Investments in and Advances to Unconsolidated Entities

We have investments in and advances to various unconsolidated entities. These entities include land development joint ventures, home building joint ventures, rental property joint ventures, Toll Brothers Realty Trust (“Trust”) and Toll Brothers Realty Trust II (“Trust II”), and a structured asset joint venture. At October 31, 2014, we had investments in and advances to these unconsolidated entities of $447.1 million and were committed to invest or advance up to an additional $84.5 million to these entities if they require additional funding.

In fiscal 2014, 2013 and 2012, we recognized income from the unconsolidated entities in which we had an investment of $41.1 million, $14.4 million, and $23.6 million, respectively. We did not recognize any impairment charges in connection with our joint ventures in fiscal 2014, 2013, or 2012. In fiscal 2012, we recovered $2.3 million of costs we previously incurred.

More specific information regarding our investments in, advances to, and future commitments to these entities is provided below.

Land Development Joint Ventures

We have investments in and advances to a number of joint ventures with unrelated parties to develop land (“Land Development Joint Ventures”). Some of these Land Development Joint Ventures develop land for the sole use of the venture participants, including us, and others develop land for sale to the joint venture participants and to unrelated builders. We recognize our share of earnings from the sale of home sites and other land by the Land Development Joint Ventures to other builders. With regard to home sites we purchase from the Land Development Joint Ventures, we adjust our cost basis in those home sites by our share of the earnings/losses of the joint venture on the home sites we purchase. At October 31, 2014, we had approximately $140.2 million invested in or advanced to our Land Development Joint Ventures and funding commitments of $32.8 million to four of the Land Development Joint Ventures which would be funded if additional investments in the ventures are required. At October 31, 2014, three of these joint ventures had aggregate loan commitments of $175.0 million and outstanding borrowings against these commitments of $96.1 million.

At October 31, 2014, we had purchase commitments or understandings to acquire 573 home sites from three of these Land Development Joint Ventures for an estimated aggregate purchase price of $184.3 million. In addition, we expect to purchase approximately 3,300 additional lots from several Land Development Joint Ventures in which we have interests. The purchase price of the lots will be determined at a future date.

Set forth below is additional information regarding activity in certain Land Development Joint Ventures; such activity is included in the summary information provided above.

In the third quarter of fiscal 2014, we received approximately 515 home sites from a Land Development Joint Venture in consideration of our previous investment in the joint venture. We have a commitment to this joint venture to fund approximately $17.1 million which represents our share of the major infrastructure improvements related to this community. Contributions to this joint venture related to the improvements will be included in “Inventory” in our Consolidated Balance Sheets when made.

In the first quarter of fiscal 2014, we entered into a joint venture with an unrelated party to develop a parcel of land in Texas. The joint venture expects to develop a master planned community consisting of up to 7,000 home sites and retail and commercial property. We have a 50% interest in this joint venture. Prior to the formation of the joint venture, we had entered into a land purchase agreement to acquire the land for approximately $79.3 million. We contributed our rights under the purchase agreement to the joint venture and were reimbursed by our joint venture partner for 50% of the costs we incurred prior to the formation of the joint venture. At October 31, 2014, we had an investment of $40.8 million in this joint venture. In May 2014, the joint venture obtained outside financing of $40.0 million to help fund the future development of the property. At October 31, 2014, the joint venture had $4.8 million of borrowing under the loan facility.

In the fourth quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a parcel of land in Maryland. The property consists of 945 acres that the joint venture expects to develop into approximately 1,300 home sites. We have a 50% interest in this joint venture. The current plan is to develop the property and sell approximately 50% of the home sites to each of the members of the joint venture. At October 31, 2014, we had an investment of $11.8 million in this joint venture.

In the second quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a parcel of land in Texas as a master planned community consisting of approximately 2,900 lots. We have a 50% interest in this joint venture. The joint venture expects to develop the property in multiple phases and sell groups of lots to the members of the joint venture and to other home builders. At October 31, 2014, the joint venture owned approximately 2,800 home sites. We made an initial investment of $15.5 million of cash to the joint venture. The joint venture entered into a $25.0 million line of credit with a bank, secured by a deed of trust on the property, which can be expanded up to $40.0 million under certain conditions. At October 31, 2014, the joint venture had $21.5 million of borrowings under this line of credit. At October 31, 2014, we had an investment of $28.0 million in this joint venture and were committed to make additional contributions to this joint venture of up to $2.2 million.

In the third quarter of fiscal 2012, we acquired for approximately $110.0 million, a 50% interest in a joint venture with an unrelated party that owned and was developing over 2,000 home sites in Orange County, California. Under the terms of the operating agreement, we acquired 266 home sites in the first phase of the property from the joint venture. We intend to acquire approximately 545 additional home sites in future phases from the joint venture. At October 31, 2014, we had an investment of $57.7 million in this joint venture and were committed to make additional contributions of up to $10.0 million to this joint venture, if needed. The joint venture has a $110.0 million credit facility from a bank to fund the development of the property. At October 31, 2014, the venture had borrowed $69.8 million under the facility.

Home Building Joint Ventures

At October 31, 2014, we had an aggregate of $189.5 million of investments in and advances to various joint ventures with unrelated parties to develop approximately 560 luxury for-sale homes (“Home Building Joint Ventures”). At October 31, 2014, we had $33.2 million of funding commitments to two of these joint ventures.

Set forth below is additional information regarding activity in certain Home Building Joint Ventures; such activity is included in the summary information provided above.

In the first quarter of fiscal 2012, we entered into a joint venture in which we have a 50% interest to develop a high-rise luxury for-sale/rental project in the metro New York market. At October 31, 2014, we had an investment of $130.8 million. Under the terms of the agreement, upon completion of the construction of the building, we will acquire ownership of the top 18 floors of the building to sell, for our own account, luxury condominium units and our partner will receive ownership of the lower floors containing residential rental units and retail space. We expect to receive title to our floors during the first half of fiscal 2015. At the time of transfer, our investment in this joint venture will be transferred to inventory.

In the third quarter of fiscal 2012, we invested in a joint venture in which we have a 50% interest to develop a high-rise luxury condominium project in conjunction with a luxury hotel in the metro New York market. At October 31, 2014, we had invested $24.0 million in this joint venture. We expect to make additional investments of approximately $24.9 million for the development of this project. We have also guaranteed approximately $7.1 million of payments related to the ground lease on this project. In November 2014, this joint venture, along with the hotel joint venture discussed in Rental Property Joint Ventures below, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and hotel. We and an affiliate of our partner provided certain guarantees under the construction loan agreement. Each partner has an obligation to fund 50% of any payments made as a result of performing under these guarantees.

Rental Property Joint Ventures

At October 31, 2014, we had an aggregate of $93.6 million of investments in and advances to several joint ventures with unrelated parties to develop luxury for-rent apartments, commercial space, and a hotel (“Rental Property Joint Ventures”). At October 31, 2014, we had $18.4 million of funding commitments to these joint ventures. At October 31, 2014, six of these joint ventures had aggregate loan commitments of $424.2 million and outstanding borrowings against these commitments of $123.0 million.

Set forth below is additional information regarding activity in certain Rental Property Joint Ventures; such activity is included in the summary information provided above.

In the fourth quarter of 2014, we entered into a joint venture with an unrelated party to develop a 418-unit student housing project and retail space in College Park, Maryland, on land that we were under contract to purchase. We have a 25% interest in this joint venture. We made an initial investment of $11.9 million to the joint venture, which included $3.5 million of land deposits previously funded by us, and our partner made an initial capital contribution of $35.7 million. In addition, we received a reimbursement of $3.1 million for certain costs incurred by us prior to the closing of the joint venture. The joint venture obtained construction loan financing of $104.5 million to fund a portion of the cost of the development of the property. At October 31, 2014, the joint venture had $1.8 million of outstanding borrowings under the loan agreement. At October 31, 2014, we had an investment of $12.4 million in this joint venture.

In the first quarter of 2014, one of our Rental Property Joint Ventures entered into a $70.0 million construction loan agreement to finance construction of multifamily residential apartments in northern New Jersey. At October 31, 2014, this joint venture had $18.0 million of outstanding borrowings under the facility.

In the fourth quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a 287-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C., on land that we owned and conveyed to the joint venture. We have a 50% interest in this joint venture. As part of our initial capital contribution, we contributed land and improvements with a fair value of $27.1 million to the joint venture and subsequently received a cash distribution of $12.5 million to align the capital accounts of each of the members of the joint venture. In the fourth quarter of fiscal 2013, the joint venture entered into a $54.0 million construction loan agreement with a bank to finance the development of this project. At October 31, 2014, the joint venture had $29.5 million of outstanding borrowings under the construction loan agreement. At October 31, 2014, we had an investment of $14.8 million in this joint venture.

In the second quarter of fiscal 2013, we entered into a joint venture with an unrelated party to develop a 38-story luxury for-rent residential apartment building and retail space in Jersey City, New Jersey, on land that we owned and conveyed to the joint venture. We have a 50% interest in this joint venture. As part of our initial capital contribution, we contributed land and improvements with a fair value of $28.8 million to the joint venture and subsequently received distributions of $10.2 million and a $1.2 million payment by the joint venture on our behalf to align the capital accounts of each of the members of the joint venture. In the second quarter of 2014, the joint venture entered into a $120.0 million construction loan agreement with a bank to finance the development of this project. At October 31, 2014, the joint venture had $46.8 million of borrowings under the facility. At October 31, 2014, we had an investment of $30.7 million in this joint venture.

In the fourth quarter of fiscal 2012, we invested in a joint venture in which we have a 50% interest to develop a multifamily residential apartment project containing approximately 398 units in suburban Philadelphia. In the first quarter of 2014, this joint venture entered into $56.0 million construction loan agreement to finance construction. At October 31, 2014, this venture had $16.6 million of borrowings under the facility. At October 31, 2014, we had an investment of $13.2 million in this joint venture.

In the third quarter of fiscal 2012, we invested in a joint venture in which we have a 50% interest to develop a luxury hotel in conjunction with a high-rise luxury condominium project in the metro New York market. At October 31, 2014, we had invested $14.6 million in this joint venture. We expect to make additional investments of approximately $17.0 million for the development of this property. In November 2014, this joint venture, along with the home building joint venture discussed in Home Building Joint Ventures above, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and hotel. See Home Building Joint Ventures above for additional information on this loan. We have also guaranteed approximately $2.1 million of payments related to the ground lease on this project.

Structured Asset Joint Venture

Through a wholly-owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), we are a 20% participant with two unrelated parties that acquired a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At October 31, 2014, we had an investment of $20.0 million in this Structured Asset Joint Venture.

Toll Brothers Realty Trust and Toll Brothers Realty Trust II

In fiscal 2005, we, together with an unrelated party, formed Trust II to invest in commercial real estate opportunities. Trust II is owned 50% by us and 50% by our partner. In December 2013, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, we realized income of approximately $23.5 million in the first quarter of fiscal 2014, representing our share of the gain on the sale. In the three-month period ended April 30, 2014, we recognized an additional gain of $0.6 million from the sale of a property by Trust II. The gain on sale of assets is included in “Income from unconsolidated entities” on our Consolidated Statements of Operations and Comprehensive Income. In December 2013, we received a $20.0 million cash distribution from Trust II. At October 31, 2014, we had an investment of $1.2 million in Trust II. In addition, in the first quarter of fiscal 2014, we recognized $2.9 million in previously deferred gains on our initial sales of the properties to Trust II. This gain is included in “Other income - net” in our Consolidated Statements of Operations and Comprehensive Income.

In 1998, prior to the formation of Trust II, we formed the Trust to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr., and former members of our senior management; and one-third by an affiliate of PASERS. As of October 31, 2014, we had an investment in the Trust of $2.6 million. We provide development, finance, and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $2.8 million, $4.2 million, and $2.7 million in fiscal 2014, 2013, and 2012, respectively. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. We received $12.0 million as our share of the proceeds and recognized this distribution as income in the second quarter of fiscal 2014. This income is included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income.

Guarantees

The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities that may include any or all of the following: (i) project completion, including any cost overruns, in whole or in part; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) indemnification of the lender as to environmental matters affecting the unconsolidated entity; (iv) a hazardous material indemnity that holds the lender harmless against any obligations for which the lender may incur liability resulting from the threat or presence of any hazardous or toxic substances at or near the property covered by a loan; and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.

In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed upon share of the guarantee; however, if the joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share.

We believe that as of October 31, 2014, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral should be sufficient to repay a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the venture. At October 31, 2014, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $599.2 million and had borrowed an aggregate of $219.0 million. The term of these guarantees generally ranges from 13 months to 47 months. We estimate that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $599.2 million before any reimbursement from our partners. Based on the amounts borrowed at October 31, 2014, our maximum potential exposure under these guarantees is estimated to be approximately $219.0 million before any reimbursement from our partners.

In addition, we have guaranteed approximately $11.2 million of ground lease payments and insurance deductibles for three joint ventures.

As of October 31, 2014, the estimated aggregate fair value of the guarantees was approximately $2.9 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At October 31, 2014, we determined that three of our joint ventures were VIEs under the guidance within ASC 810. We have, however, concluded that we were not the primary beneficiary of the VIEs because the power to direct the activities of these VIEs that most significantly impact their performance was shared by us and the VIEs’ other members. Business plans, budgets, and other major decisions are required to be unanimously approved by all members. Management and other fees earned by us are nominal and believed to be at market rates, and there is no significant economic disproportionality between us and other members. The information presented below regarding the investments, commitments, and guarantees in unconsolidated entities deemed to be VIEs is also included in the information provided above.

At October 31, 2014 and 2013, our investments in our unconsolidated joint ventures deemed to be VIEs, which are included in investments in and advances to unconsolidated entities in our Consolidated Balance Sheets, totaled $46.4 million and $22.9 million, respectively. At October 31, 2014, the maximum exposure of loss to our investments in unconsolidated joint ventures that are VIEs is limited to our investment in the unconsolidated VIEs, except with regard to $43.4 million of additional commitments to the VIEs, $21.6 million of loan guarantees, and a $9.1 million guarantee of ground lease payments. At October 31, 2013, the maximum exposure to loss of our investments in unconsolidated joint ventures that are VIEs was limited to our investment in the unconsolidated VIEs, except with regard to a $41.7 million additional commitment to fund the joint ventures, $14.4 million of loan guarantees, and a $9.6 million guarantee of ground lease payments.

Joint Venture Condensed Financial Information

The Condensed Balance Sheets, as of the dates indicated, and the Condensed Statements of Operations and Comprehensive Income, for the periods indicated, for the unconsolidated entities in which we have an investment, aggregated by type of business, are included below (in thousands). The column titled “Rental Property Joint Ventures” includes the Rental Property Joint Ventures, the Trust and Trust II described above.

Condensed Balance Sheets:



	October 31, 2014
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	31,968	$	21,821	$	33,040	$	23,462	$	110,291
Inventory	258,092		465,144						723,236
Non-performing loan portfolio							57,641		57,641
Rental properties					140,238				140,238
Rental properties under development					327,315				327,315
Real estate owned (“REO”)							184,753		184,753
Other assets (1)	30,166		75,164		14,333		77,986		197,649
Total assets	$	320,226	$	562,129	$	514,926	$	343,842	$	1,741,123
Debt (1)	$	102,042	$	8,713	$	333,128	$	77,950	$	521,833
Other liabilities	23,854		56,665		43,088		177		123,784
Members’ equity	194,330		496,751		138,710		106,298		936,089
Noncontrolling interest							159,417		159,417
Total liabilities and equity	$	320,226	$	562,129	$	514,926	$	343,842	$	1,741,123
Company’s net investment in unconsolidated entities (2)	$	140,221	$	189,509	$	97,353	$	19,995	$	447,078



	October 31, 2013
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	30,826	$	31,164	$	35,014	$	40,097	$	137,101
Inventory	350,150		338,814		4,998				693,962
Non-performing loan portfolio							107,411		107,411
Rental properties					164,325				164,325
Rental properties under development					133,081				133,081
Real estate owned (“REO”)							202,259		202,259
Other assets (1)	12,700		70,180		18,526		155,921		257,327
Total assets	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Debt (1)	$	135,200	$	11,977	$	235,226	$	155,900	$	538,303
Other liabilities	21,015		19,636		9,461		379		50,491
Members’ equity	237,461		408,545		111,257		139,764		897,027
Noncontrolling interest							209,645		209,645
Total liabilities and equity	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Company’s net investment in unconsolidated entities (2)	$	142,448	$	166,271	$	68,711	$	25,703	$	403,133


(1)	Included in other assets at October 31, 2014 and 2013, of the Structured Asset Joint Venture are $78.0 million and $155.9 million, respectively, of restricted cash held in a defeasance account that will be used to repay debt of the Structured Asset Joint Venture.

(2)

Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities are primarily a result of the acquisition price of an investment in a land development joint venture in fiscal 2012 that was in excess of our pro rata share of the underlying equity, impairments related to our investment in unconsolidated entities, a loan made to one of the entities by us, interest capitalized on our investment, the estimated fair value of the guarantees provided to the joint ventures, and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations and Comprehensive Income:



	For the year ended October 31, 2014
	Land Develop- ment Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	136,949	$	54,923		$	32,875		$	8,023		$	232,770
Cost of revenues	73,628		53,221			14,250			14,152			155,251
Other expenses	730		5,165			35,003			1,585			42,483
Total expenses	74,358		58,386			49,253			15,737			197,734
Gain on disposition of loans and REO									30,420			30,420
Income (loss) from operations	62,591		(3,463		)	(16,378		)	22,706			65,456
Other income	66		105			45,933			3,121			49,225
Net income (loss)	62,657		(3,358		)	29,555			25,827			114,681
Less: income attributable to noncontrolling interest									(15,496		)	(15,496		)
Net income (loss) attributable to controlling interest	62,657		(3,358		)	29,555			10,331			99,185
Other comprehensive income						728						728
Total comprehensive income (loss)	$	62,657	$	(3,358	)	$	30,283		$	10,331		$	99,913
Company’s equity in earnings (losses) of unconsolidated entities (3)	$	1,190	$	(2,034	)	$	40,081		$	1,904		$	41,141



	For the year ended October 31, 2013
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture			Total
Revenues	$	43,937	$	40,386	$	38,727	$	37,492		$	160,542
Cost of revenues	20,142		36,208		16,704		30,496			103,550
Other expenses	1,146		2,554		20,875		3,399			27,974
Total expenses	21,288		38,762		37,579		33,895			131,524
Gain on disposition of loans and REO							68,323			68,323
Income from operations	22,649		1,624		1,148		71,920			97,341
Other income	11		571		86		329			997
Net income	22,660		2,195		1,234		72,249			98,338
Less: income attributable to noncontrolling interest							(43,349		)	(43,349		)
Net income attributable to controlling interest	22,660		2,195		1,234		28,900			54,989
Other comprehensive income					922					922
Total comprehensive income	$	22,660	$	2,195	$	2,156	$	28,900		$	55,911
Company’s equity in earnings of unconsolidated entities (3)	$	3,288	$	1,471	$	3,965	$	5,668		$	14,392



	For the year ended October 31, 2012
	Land Develop- ment Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture			Total
Revenues	$	39,278	$	89,947	$	37,035	$	31,686		$	197,946
Cost of revenues	36,315		65,068		13,985		32,828			148,196
Other expenses	1,414		3,477		21,226		8,646			34,763
Total expenses	37,729		68,545		35,211		41,474			182,959
Gain on disposition of loans and REO							42,244			42,244
Income from operations	1,549		21,402		1,824		32,456			57,231
Other income	2,658		153		4		691			3,506
Net income	4,207		21,555		1,828		33,147			60,737
Less: income attributable to noncontrolling interest							(19,888		)	(19,888		)
Net income attributable to controlling interest	4,207		21,555		1,828		13,259			40,849
Other comprehensive income										—
Total comprehensive income	$	4,207	$	21,555	$	1,828	$	13,259		$	40,849
Company’s equity in earnings of unconsolidated entities (3)	$	3,995	$	15,303	$	1,602	$	2,692		$	23,592

(3)

Differences between our equity in earnings (losses) of unconsolidated entities and the underlying net income (loss) of the entities is primarily a result of prior impairments related to our investment in unconsolidated entities, a basis difference of an acquired joint venture interest, distributions from entities in excess of the carrying amount of our net investment, and our share of the entities’ profits related to home sites purchased by us which reduces the our cost basis of the home sites acquired.