  
Co-Chief Operating Officer
Greg McWilliams
  
 
67

 
  
Chief Policy Officer

Emile Haddad.    Mr. Haddad has been our President and Chief Executive Officer and Chairman of our board of directors since May 2016. Mr. Haddad has been a member of our board since 2009. From 2009 until May 2016, Mr. Haddad was President and Chief Executive Officer of the management company, which he co-founded.
 
Erik R. Higgins.   Mr. Higgins is our Chief Financial Officer and Vice President and has been since May 2016. From September 2015 to May 2016, Mr. Higgins was Chief Financial Officer of the management company. For more than ten years prior to joining the management company, Mr. Higgins was Senior Vice President-National Finance of Lennar, where he was responsible for Lennar’s project-level financing and joint venture asset management.
 
Michael Alvarado.    Mr. Alvarado has been our Chief Legal Officer, Vice President and Secretary since May 2016. From 2011 until May 2016, Mr. Alvarado served as General Counsel for the management company.
 
Lynn Jochim.   Ms. Jochim was named our Co-Chief Operating Officer in March 2018. From May 2016 until her appointment as Co-Chief Operating Officer, Ms. Jochim served as our Executive Vice President. From 2009 until May 2016, Ms. Jochim worked for the management company, being principally responsible for Great Park Neighborhoods.
 
Greg McWilliams.    Mr. McWilliams was named our Chief Policy Officer in March 2018. From May 2016 until his appointment as Chief Policy Officer, Mr. McWilliams served as our Regional President-Southern California. From 2004 until May 2016, Mr. McWilliams was President of Newhall Land & Farming.
 
Kofi Bonner.    Mr. Bonner was named our Co-Chief Operating Officer in March 2018. From May 2016 until his appointment as Co-Chief Operating Officer, Mr. Bonner served as our Regional President - Northern California, leading development of our communities, Candlestick Point and The San Francisco Shipyard.

ITEM 2.     Properties

We lease and maintain our principal executive office located in Irvine, California. We also lease and maintain offices in Valencia, California and San Francisco, California near our master-planned communities in those respective areas. We believe our present facilities are sufficient to support our operations.
We are developing new, vibrant and sustainable communities that, in addition to homesites, include commercial, retail, educational and recreational elements, as well as civic areas, parks and open spaces. We are the initial developer of our three communities that are designed to include approximately 40,000 residential homes and

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approximately 23 million square feet of commercial space over a period of more than 10 years. The properties we are developing at our mixed-use, master-planned communities are held as inventory in the ordinary course of the planning and development process. We discuss these properties in Item 1 of this report.
    

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ITEM 3.     Legal Proceedings

Landmark Village and Mission Village
The Los Angeles County Board of Supervisors (“BOS”) approved the Newhall Ranch Landmark Village and Mission Village environmental impact reports (“EIRs”) and permits in late 2011 and 2012. In 2012, petitioners filed two petitions (one for each village development) in Los Angeles County Superior Court (“Superior Court”) challenging such approvals under certain state environmental and planning and zoning laws. In 2014, the Superior Court issued decisions in favor of Los Angeles County (the “County”) and us, and in 2015, the Court of Appeal affirmed the Superior Court’s decisions in full. The Petitioners then filed a petition for review, and in 2015, the California Supreme Court (“Supreme Court”) granted petitioners’ request to review the County’s greenhouse gas (“GHG”) emission analysis, but ordered that further proceedings in the two actions be deferred pending disposition of the related GHG issue in a related case involving a challenge to an EIR certified by the California Department of Fish and Wildlife (“CDFW”).
After the Supreme Court decision invalidating the GHG findings in the related CDFW action, in 2016, the Court of Appeal issued new decisions reversing the trial court judgments to the sole extent that the County’s EIRs did not support its GHG significance impact finding. The matters were remitted to the trial court and that court issued the judgment and writ requested by the County. In May 2017, petitioners filed a notice of appeal challenging the scope of the trial court’s judgment and writ.
In September 2017, petitioners Center for Biological Diversity, California Native Plant Society, and Wishtoyo Foundation/Ventura Coastkeeper (collectively, “Settling Petitioners”) settled all of their respective claims in the Landmark Village and Mission Village cases and in the related CDFW action, leaving only two petitioners, Santa Clarita Organization for Planning and the Environment and Friends of the Santa Clara River (collectively, “Non-Settling Petitioners”). Also in September 2017, the County advised the trial court it had taken the actions required to fully comply with the writs, and requested that the Superior Court discharge the writs. As explained in further detail below, the two Non-Settling Petitioners filed a new action challenging the County’s certification of the additional environmental analyses and approval of the Landmark Village and Mission Village projects and related permits.
In October 2017, the two Non-Settling Petitioners objected to Los Angeles County’s return to the writs, raising the same issues as to the scope of the trial court’s writ as they raised in the related CDFW action. As requested by the County and us, the trial court deferred its ruling on the Non-Settling Petitioners’ objections until the Court of Appeal’s opinion in the related CDFW action had been finalized and that court issued an opinion resolving the Landmark Village and Mission Village appeals as to the scope of the writs. In March 2018, the Supreme Court denied the Non-Settling Petitioners’ petition to review the Court of Appeal's decision in the CDFW action. Thereafter, in May 2018, the Court of Appeal issued its combined decision in favor of Los Angeles County and us on the Landmark Village and Mission Village appeals as to the scope of the writs. Based on the County’s compliance with the writ directives, the trial court issued signed orders discharging the writs in August 2018. The time for an appeal of the judgment expired in October 2018 without an appeal being filed.
Landmark Village/Mission Village
During the pendency of the above-referenced litigation involving the approval of the original EIRs and related permits for the Landmark Village and Mission Village projects, in July 2017, the BOS certified the final additional environmental analyses required as a result of the Supreme Court’s decision regarding the original GHG analysis and reapproved the Landmark Village and Mission Village projects and related permits. In August 2017, the two Non-Settling Petitioners filed a new petition for writ of mandate in the Superior Court. The petition challenges the County’s July 2017 approvals of the Mission Village and Landmark Village environmental analyses and the two projects based on claims arising under CEQA and the California Water Code. The Court held a hearing on the merits of the petition in September 2018. In December 2018, the Superior Court issued its written decision denying the Non-Settling Petitioners’ petition for writ of mandate. Thereafter, in January 2019, the Superior Court entered judgment on the petition for writ of mandate in favor of the County and the Company.

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Hunters Point Litigation

In May 2018, residents of the Bayview Hunters Point neighborhood filed a putative class action in San Francisco Superior Court naming Tetra Tech, Inc., an independent contractor hired by the U.S. Navy to conduct testing and remediation of toxic radiological waste at The San Francisco Shipyard (“Tetra Tech”), Lennar and us as defendants. The plaintiffs allege that, among other things, Tetra Tech fraudulently misrepresented its test results and remediation efforts. The plaintiffs are seeking damages against Tetra Tech and have requested an injunction to prevent Lennar and us from undertaking any development activities at The San Francisco Shipyard.
In June 2018, two construction workers who allegedly engaged in development activities at The San Francisco Shipyard filed a lawsuit in San Francisco Superior Court naming Tetra Tech, Lennar and us, among others, as defendants. The plaintiffs allege personal injuries resulting from exposure to contamination at The San Francisco Shipyard and are seeking damages relating to such alleged injuries. In March 2019, the plaintiffs dismissed us from the lawsuit.
Since July 2018, a number of lawsuits have been filed in San Francisco Superior Court on behalf of homeowners in The San Francisco Shipyard, which name Tetra Tech, Lennar, us and the our CEO, among others, as defendants. The plaintiffs allege that environmental contamination issues at The San Francisco Shipyard were not properly disclosed to them before they purchased their homes. They also allege that Tetra Tech and other defendants (not including the Company) have created a nuisance at The San Francisco Shipyard under California law. They seek damages as well as certain declaratory relief. We believe that we have meritorious defenses to the allegations in all of these cases and may have insurance and indemnification rights against third parties, including related parties, with respect to these claims. Given the preliminary nature of these claims, we cannot predict the outcome of these matters.

ITEM 4.     Mine Safety Disclosures

Not applicable.

38


PART II

ITEM 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

Our Class A common shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “FPH.” Our shares have been publicly traded since May 10, 2017. Our Class B common shares are neither listed nor traded on any stock exchange.
No distributions on our Class A or Class B common shares have been declared or paid since the formation transactions. Any future determination related to our distribution policy will be made at the sole discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and other factors the board of directors may deem relevant. Because we are a holding company and our only investment is our interest in the operating company, we will only be able to pay distributions from funds we receive from the operating company. In addition, the operating company’s ability to pay distributions to us will depend on the ability of its consolidated and nonconsolidated subsidiaries to pay dividends or distributions to the operating company. The priority distribution rights of the holders of legacy interests in the Great Park Venture and the Class B partnership interests in FP LP will limit the cash available for distribution to the operating company until such rights are satisfied in full.
Holders of our Class B common shares are entitled to receive distributions of the same type and at the same time as any distribution payable on our outstanding Class A common shares in an amount per Class B common share equal to the amount of distributions paid on 0.0003 Class A common shares.
As of February 28, 2019, there were 90 and 11 holders of record of our Class A and Class B common shares, respectively.
Our board of directors may, from time to time, in its sole discretion, authorize our company to repurchase our outstanding shares. There were no repurchases of our shares during the year ended December 31, 2018.


39


Performance Graph
The following graph compares the cumulative total return of our Class A common shares with the S&P 500 and the S&P Homebuilders Select Industry Index from May 10, 2017 (the date our Class A common shares commenced trading on the NYSE) through December 31, 2018. The graph assumes $100 was invested at the market close on May 10, 2017 in our Class A common shares, the S&P 500 and the S&P Homebuilders Select Industry Index, and the reinvestment of all dividends.performancegraphcolora01.jpg
Recent Sale of Unregistered Securities
We conduct all of our business in or through our subsidiary, the operating company. Under the Limited Partnership Agreement of the operating company, holders (the “Class A Unit Holders”) of Class A units of the operating company (“Class A Units”) may exchange their Class A Units for, at our option, either (1) Class A common shares on a one-for-one basis (subject to adjustment in the event of share splits, distributions of shares, warrants or share rights, specified extraordinary distributions and similar events), or (2) cash in an amount equal to the market value of such shares at the time of exchange.
On December 21, 2018, we issued 306,751 Class A Common Shares to certain Class A Unit Holders in exchange for an equal number of Class A Units after receiving notices of redemption from such Class A Unit Holders. These issuances were exempt from registration in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended, on the basis that no public offering was made. In connection with such exchanges, an aggregate of 306,751 Class B common shares held by such Class A Unit Holders automatically converted into 92 Class A Common Shares, pursuant to our Second Amended and Restated Limited Liability Company Agreement. These issuances were exempt from registration in reliance upon Section 3(a)(9) of the Securities Act of 1933, as amended, on the basis that securities were exchanged by the issuer with existing security holders and no commission or other remuneration was paid or given for soliciting such exchange.

On February 13, 2019, in connection with the termination of the Retail Project, we sold 357,928 Class B common shares to an affiliate of Lennar and 78,570 Class B common shares to an affiliate of Castlelake at a price of $0.0063 per share. Our Class B common shares automatically convert into Class A common shares, at a ratio of 0.0003

40


Class A common shares for each Class B common share, upon the exchange (by the holder of the Class B common shares) of Class A Units of the operating company for our Class A common shares. The Class B common shares were issued in reliance on the exemption afforded by Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering.
ITEM 6.     Selected Financial Data

The following sets forth our selected consolidated financial data as of and for each of the years ended December 31, 2015 through 2018. We adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018 on a modified retrospective basis. Financial results for the year ended December 31, 2018 are presented in accordance with this new revenue recognition standard. Historical financial results for reporting periods prior to 2018 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard, Accounting Standards Codification 605, Revenue Recognition. The information presented is based upon and should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this annual report on Form 10-K.
As a result of the formation transactions, our results of operations will not be comparable between periods which did not include the results of operations of the San Francisco Venture, the management company or our investment in the Great Park Venture prior to May 2, 2016 and those after May 2, 2016 that do include such results.


41


 
Year Ended December 31,
(In thousands, except per share/unit amounts)
2018
 
2017
 
2016
 
2015
RESULTS OF OPERATIONS:
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
Land sales
$
133

 
$
17,257

 
$
9,561

 
$
17,229

Land sales—related party
900

 
87,556

 
2,512

 
6,065

Management services—related party
40,976

 
22,517

 
16,856

 

Operating properties
6,981

 
12,101

 
10,439

 
12,288

Total revenues
48,990

 
139,431

 
39,368

 
35,582

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Land sales
(165
)
 
84,659

 
356

 
(2,862
)
Management services
23,962

 
10,791

 
9,122

 

Operating properties
5,077

 
11,450

 
10,656

 
10,161

Selling, general, and administrative
98,983

 
122,367

 
120,724

 
27,686

Management fees—related party

 

 
1,716

 
5,109

Total costs and expenses
127,857

 
229,267

 
142,574

 
40,094

OTHER INCOME:
 
 
 
 
 
 
 
Adjustment to payable pursuant to tax receivable agreement
1,928

 
105,586

 

 

Interest income
11,767

 
2,577

 

 

Miscellaneous
8,573

 
93

 
57

 
144

Total other income
22,268

 
108,256

 
57

 
144

EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES
(2,163
)
 
5,776

 
(1,356
)
 

(LOSS) INCOME BEFORE INCOME TAX (PROVISION) BENEFIT
(58,762
)
 
24,196

 
(104,505
)
 
(4,368
)
INCOME TAX (PROVISION) BENEFIT
(9,183
)
 

 
7,888

 
546

NET (LOSS) INCOME
(67,945
)
 
24,196

 
(96,617
)
 
(3,822
)
LESS NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(33,231
)
 
(49,039
)
 
(63,351
)
 
(1,137
)
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY
$
(34,714
)
 
$
73,235

 
$
(33,266
)
 
$
(2,685
)
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY PER CLASS A SHARE/UNIT
 
 
 
 
 
 
 
Basic
$
(0.53
)
 
$
1.33

 
$
(0.89
)
 
$
(0.07
)
Diluted
$
(0.53
)
 
$
0.18

 
$
(0.89
)
 
$
(0.07
)


42


 
December 31,
(In thousands)
2018
 
2017
 
2016
 
2015
FINANCIAL POSITION:
 
 
 
 
 
 
 
Inventories
$
1,696,084

 
$
1,425,892

 
$
1,360,451

 
$
259,872

Cash and cash equivalents
495,694

 
848,478

 
62,304

 
108,657

Marketable securities held to maturity

 

 
20,577

 
25,000

Total assets
2,923,892

 
2,978,355

 
2,114,582

 
441,851

Debt
557,004

 
560,618

 
69,387

 
8,577

Total liabilities
1,075,375

 
1,072,746

 
606,469

 
93,418

Total noncontrolling interests
1,261,491

 
1,320,208

 
1,265,197

 
87,511

Total capital
1,848,517

 
1,905,609

 
1,508,113

 
348,433


43


ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated audited financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Item 1A. Risk Factors” section of this report. Actual results could differ materially from those set forth in any forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We conduct all of our business in or through our operating company, Five Point Operating Company, LP (the “operating company”). We are, through a wholly owned subsidiary, the sole managing general partner and owned, as of December 31, 2018, approximately 61.7% of the operating company. The operating company directly or indirectly owns equity interests in: (1) Five Point Land, LLC (“FPL”), which owns The Newhall Land & Farming Company, a California limited partnership, the entity that is developing Newhall Ranch; (2) The Shipyard Communities, LLC (the “San Francisco Venture”), which is developing Candlestick Point and The San Francisco Shipyard; (3) Heritage Fields LLC (the “Great Park Venture”), which is developing Great Park Neighborhoods; (4) Five Point Communities, LP and Five Point Communities Management, Inc. (together, the “management company”), which have historically managed the development of Great Park Neighborhoods and Newhall Ranch; and (5) Five Point Office Venture Holdings I, LLC (the “Gateway Commercial Venture”), which owns the Five Point Gateway Campus. The operating company consolidates and controls the management of all of these entities except for the Great Park Venture and the Gateway Commercial Venture. The operating company owns a 37.5% percentage interest in the Great Park Venture, and a 75% interest in the Gateway Commercial Venture and accounts for its interest in both using the equity method. The management company performs development management services for the Great Park Venture and property management services for the Gateway Commercial Venture.
Formation Transactions
On May 2, 2016, we completed the formation transactions, in which we acquired controlling interests in the San Francisco Venture and the management company and a 37.5% percentage interest in the Great Park Venture.
We have identified Five Point Holdings, LLC as our predecessor for accounting purposes. Prior to the formation transactions, Five Point Holdings, LLC had a controlling interest in the operating company, which owns FPL. Our acquired businesses were not under common control prior to the formation transactions, despite having commonality of several owners. In determining Five Point Holdings, LLC as our predecessor, we considered many factors, including, but not limited to, Five Point Holdings, LLC being considered the accounting acquirer in the formation transactions, the extent of historical operations at the companies, the relative size of each business acquired and our organizational and governance structure subsequent to the formation transactions.
Our Business
We stage the development process to optimize the pace of land sales and land values within our communities. As a result, we are often in multiple phases of the development lifecycle within each of our communities. The development lifecycle of our mixed-use, master-planned communities can be broken down into

44


several phases. First, we obtain title, or the contractual right to acquire title, to the undeveloped land. Second, we obtain the necessary primary entitlements from governmental agencies for the community, which typically include zoning and general plan approvals and certification of an environmental impact report under the California Environmental Quality Act (“CEQA”), as well as any state or federal permits required for development. Third, we continue to refine the master plan for the community beyond the primary entitlements by planning and subdividing the land into separate legal lots for residential and commercial development and obtaining any other requisite discretionary approvals needed to commence construction. Fourth, we make significant investments in the community’s infrastructure and common improvements, including grading and installing roads, sidewalks, gutters, utility improvements (such as storm drains, water, gas, sewer, power and communications), landscaping and shared amenities (such as community buildings, neighborhood parks, trails and open spaces), and prepare each lot for sale or development by us. Fifth, residential and commercial lots within the community are typically sold to homebuilders, commercial developers or commercial buyers, although in some cases we may retain lots and build homes or commercial buildings ourselves. Sixth, homebuilders construct the homes and commercial developers, commercial buyers or we construct the commercial buildings. Finally, homebuilders or commercial builders sell the homes or commercial buildings to homebuyers or commercial buyers, although in some cases we may retain certain income-producing properties. Given the large scale of our communities, some of these phases may occur concurrently across different parts of a single community. Further, depending on the specific plans for each community and market conditions, these phases may occur in a different sequence than as described above.
Within the development lifecycle, our cash expenditures are concentrated in the title acquisition, entitlement and infrastructure development phases, and our revenue generation occurs in the land sale phase. If we also build all or a portion of the homes or commercial buildings within a community, we incur additional development costs and receive revenue when homes or commercial properties are sold. In addition, with respect to properties that we may retain in the future, we expect to receive revenue in connection with lease or other related payments from tenants.
Our principal source of revenue generation is from selling homesites to homebuilders and commercial lots to commercial developers or commercial buyers. We primarily sell homesites to national, regional and local homebuilders in a competitive process, although in some cases we may negotiate with a single homebuilder directly. Our residential land sales typically require a cash payment upfront and include participation provisions that allow us to share in the profits realized by the homebuilders if the overall profitability of a block of homes exceeds an agreed-upon margin. We may sell commercial lots to commercial developers through a competitive process or we may negotiate directly with a commercial buyer. We also regularly assess our development plan and may retain a portion of the commercial or multi-family properties in our communities as income-producing assets.
In the ordinary course of our business, we have sold homesites to Lennar, which is our largest equity owner, or its subsidiaries or joint ventures in which Lennar is a member. During the years ended December 31, 2018, 2017 and 2016, we recognized $0.9 million, $87.6 million and $2.5 million, respectively, of such revenue. We did not sell homesites to Lennar during the year ended December 31, 2018 but did recognize revenues related to certain fees or profit participation associated with homesites sold in prior periods. Additionally, since the formation transactions on May 2, 2016, we have been providing certain management services for ventures in the San Francisco Bay area in which Lennar is a significant participant. For the years ended December 31, 2018, 2017 and 2016, we recognized $4.4 million, $5.8 million and $3.5 million, respectively, of revenue related to these agreements. However, we do not expect these arrangements to contribute material revenues in future periods. We also provide management services to the Great Park Venture pursuant to a development management agreement. In addition to our 37.5% percentage interest in the Great Park Venture, Lennar owns a 25% legacy interest in the Great Park Venture. Lennar, along with an affiliate of Castlelake L.P. (“Castlelake”), also owns interests in an entity that owns a 12.5% legacy interest in the

45


Great Park Venture. For the years ended December 31, 2018, 2017 and 2016, we recognized $35.1 million, $16.2 million and $13.3 million, respectively, of revenue from management services provided to the Great Park Venture. Other than Lennar and the Great Park Venture, no customer accounted for more than 10% of our revenue during the years ended December 31, 2018, 2017 and 2016.
Factors That May Influence our Results of Operations
Fluctuations in the Economy and Market Conditions
Our results of operations are subject to various risks and fluctuations in value and demand, many of which are beyond our control. Our business could be impacted by, among other things, downturns in economic conditions at the national, regional or local levels, particularly where our communities are located, inflation and increases in interest rates, significant job losses and unemployment levels, and declines in consumer confidence and spending.
Supply and Demand for Residential and Commercial Properties
We generate most of our revenue from land sales, which are dependent on demand from homebuilders, commercial developers and commercial buyers, which is in turn dependent on the prices that homebuyers, commercial buyers and renters are expected to pay. In addition, sales of homesites typically include participation provisions that allow us to share in the profits realized by the homebuilders if the overall profitability of a block of homes exceeds an agreed-upon margin. Because our revenue is influenced by the prices that homebuyers and commercial buyers are willing to pay for homes or commercial buildings in our region, our results of operations may be influenced by, among other things, the overall supply and demand for housing and commercial properties, the prevailing interest rates for mortgages, and the availability of mortgage financing for residential and commercial developers and residential and commercial buyers.
Timing of Obtaining the Necessary Approvals to Begin Development
As a developer of real property in California, we are subject to numerous land use and environmental laws and regulations. Before we can begin developing our communities, we must obtain entitlements, permits and approvals. Depending upon the type of the approval being sought, we may also need to complete an environmental impact report, remediate environmental impacts or agree to finance or develop public infrastructure within the community, each of which would impose additional costs on us. In the event that we materially modify any of our existing entitlements, approvals or permits, we may also need to go through a discretionary approval process before the relevant governmental authority or go through an additional or supplemental environmental review and certification process.
In addition, laws and regulations governing the approval processes provide third parties with the opportunity to challenge our entitlements, permits and approvals. The prospect of these third-party challenges creates additional uncertainty. Third-party challenges in the form of litigation can adversely affect the length of time or the cost required to obtain the necessary governmental approvals to develop, or result in the denial of our right to develop the particular community or development area in accordance with our current development plans. Furthermore, adverse decisions arising from any litigation can increase the cost or length of time to obtain ultimate approval of a project, if such approval is obtained at all, and can adversely affect the design, scope, plans and profitability of a project, which can negatively affect our financial condition and results of operations. See Part I, Item 3, of this report for a discussion of legal proceedings.

46


Financial Information
As a result of the formation transactions, our consolidated results of operations after May 2, 2016 are not comparable to our consolidated results of operations prior to that date because our results of operations prior to May 2, 2016 did not include either the financial condition and results of operations of the San Francisco Venture and the management company or our investment in the Great Park Venture. Consequently, our results of operations for the year ended December 31, 2016 include only eight months of results attributable to the San Francisco Venture and the management company and to our investment in the Great Park Venture, compared to a full year of operations included in the results for the years ended December 31, 2018 and 2017.
The timing of our land sale revenues is influenced by the factors described above. As a result, we have historically experienced, and expect to continue to experience, variability in results of operations between comparable periods.
On January 1, 2018, we, the Great Park Venture, and the Gateway Commercial Venture adopted the new revenue recognition guidance contained in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, using the modified retrospective approach with the cumulative effect recorded as an adjustment to opening capital. The new guidance was applied to contracts not completed at the transition date. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, Revenue from Contracts with Customers, while prior period results have not been adjusted and continue to be reported in accordance with historical accounting under ASC Topic 605, Revenue Recognition, and other industry specific guidance. See Part II, Item 8 of this report for a discussion of recently adopted accounting pronouncements.
Segments
Our four reportable segments are Newhall, San Francisco, Great Park and Commercial:

Our Newhall segment includes operating results for the Newhall Ranch community, as well as results attributable to other land historically owned by FPL, including 16,000 acres in Ventura County, The Tournament Players Club at Valencia Golf Course (which was sold in January 2018), 500 acres of remnant commercial, residential and open space land in Los Angeles County.
Our San Francisco segment includes operating results for the Candlestick Point and The San Francisco Shipyard communities, as well as results attributable to the development management services that we provide to Lennar with respect to the Concord community in the San Francisco Bay Area. As of December 31, 2018, we terminated the services we provided under the development management agreement for the Treasure Island community.
Our Great Park segment includes operating results for the Great Park Neighborhoods community and development management services provided by the management company for the Great Park Venture.
Our Commercial segment includes the operating results of the Five Point Gateway Campus and property management services provided by the management company for the Gateway Commercial Venture.

47


Results of Operations
The Company
The following table summarizes our consolidated historical results of operations for the years ended December 31, 2018, 2017 and 2016.
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Statement of Operations Data
 
 
 
 
 
REVENUES:
 
 
 
 
 
Land sales
$
133

 
$
17,257

 
$
9,561

Land sales—related party
900

 
87,556

 
2,512

Management services—related party
40,976

 
22,517

 
16,856

Operating properties
6,981

 
12,101

 
10,439

Total revenues
48,990

 
139,431

 
39,368

COSTS AND EXPENSES:
 
 
 
 
 
Land sales
(165
)
 
84,659

 
356

Management services
23,962

 
10,791

 
9,122

Operating properties
5,077

 
11,450

 
10,656

Selling, general, and administrative
98,983

 
122,367

 
120,724

Management fees—related party

 

 
1,716

Total costs and expenses
127,857

 
229,267

 
142,574

OTHER INCOME:
 
 
 
 
 
Adjustment to payable pursuant to tax receivable agreement
1,928

 
105,586

 

Interest income
11,767

 
2,577

 

Miscellaneous
8,573

 
93

 
57

Total other income
22,268

 
108,256

 
57

EQUITY IN (LOSS) EARNINGS FROM UNCONSOLIDATED ENTITIES
(2,163
)
 
5,776

 
(1,356
)
(LOSS) INCOME BEFORE INCOME TAX (PROVISION) BENEFIT
(58,762
)
 
24,196

 
(104,505
)
INCOME TAX (PROVISION) BENEFIT
(9,183
)
 

 
7,888

NET (LOSS) INCOME
(67,945
)
 
24,196

 
(96,617
)
LESS NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(33,231
)
 
(49,039
)
 
(63,351
)
NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY
$
(34,714
)
 
$
73,235

 
$
(33,266
)
Years Ended December 31, 2018 and 2017
Revenues. Revenues decreased by $90.4 million, or 64.9%, to $49.0 million for the year ended December 31, 2018, from $139.4 million for the year ended December 31, 2017. The difference in revenue was primarily due to a land sale of 3.6 acres planned for construction of up to 390 for-sale homesites to a related party at our San Francisco segment in January 2017. Offsetting this decrease was an increase in management services revenue at our Great Park segment mostly resulting from our application of ASC Topic 606 in 2018 for the recognition of certain variable management fees under the new revenue recognition guidance.

48


Cost of land sales. The higher cost of land sales for the year ended December 31, 2017 was primarily due to the land sale at our San Francisco segment.
Cost of management services. Cost of management services increased by $13.2 million, or 122.1%, to $24.0 million for the year ended December 31, 2018, from $10.8 million for the year ended December 31, 2017. The increase was primarily due to intangible asset amortization expense at our Great Park segment.
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $23.4 million, or 19.1%, to $99.0 million for the year ended December 31, 2018, from $122.4 million for the year ended December 31, 2017. The decrease is mainly due to lower expenses, including litigation related costs, incurred at our Newhall segment and lower compensation expense (share-based and payroll) incurred in 2018. Share-based compensation decreased as a result of certain awards granted in connection with the formation transactions becoming fully vested at the completion of the service period in January 2018.
Other income. Other income for the year ended December 31, 2018 consisted primarily of a $6.7 million gain on the sale of an operating asset at our Newhall segment in addition to interest income earned on our cash and cash equivalents. For the year ended December 31, 2017, we recorded other income primarily as a result of a decrease to our estimate of the payable pursuant to the tax receivable agreement due to the reduction to our corporate tax rate resulting from the passage of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
Equity in (loss) earnings from unconsolidated entities. Equity in earnings from unconsolidated entities decreased to a loss of $2.2 million for the year ended December 31, 2018, from earnings of $5.8 million for the year ended December 31, 2017. The decrease in earnings was primarily due to land sale activity at our Great Park segment in 2018 compared to 2017.
Income tax provision. At December 31, 2018, we had a deferred tax asset of $150.8 million, and a deferred tax liability of $136.8 million. We net $127.6 million of the deferred tax asset against the deferred tax liability and recorded a valuation on the remaining deferred tax asset of $23.2 million. This net deferred tax liability of $9.2 million, and the increase in the valuation allowance, is a result of certain deferred tax assets not being able to offset the deferred tax liability due to changes to the utilization of tax attributes as a result of the Tax Act. We assessed the realization of the net deferred tax asset and the need for a valuation allowance, based on positive and negative evidence, and determined that, at both December 31, 2018 and December 31, 2017, it was more likely than not that such net deferred tax assets would not be realized. Pre-tax loss of $58.8 million for the year ended December 31, 2018 resulted in an increase to the net deferred tax asset of $6.1 million. The recording of a tax provision to increase our valuation allowance, against a pre-tax book loss, provided for a negative effective tax rate and resulted in a $9.2 million provision in 2018. For the year ended December 31, 2017, we had a deferred tax asset valuation allowance of $7.9 million against a net deferred tax asset of the same amount. In 2017, there was a zero tax rate against pre-tax income due to the valuation allowance, as well as the non-taxable nature of the tax receivable agreement re-measurement gain. Our effective tax rate, before changes in valuation allowance, decreased for the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due to the effect of the federal rate change on our deferred tax balances and the impact of our noncontrolling interests not participating in the income from the reduction in the payable pursuant to the tax receivable agreement.
Years Ended December 31, 2017 and 2016
Revenues. Revenues increased by $100.1 million, or 254.2%, to $139.4 million for the year ended December 31, 2017, from $39.4 million for the year ended December 31, 2016. The increase in revenue was primarily due to a land sale to a related party at our San Francisco segment. Additionally, the increase was also driven in part by revenues from development management services provided to related parties at our San Francisco

49


and Great Park segments. Prior to the formation transactions, our predecessor did not provide development management services.
Cost of land sales. Cost of land sales increased by $84.3 million to $84.7 million for the year ended December 31, 2017, from $0.4 million for the year ended December 31, 2016. The increase was primarily due to the land sale at our San Francisco segment.
Selling, general, and administrative. Selling, general, and administrative expenses increased by $1.6 million, or 1.3%, to $122.3 million for the year ended December 31, 2017, from $120.7 million for the year ended December 31, 2016. This increase was primarily due to higher general and administrative expenses, including payroll expenses (excluding share-based compensation), incurred for the year ended December 31, 2017 primarily attributable to the acquired business operations of the San Francisco Venture and the corporate overhead of the management company that are included in the results for the full year of operations compared to eight months of operations in 2016 (from the acquisition date on May 2, 2016 to December 31, 2016). Offsetting this higher 2017 expense was a higher share-based compensation expense in 2016 incurred in connection with the formation transactions.
Management fees—related party. For the year ended December 31, 2016, we incurred management fees of $1.7 million related to the engagement of the management company as the development manager of Newhall Ranch. As a result of our acquisition of the management company in the formation transactions, the development management agreement for Newhall Ranch was terminated.
Equity in earnings (loss) from unconsolidated entities. Equity in earnings from unconsolidated entities increased by $7.1 million to $5.8 million for the year ended December 31, 2017, from a loss of $1.4 million for the year ended December 31, 2016. The increase was primarily due to increased revenue from land sales at our Great Park segment.
Income tax benefit. At December 31, 2017, we had a deferred tax asset valuation allowance of $7.9 million against a net deferred tax asset of the same amount. We assessed the realization of the net deferred tax asset and the need for a valuation allowance, based on positive and negative evidence, and determined that, at both December 31, 2017 and December 31, 2016, it was more likely than not that such net deferred tax assets would not be realized. Pre-tax income of $24.2 million for the year ended December 31, 2017, combined with the change in federal tax rates, resulted in a decrease to the net deferred tax asset of $7.8 million. Offsetting the decrease to the net deferred tax asset was a decrease to our deferred tax asset valuation allowance of $7.8 million. For the year ended December 31, 2016, we recognized an income tax benefit of $7.9 million attributable to a $104.5 million pre-tax loss for the period. The tax benefit also resulted in a decrease to the net deferred tax liability that existed during the period. Our effective tax rate, before changes in valuation allowance, increased for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to the effect of the federal rate change on our deferred tax balances and the impact of our noncontrolling interests not participating in the income from the reduction in the payable pursuant to the tax receivable agreement.
Newhall Segment
Our Newhall Ranch property consists of approximately 15,000 acres in northern Los Angeles County. Newhall Ranch is designed to include approximately 21,500 homesites and approximately 11.5 million square feet of commercial space. Newhall Ranch is directly adjacent to our completed, award-winning Valencia master-planned community, where today approximately 20,000 households reside and approximately 60,000 people work. We are continuing horizontal development activities at Newhall Ranch’s first neighborhood, Mission Village, and expect to

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start delivering homesites to builders in late 2019. Mission Village is approved for up to 4,055 homesites and approximately 1.6 million square feet of commercial development.
The following table summarizes the results of operations of our Newhall segment for the years ended December 31, 2018, 2017 and 2016.
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Statement of Operations Data
 
 
 
 
 
Revenues
 
 
 
 
 
Land sales
$
133

 
$
17,257

 
$
9,561

Land sales—related party
16

 
2,746

 
2,107

Operating properties
6,252

 
11,565

 
10,376

Total revenues
6,401

 
31,568

 
22,044

Costs and expenses
 
 
 
 
 
Land sales
(241
)
 
3,201

 
356

Operating properties
5,077

 
11,450

 
10,656

Selling, general, and administrative
15,391

 
29,371

 
32,076

Management fees—related party

 

 
1,716

Total costs and expenses
20,227

 
44,022

 
44,804

         Other income
7,024

 
96

 
57

Segment loss
$
(6,802
)
 
$
(12,358
)
 
$
(22,703
)
Years Ended December 31, 2018 and 2017    
Land sales revenues. Revenues decreased by $19.9 million, or 99.3%, to $0.1 million for the year ended December 31, 2018, from $20.0 million for the year ended December 31, 2017. Land sales revenues for the year ended December 31, 2017 included the sale of 153 residential homesites on approximately 24 acres in Sacramento, California for gross proceeds of $7.2 million. The property was the last part of the Newhall segment’s land holdings in Sacramento, California. Additional land sale revenues in 2017 were primarily due to miscellaneous land sale revenue recognition, which includes the recognition of deferred revenues, profit participation and collection of various builder fees.
Operating Properties. In January 2018, we completed the sale of The Tournament Players Club at Valencia Golf Course to a third party for net cash proceeds of $5.7 million, and the buyer’s assumption of certain liabilities, including certain club membership related liabilities. We recognized a gain of $6.7 million during the year ended December 31, 2018 as a result of the sale, included in other income. We operated the property as an amenity to the segment’s completed Valencia community, and we do not consider the sale of The Tournament Players Club at Valencia Golf Course to be a disposal that represents a strategic shift that will have a major effect on our future operations and financial results. Included in operating properties revenues and expenses for 2017 was $5.8 million in revenues and $6.5 million of expenses generated from operations at The Tournament Players Club at Valencia Golf Course.
Selling, general, and administrative. Selling, general, and administrative expenses decreased by $14.0 million, or 47.6%, to $15.4 million for the year ended December 31, 2018, from $29.4 million for the year ended December 31, 2017. This decrease was primarily due to decreased legal and consulting expenses incurred in 2018

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compared to 2017 related to certain legal proceedings. See Part I, Item 3 of this report for a discussion of legal proceedings.
Years Ended December 31, 2017 and 2016    
Revenues. Revenues increased by $9.5 million, or 43.2%, to $31.6 million for the year ended December 31, 2017, from $22.0 million for the year ended December 31, 2016. In 2017, we sold 153 residential homesites in Sacramento, California for gross proceeds of $7.2 million (see above). No residential homesites or significant commercial acres were sold in 2016. Additional land sale revenues in both periods represent recognition of deferred revenue, profit participation and collection of various builder fees related to prior period land sales.
Management fees—related party. No management fees were incurred for the year ended December 31, 2017, and $1.7 million of management fees were incurred for the year ended December 31, 2016. As a result of our acquisition of the management company with the formation transactions, our development management agreement with the management company was terminated on May 2, 2016.
San Francisco Segment
Located almost equidistant between downtown San Francisco and the San Francisco International Airport, Candlestick Point and The San Francisco Shipyard consists of approximately 800 acres of bayfront property in the City of San Francisco. Candlestick Point and The San Francisco Shipyard is designed to include approximately 12,000 homesites and approximately 6.3 million square feet of commercial space.
On May 2, 2016, the San Francisco Venture transferred to a joint venture (the “Lennar-CL Venture”) between Lennar and an affiliate of Castlelake certain assets and liabilities of the San Francisco Venture, including property within The San Francisco Shipyard known as the Phase 1 Land (the “Separation Transaction”). The Lennar-CL Venture is responsible for current and future residential construction on the Phase 1 Land. We are not entitled to any of the proceeds from future sales of homes on the Phase 1 Land (although we will receive a marketing fee for each home sold). The Lennar-CL Venture was also transferred the ownership interest in a joint venture (the “Mall Venture”) formed with affiliates of The Macerich Company (“Macerich”) that intended to construct an urban retail outlet shopping district (the “Retail Project”) at Candlestick Point. Following the Separation Transaction, we were obligated to complete certain development activities and convey the parcels of property to the Mall Venture upon which the Retail Project was to be developed. In early 2019, following discussions with the members of the Mall Venture, we and the members of the Mall Venture decided not to proceed with the Retail Project. As part of the termination of the Retail Project, we were released from our obligation to convey parcels of property on which the Retail Project was intended to be developed by the Mall Venture. We were also released from certain development obligations. In return, we repaid Macerich a $65.1 million obligation related to a promissory note in the same amount, plus $5.5 million of accrued interest associated with the promissory note. The San Francisco Venture also issued an aggregate of 436,498 of its Class A Units (while we concurrently issued 436,498 of our Class B common shares) to affiliates of Lennar and Castlelake. The San Francisco Venture can now redevelop these parcels for alternative uses.
In November 2016, San Francisco voters approved an initiative measure, Proposition O, to exempt Candlestick Point and The San Francisco Shipyard from citywide office development growth restrictions. Those growth controls (referred to as Proposition M after the 1986 initiative measure first imposing them) limit the amount of new office construction in San Francisco to 950,000 square feet per year and require each new office development of 25,000 square feet or more to obtain an allocation of office space from the Planning Commission. With passage of Proposition O and the approval to implement the redevelopment plan amendments that the San

52


Francisco Venture is seeking, development at Candlestick Point and The San Francisco Shipyard will not be required to obtain an allocation of office space and will not be subject to the Proposition M annual limitations on office development. This means the full amount of permitted commercial square footage at Candlestick Point and The San Francisco Shipyard can be constructed as we determine, including all at once, even though Proposition M may delay new office developments elsewhere in San Francisco. In 2018, our disposition and development agreement with the City of San Francisco was amended to increase the total amount of commercial use at Candlestick Point and The San Francisco Shipyard by over two million square feet, most of which we anticipate will be for office use, and increases our total commercial space to approximately 6.3 million square feet.
At The San Francisco Shipyard, approximately 408 acres are still owned by the U.S. Navy and will not be conveyed to us until the U.S. Navy satisfactorily completes its finding of suitability to transfer, or “FOST,” process, which involves multiple levels of environmental and governmental investigation, analysis, review, comment and approval. Based on our discussions with the U.S. Navy, we had previously expected the U.S. Navy to deliver this property between 2019 and 2022. However, allegations that Tetra Tech, Inc. (“Tetra Tech”), a contractor hired by the U.S. Navy, misrepresented sampling results at The San Francisco Shipyard have resulted in data reevaluation, governmental investigations, criminal proceedings, lawsuits, and a determination by the U.S. Navy and other regulatory agencies to undertake additional sampling. As part of the 2018 Congressional spending bill, the U.S. Department of Defense allocated $36.0 million to help fund resampling efforts at The San Francisco Shipyard. An additional $60.4 million to fund resampling efforts was approved as part of a 2019 military construction spending bill. These activities have delayed the remaining land transfers from the U.S. Navy and could lead to additional legal claims or government investigations, all of which could in turn further delay or impede our future development of such parcels. Our development plans were designed with the flexibility to adjust for potential land transfer delays, and we have the ability to shift the phasing of our development activities to account for potential delays caused by U.S. Navy retesting, but there can be no assurance that these matters and other related matters that may arise in the future will not materially impact our development plans.
We have been, and may in the future be, named as a defendant in lawsuits seeking damages and other relief arising out of alleged contamination at The San Francisco Shipyard and Tetra Tech’s alleged misrepresentations of related sampling work. See Part I, Item 3 of this report for additional information. Given the preliminary nature of the claims to date, the Company cannot predict the outcome of these matters.


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The following table summarizes the results of operations of our San Francisco segment for the years ended December 31, 2018 and 2017 and for the period from May 2, 2016 (date of formation transactions) to December 31, 2016.
 
Year ended December 31,
 
Year ended December 31,
 
Period from May 2, 2016 to December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Statement of Operations Data
 
 
 
 
 
Revenues
 
 
 
 
 
Land sales—related party
$
884

 
$
84,810

 
$
405

Operating property
729

 
536

 
62

Management services—related party
4,397

 
5,841

 
3,532

Total revenues
6,010

 
91,187

 
3,999

Costs and expenses
 
 
 
 
 
Land sales
76

 
81,458

 

Management services
1,015

 
709

 
110

Selling, general, and administrative
22,979

 
28,288

 
18,093

Total costs and expenses
24,070

 
110,455

 
18,203

Segment loss
$
(18,060
)
 
$
(19,268
)
 
$
(14,204
)
Years Ended December 31, 2018 and 2017