REAL ESTATE AND WATER ASSETS

12 Months Ended

Dec. 31, 2011

Real Estate [Abstract]

Real Estate and Water Assets

REAL ESTATE AND WATER ASSETS:

The cost assigned to the various components of real estate and water assets at December 31, is as follows (in thousands):

	2011		2010
Real estate	$	161,733	$	172,001
Real estate improvements, net of accumulated amortization of $8.3 million in 2011 and $7.4 million in 2010	8,197		8,830
Water and water rights	79,020		73,625
Pipeline rights and water credits at Fish Springs	84,890		101,114
	$	333,840	$	355,570

For the three years ended December 31, 2011, amortization of leasehold improvements was $879,000, $880,000 and $852,000, respectively. The carrying value of intangible assets not subject to amortization is $111.4 million and $127.6 million at December 31, 2011 and 2010, respectively.

Impairment Losses during 2011:

In response to specific events and changes in circumstances during 2011, the Company completed impairment testing for its intangible assets. The fair value of these assets is calculated using discounted cash flow models that incorporate a wide range of assumptions including current asset pricing, price escalation, discount rates, absorption rates, and timing of sales, and costs. These models are sensitive to minor changes in any of the input variables. Given the dramatic and prolonged slow-down in housing starts and sales in the North Valleys of Reno, Nevada, and the recent decline in market prices for similar assets, the Company adjusted its assumptions and judgments in the model for the price, timing and absorption of water sales from our prior projections for the Fish Springs water credits and pipeline rights and Carson Lyon water assets. These changes in assumptions and judgments resulted in a fair value of the Fish Springs asset of approximately $84.9 million compared to its carrying value of $101.1 million. Consequently, an impairment charge of $16.2 million was recorded in the third quarter of 2011, to reduce the carrying value to fair value. This is the only such impairment charge recorded on this asset and is reported in the statement of operations within impairment loss on real estate and water assets and is included in the results of operations of the water resource and water storage segment. There were no other impairment charges on any other intangible assets recorded in the period.

During the fourth quarter of 2011, the Company recorded impairment losses on certain of its real estate assets due to the state of the housing market that has impacted the timing and potential sales proceeds of certain projects, primarily located in outlying areas of Fresno, California. The Company adjusted its assumptions and judgments in the cash flows for revenues and costs. These changes in assumptions resulted in cash flows that did not support recovery of the carrying value of the project and as a result, the Company recorded an impairment loss of $5.2 million which represents the difference between the estimate of fair value of the projects and their carrying value. The loss is reported in the statement of operations within impairment loss on real estate and water assets and is included in the results of operations of the real estate operations segment. There were no real estate impairment charges recorded in 2010 or 2009.

Impairment Loss during 2010:

During the fourth quarter of 2010, the Company completed its annual impairment test for intangible assets which include certain water rights and the exclusive right to use assets that the Company constructed and later dedicated to various municipalities.  These assets are located in select markets in Nevada, primarily in Washoe and Lyon counties.  The fair values are calculated using discounted cash flow models that incorporate a wide range of assumptions including current asset pricing and future escalation, absorption and timing of sales, future costs, and discount rates.   Given the growth projections issued in the fourth quarter of 2010 from the Nevada State Demographer are significantly lower than previous population projections and the dramatic and prolonged slow-down in housing starts and sales in the Dayton corridor area of Lyon County, will likely result in the delay of sales of some of our Carson River water rights.  Consequently, we have adjusted our assumptions and judgments for the forecast of the timing and volume of water sales from our original projections for the discounted cash model for our Carson River water rights.  These changes in assumptions and judgments resulted in a fair value of $26.6 million compared to a carrying value of $36.9 million for our Carson River water rights.  Consequently, an impairment charge of $10.3 million was recorded to write off the excess of carrying value over the fair value.  This is the only such impairment charge recorded on this asset.

Impairment Loss during 2009:

Lincoln/Vidler jointly filed a permit application in 1998 for 14,000 acre-feet of water rights for industrial use from the Tule Desert Groundwater Basin in Lincoln County, Nevada.  In November 2002, the Nevada State Engineer awarded Lincoln/Vidler a permit for 2,100 acre-feet of water rights, which Lincoln/Vidler subsequently sold in 2005, and ruled that an additional 7,240 acre-feet could be granted pending additional studies by Lincoln/Vidler (the “2002 Ruling”).  Subsequent to the 2002 Ruling and consistent with the Nevada State Engineer’s conditions Vidler subsequently performed these additional engineering and scientific studies.

During 2008, Lincoln/Vidler submitted comprehensive and substantial evidence to the Nevada State Engineer to support its permit applications as required by the 2002 Ruling.  On April 29, 2009, the Nevada State Engineer issued a ruling with respect to such applications (the “2009 Ruling”).  The 2009 Ruling determined that the perennial yield of the groundwater recharge in the Tule Desert Groundwater Basin was likely in the range of 2,500 to 5,000 acre-feet per year.  The Nevada State Engineer further concluded that it would permit the appropriation of only one-half of the upper end of that range, or 2,500 acre-feet.  Since 2,100 acre-feet had already been appropriated to and permitted to Lincoln/Vidler under the 2002 Ruling, the Nevada State Engineer found that only 396 acre-feet of unappropriated water remained in the Tule Desert Groundwater Basin.  Accordingly, the 2009 Ruling granted Lincoln/Vidler 396 acre-feet of additional permitted water rights, instead of the applied for 7,240 acre-feet of water rights.

The carrying value of the applications for the additional 7,240 acre-feet was $16.4 million before the ruling, which primarily represented costs incurred for the data collection, drilling and monitoring costs and expenses incurred to collect, interpret and submit the groundwater data to the Nevada State Engineer.  Under agreements in place with developers at the time of ruling, Vidler would only record approximately $4 million of revenue from the 396 acre-feet of water rights granted in the 2009 Ruling.  As such, the carrying value of the 396 acre–feet we had been awarded was written down to this estimated recoverable value, and we recorded a loss on impairment of approximately $12.4 million during 2009.  

The Company did not identify any other impairments on its real estate or water assets during the year ended December 31, 2011, 2009 or 2008.

Settlement of the Tule Desert Groundwater Basin Litigation

On May 27, 2009, Lincoln/Vidler filed an appeal of the 2009 Ruling in Nevada District Court, as well as in U.S. Federal Court.

On April 15, 2010, Lincoln/Vidler and the Nevada State Engineer announced that they had concluded a Settlement Agreement with respect to the entire litigation between the parties.  The Settlement Agreement resulted in the granting to Lincoln/Vidler of the original Lincoln/Vidler Application of 7,240 acre-feet of water rights with an initial 2,900 acre-feet of water rights available for sale or lease by Lincoln/Vidler and the balance of the water rights (4,340 acre-feet) is the subject of staged pumping and development over the next several years.  The staged pumping development under the Settlement Agreement requires the continuing collection of recharge data and pumping data over the next several years by Lincoln/Vidler to further refine the modeling of the basin and potential impacts, if any, from deep aquifer pumping in the remote, unpopulated desert valley in Lincoln County, Nevada.

The Settlement Agreement results in Lincoln/Vidler obtaining up to an additional 6,844 acre–feet of permitted water rights in the Tule Desert Groundwater Basin.  

Fish Springs Pipeline Rights and Water Credits:

At December 31, 2011 and 2010, pipeline rights and water credits at Fish Springs Ranch included $92.7 million of direct construction costs, $6.4 million for the 7,987 acre-feet of water credits and $2 million of capitalized interest.  As the Company sells water credits to end users, the costs of the pipeline rights will be reported as cost of water sold.  No water credits were sold during 2011, 2010 or 2009.

The final regulatory approval required for the pipeline project was a Record of Decision (“ROD”) for a right of way, which was granted on May 31, 2006.  Subsequently, there were two protests against the ROD, and the matter was appealed and subsequently dismissed.  However, in October 2006, one protestant, the Pyramid Lake Paiute Tribe (the “Tribe”), filed an action with the U.S. District Court against the Bureau of Land Management and U.S. Department of the Interior.  The Tribe asserted that the exportation of 8,000 acre-feet of water per year from Fish Springs would negatively impact their water rights located in a basin within the boundaries of the Tribe reservation.  The Company was able to reach a $7.3 million financial settlement with the Tribe that ended the dispute in September 2007.  The settlement agreement is pending ratification by the United States Congress.

There is 13,000 acre-feet per-year of permitted water rights at Fish Springs Ranch.  The existing permit allows up to 8,000 acre-feet of water per year to be exported to support the development in the Reno area.  The settlement agreement also provides that, in exchange for the Tribe agreeing to not oppose all permitting activities for the pumping and export of groundwater in excess of 8,000 acre-feet of water per year, Fish Springs will pay the Tribe 12% of the gross sales price for each acre-foot of additional water that Fish Springs sells in excess of 8,000 acre-feet per year, up to 13,000 acre-feet per year.  The obligation to expense and pay the 12% fee is due only if and when the Company sells water in excess of 8,000 acre-feet, accordingly, Fish Springs Ranch will record the liability for such amounts as they become due upon the sale of any such excess water.  Currently Fish Springs does not have regulatory approval to export any water in excess of 8,000 acre-feet per year from Fish Springs Ranch to support further development in northern Reno, and it is uncertain whether such regulatory approval will be granted in the future.  Consequently, for the year ended December 31, 2008, the Company accrued settlement expense of $7.3 million.  In January 2008, the Company paid $3.1 million to the Tribe and the final payment of $3.6 million has been accrued for as of December 31, 2011, and is not due until the settlement agreement has been ratified by the United States Congress.