Investments in Unconsolidated Entities

We have investments in various unconsolidated joint venture entities. These joint ventures (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”), which includes our investment in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in distressed loans and real estate and provide financing to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).

The table below provides information as of January 31, 2017, regarding active joint ventures that we are invested in, by joint venture category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Gibraltar Joint Ventures		Total
Number of unconsolidated entities	7		4		13		4		28
Investment in unconsolidated entities	$	300,124	$	130,487	$	149,599	$	21,486	$	601,696
Number of unconsolidated entities with funding commitments by the Company	5		1		3		1		10
Company’s remaining funding commitment to unconsolidated entities	$	43,794	$	8,300	$	3,850	$	9,621	$	65,565

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at January 31, 2017, regarding the debt financing obtained by category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Total
Number of joint ventures with debt financing	3		1		11		15
Aggregate loan commitments	$	275,000	$	236,500	$	1,002,866	$	1,514,366
Amounts borrowed under loan commitments	$	237,626	$	57,548	$	708,174	$	1,003,348

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

Land Development Joint Ventures

During the three months ended January 31, 2017, our Land Development Joint Ventures sold approximately 303 lots and recognized revenues of $56.3 million. We acquired 102 of these lots for $25.0 million. Our share of the joint venture income from the lots we acquired of $3.7 million was deferred by reducing our basis in those lots acquired. During the three months ended January 31, 2016, our Land Development Joint Ventures sold approximately 83 lots and recognized revenues of $12.6 million. We acquired 9 of these lots for $0.8 million. Our share of the income from the lots we acquired of $0.2 million was deferred by reducing our basis in those lots acquired.

In the fourth quarter of fiscal 2015, we entered into a joint venture with an unrelated party to purchase and develop a parcel of land located in Irvine, California. The joint venture expects to develop approximately 840 home sites on this land in multiple phases. We have a 50% interest in this joint venture. The joint venture intends to develop the property and sell approximately 50% of the value of the home sites to each of the members of the joint venture. At January 31, 2017, we had an investment of $170.2 million in this joint venture and were committed to make additional contributions to this joint venture of up to $12.5 million. To finance a portion of the land purchase, the joint venture entered into a $320.0 million purchase money mortgage with the seller. In December 2016, the joint venture entered into a $200.0 million building loan agreement and each member made a capital contribution of $80.0 million. A portion of the proceeds from the building loan in addition to the capital contributions made by the members were used to repay the purchase money mortgage. At January 31, 2017, this joint venture had $186.7 million of outstanding borrowings under the building loan.

Home Building Joint Ventures

Our Home Building Joint Ventures are delivering homes in New York City and Jupiter, Florida. During the three months ended January 31, 2017, our Home Building Joint Ventures delivered 87 homes with a sales value of $217.4 million. During the three months ended January 31, 2016, our Home Building Joint Ventures delivered 19 homes with a sales value of $16.0 million.

In December 2016, we entered into a joint venture with an unrelated party to complete the development of a high-rise luxury condominium project in New York City. Before the formation of this joint venture, we acquired the property and incurred approximately $176.0 million of land and land development costs. The joint venture, in which we have a 20% interest, purchased the property from us at our cost, a portion of which was financed by a $236.5 million construction loan obtained by the joint venture. From the sale and financing, we received proceeds of $148.0 million, of which $106.1 million had been held in escrow by our captive title company at October 31, 2016 and was included in “Receivables, prepaid expenses, and other assets” on our Condensed Consolidated Balance Sheet at October 31, 2016. At January 31, 2017, we had an investment of $30.0 million in this joint venture and the joint venture had $57.5 million of outstanding borrowings under the construction loan.

Rental Property Joint Ventures

As of January 31, 2017, our Rental Property Joint Ventures owned 10 for-rent apartment projects, which are located in the metro Boston to metro Washington, D.C. corridor. At January 31, 2017, our joint ventures had approximately 2,950 units that were occupied or ready for occupancy, 600 units in the lease-up stage, and 1,400 units under active development. In addition, we either own, have under contract, or under a letter of intent approximately 4,910 units, which are in the planning stage. We intend to develop these units with joint venture partners in the future.

In the second quarter of fiscal 2016, we entered into a joint venture with an unrelated party to develop a 525-unit luxury for-rent residential apartment building near Union Station in Washington, D.C. Prior to the formation of this joint venture, we acquired the land, through a 100%-owned entity, and incurred $35.1 million of land and land development costs. Our partner acquired a 50% interest in this entity for $20.2 million and we subsequently received cash of $18.7 million to align the capital accounts of each of the partners of the joint venture. In the third quarter of fiscal 2016, as a result of the sale of 50% of our interest to our partner, we recognized a gain of $3.0 million. Due to our continued involvement in the joint venture through our ownership interest, we deferred $3.0 million of the gain realized on the sale. At January 31, 2017, we had an investment of $29.1 million in this joint venture and expect to make additional investments of approximately $0.8 million for the development of this project. In November 2016, the joint venture entered into a $130.6 million construction loan agreement. At January 31, 2017, there were no outstanding borrowings under the construction loan agreement.

In the fourth quarter of fiscal 2016, we entered into a joint venture with an unrelated party to develop a 390-unit luxury for-rent residential apartment building in a Boston, Massachusetts suburb, on land that we were under contract to purchase. We have a 25% interest in this joint venture. In the fourth quarter of fiscal 2016, the joint venture entered into a $91.0 million construction loan agreement with a bank to finance the development of this project. At January 31, 2017, there were no outstanding borrowings under the construction loan agreement. At January 31, 2017, we had an investment of $9.3 million in this joint venture and expect to make additional investments of approximately $1.7 million for the development of this project.

We have an investment 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 New York City being developed by a related Home Building Joint Venture. At January 31, 2017, we had invested $40.5 million in this joint venture. In November 2014, this joint venture, along with the related Home Building Joint Venture, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and the hotel. In December 2016, this joint venture entered into an $80.0 million, three-year term loan agreement. The proceeds from the term loan, along with proceeds from the closing of condominium units at the Home Building Joint Venture, were used to repay the construction loan. At January 31, 2017, this joint venture had $80.0 million of outstanding borrowings under the term loan.

In 1998, we formed the Trust to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by current and former members of our senior management; and one-third by an unrelated party. As of January 31, 2017, our investment in the Trust was zero as cumulative distributions received from the Trust have been in excess of the carrying amount of our net investment. We provide development, finance, and management services to the Trust and recognized fees under the terms of various agreements in the amount of $0.4 million in both the three-month periods ended January 31, 2017 and 2016. In the first quarter of fiscal 2016, we received a $2.0 million distribution from the Trust, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statement of Operations and Comprehensive Income. No distributions were received from the Trust in the first quarter of fiscal 2017.

Gibraltar Joint Ventures

In the second quarter of fiscal 2016, we, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), entered into two ventures with an institutional investor to provide builders and developers with land banking and venture capital. We have a 25% interest in these ventures. These ventures will finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies. We may invest up to $100.0 million in these ventures. As of January 31, 2017, we had an investment of $10.5 million in these ventures.

In addition, in the second quarter of fiscal 2016, we entered into a separate venture with the same institutional investor to purchase, from Gibraltar, certain foreclosed real estate owned (“REO”) and distressed loans for $24.1 million. We have a 24% interest in this venture. At January 31, 2017, we have a $5.0 million investment in this venture and are committed to invest an additional $9.6 million, if necessary.

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. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; 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 a 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 January 31, 2017, in the event we become legally obligated to perform under a guarantee of an obligation of an unconsolidated entity due to a triggering event, the collateral in such entity 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 January 31, 2017, certain unconsolidated entities have loan commitments aggregating $1.25 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $206.5 million to be our maximum exposure related to repayment and carry cost guarantees. At January 31, 2017, the unconsolidated entities had borrowed an aggregate of $747.7 million, of which we estimate $147.0 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 3 months to 46 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.

In addition, we have guaranteed approximately $4.0 million of ground lease payments and insurance deductibles for three joint ventures.

As of January 31, 2017, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $5.6 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At January 31, 2017 and October 31, 2016, we determined that five and three, respectively, of our joint ventures were VIEs under the guidance of ASC 810, “Consolidation.” However, we have concluded that we were not the primary beneficiary of these VIEs because the power to direct the activities of such VIEs that most significantly impact their performance was either shared by us and such VIEs’ other partners or such activities were controlled by our partner. For VIEs where the power to direct significant activities is shared, 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 the 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 January 31, 2017 and October 31, 2016, our investments in the unconsolidated joint ventures deemed to be VIEs, which is included in “Investments in unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $21.5 million and $16.4 million, respectively. At January 31, 2017, the maximum exposure of loss to our investments in the unconsolidated joint ventures that are VIEs was limited to our investments in the unconsolidated VIEs, except with regard to $9.6 million of additional commitments to the VIEs. At October 31, 2016, the maximum exposure of loss to our investments in the unconsolidated joint ventures that are VIEs was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $1.4 million of additional commitments to the VIEs. Of our potential exposure for these loan guarantees at October 31, 2016, $14.3 million is related to repayment and carry cost guarantees.

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 are included below (in thousands):

Condensed Balance Sheets:



	January 31, 2017		October 31, 2016
Cash and cash equivalents	$	110,665	$	130,794
Inventory	1,177,928		1,074,888
Loans receivable, net	26,684		—
Non-performing loan portfolio	3,835		4,298
Rental properties	675,069		621,615
Rental properties under development	312,645		302,632
Real estate owned (“REO”)	84,471		87,226
Other assets	169,064		175,805
Total assets	$	2,560,361	$	2,397,258
Debt	$	1,008,011	$	1,164,883
Other liabilities	132,829		152,881
Members’ equity	1,322,829		980,354
Noncontrolling interest	96,692		99,140
Total liabilities and equity	$	2,560,361	$	2,397,258
Company’s net investment in unconsolidated entities (1)	$	601,696	$	496,411

(1)

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; interest capitalized on our investments; the estimated fair value of the guarantees provided to the joint ventures; gains recognized from the sale of our ownership interests; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations and Comprehensive Income:



	Three months ended January 31,
	2017			2016
Revenues	$	295,702		$	42,486
Cost of revenues	165,706			35,513
Other expenses	21,134			9,307
Total expenses	186,840			44,820
Gain on disposition of loans and REO	8,886			25,983
Income from operations	117,748			23,649
Other income	2,586			1,005
Income before income taxes	120,334			24,654
Income tax provision	3,827			—
Net income including earnings from noncontrolling interests	116,507			24,654
Less: income attributable to noncontrolling interest	(2,080		)	(11,610		)
Net income attributable to controlling interest	114,427			13,044
Other comprehensive income	—			87
Total comprehensive income	$	114,427		$	13,131
Company’s equity in earnings of unconsolidated entities (2)	$	46,445		$	8,638

(2)

Differences between our equity in earnings of unconsolidated entities and the underlying net income of the entities are primarily a result of a basis difference of an acquired joint venture interest; distributions from entities in excess of the carrying amount of our net investment; recoveries of previously incurred charges; unrealized gains on our retained joint venture interests; and our share of the entities’ profits related to home sites purchased by us which reduces our cost basis of the home sites acquired.