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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
[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
[_]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:  1-10153
HOMEFED CORPORATION 
(Exact Name of Registrant as Specified in its Charter)
Delaware33-0304982
(State or other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
1903 Wright Place, Suite 220
Carlsbad, California  92008
(760) 918-8200
 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:  None.
     Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [   ]  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  [  ] 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  [   ]
 
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 and post such files).      Yes  [ x ]   No  [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer[   ] 
Accelerated filer
[ x ]
 Non-accelerated filer[   ] Smaller reporting company[ x ]
Emerging growth company[    ]
 
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).  Yes  [  ]    No  [x]
 
Based on the average bid and asked prices of the Registrant’s Common Stock as published by the OTC Bulletin Board Service as of June 30, 2018, the aggregate market value of the Registrant’s Common Stock held by non-affiliates was approximately $207,559,100 on that date.
 
As of February 12, 2019, there were 15,500,246 outstanding shares of the Registrant’s Common Stock, par value $.01 per share.
 
DOCUMENTS INCORPORATED BY REFERENCE: NONE
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV on page 58.  








PART I
Item 1Business.
Overview
HomeFed Corporation is a developer and owner of residential and mixed-use real estate projects in California, Virginia, South Carolina, Florida, Maine and New York.  After many years in the entitlement process, the majority of our assets are now either operating real estate or entitled land ready for sale.  We may also from time to time investigate and pursue the acquisition of new real estate projects, both residential and commercial. 
This section should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report and the information set forth under the heading, “Cautionary Statement for Forward-Looking Information” in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Strategic Priorities
 
In 2019, our primary strategic priority is to optimize our asset in the Otay Ranch area by focusing on expediting development and maximizing revenue over the coming years. In addition, we intend to continue to focus on lot and home sales to maximize our revenue at our San Elijo Hills, Ashville Park, Market Common and SweetBay projects. We also plan to strategically develop land and continue the entitlement process where these activities are ongoing. We own a portfolio of diverse assets and continue to focus on improving cash flow and value creation at Brooklyn Renaissance Plaza and at our new investment, RedSky JZ Fulton Investors (as described below in "Recent Transactions") and our other properties held for investment purposes.
 
Company Information
 
At December 31, 2018, we and our consolidated subsidiaries had 39 full-time employees.  We incorporated in 1988, and our executive office is located at 1903 Wright Place, Suite 220, Carlsbad, California 92008. Our primary telephone number is (760) 918-8200 and our website address is www.homefedcorporation.com. 
 
As used herein, the term “Company”, “HomeFed”, “we”, “us”, “our” or similar expressions refer to HomeFed Corporation, and our subsidiaries, except as the context otherwise may require.

Recent Announcement

On February 19, 2019, we announced that we received a proposal from our majority shareholder, Jefferies Financial Group Inc. (“Jefferies”), to purchase the remaining common stock of HomeFed not already owned by Jefferies in a transaction that would entail Jefferies issuing two shares of Jefferies common stock for each share of HomeFed’s common stock to be acquired by Jefferies.

Consistent with its fiduciary duties and with the stockholders agreement between HomeFed and Jefferies, the HomeFed Board of Directors has appointed a special committee of independent directors (the "special committee") who, in consultation with independent financial and legal advisors, will carefully review and evaluate Jefferies’ proposal. Jefferies’ proposal is subject to an affirmative recommendation by the special committee and approval by holders of a majority of the outstanding shares of HomeFed common stock not already owned by Jefferies or its affiliates, in addition to any other vote required by applicable law.

Jefferies’ proposal is described in an amendment to its Schedule 13D filed with the Securities and Exchange Commission on February 19, 2019, available on the SEC’s website at https://www.sec.gov.


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Recent Transactions

In December 2018, we formed a joint venture partnership with RedSky JZ Fulton Holdings, LLC, a Delaware limited liability company (“RS JZ”), for the acquisition and possible redevelopment of a development site located on the Fulton Mall corridor in Downtown Brooklyn, New York. The property consists of 15 separate tax lots, divided into two premier development sites which may be redeveloped with buildings consisting of up to 540,000 square feet of floor area development rights. RS JZ is itself a joint venture consisting of RedSky Capital, LLC (“RedSky”), a Brooklyn-based real estate developer, and JZ Capital Partners Limited (“JZ”), a London-based investment company.

Pursuant to that certain Contribution Agreement, dated as of December 10, 2018 (the "Contribution Agreement"), among RS JZ, HF Fulton Street Holdings LLC (“HF Fulton”), a wholly-owned subsidiary of HomeFed, and RedSky JZ Fulton Investors, LLC, a Delaware limited liability company (the “Joint Venture”), HomeFed contributed capital in the amount of $52,500,000 to the Joint Venture. As consideration for the capital contribution, RS JZ caused the Joint Venture to issue to HF Fulton a membership interest in the Joint Venture consisting of 49% of the total membership interests in the Joint Venture. RS JZ holds the remaining 51% membership stake in the Company. The Contribution Agreement includes customary representations and warranties by RS JZ in favor of HF Fulton as to the state of title and other matters affecting title to the property, and as to the assets and liabilities of the Joint Venture. The Contribution Agreement also includes customary representations and warranties as to the assets and liabilities of the two wholly-owned subsidiaries of the Joint Venture which own fee title to the property. 

Our Businesses
 
We operate in two reportable segments—real estate and corporate. Real estate operations consist of a variety of residential land development projects and commercial properties and other unimproved land, all in various stages of development. Real estate also includes contract service revenues, contract service expenses and the equity method investments in BRP Holding, BRP Hotel, RedSky JZ Fulton Investors and the Builder LLCs in the Otay Land project. Corporate primarily consists of investment income and overhead expenses. Our farming segment, which we no longer report, consisted of the Rampage property which included an operating grape vineyard and an almond orchard under development which was sold in January 2018. Revenue from the sale of the Rampage property is included in our real estate segment.
 
Real Estate

As the owner of development projects, we are responsible for the completion of a wide range of activities, including design engineering, grading raw land, constructing public infrastructure such as streets, utilities and public facilities, and finishing individual lots for home sites or other facilities. Prior to commencement of development, we may engage in incidental activities to maintain the value of the project; such activities are not treated as a separate operating segment.  We develop and market our communities in phases to allow ourselves the flexibility to sell finished lots to suit market conditions and to enable us to create stable and attractive neighborhoods.  Consequently, at any particular time, the various phases of a project will be in different stages of land development and construction. Given the larger number of entitled lots we now own, rather than holding property for years, it is very possible that we may decide to sell one or more phases of an active project to another developer or consider entering into joint ventures with partners like we have with the Village of Escaya as described below. In addition, from time to time we have received expressions of interest from buyers for multiple phases of a project, or the remaining undeveloped land of an entire project. We evaluate these proposals when we receive them, but no assurance can be given that we will sell all or any portion of our development projects in such a manner.
 
For any master-planned community, plans must be prepared that provide for infrastructure, neighborhoods, commercial and industrial areas, educational and other institutional or public facilities, adequate water supply, as well as open space, in compliance with regulations regarding reduction in emissions of greenhouse gases, local growth ordinances, affordable housing, storm water permits and in California Title 24 (the “Cal Green” code).  Once preliminary plans have been prepared, numerous governmental approvals, licenses, permits and agreements,
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referred to as “entitlements,” must be obtained before development and construction may commence.  These often involve a number of different governmental jurisdictions and agencies, challenges through litigation, considerable risk and expense, and substantial delays. Unless and until the requisite entitlements are received and substantial work has been commenced in reliance upon such entitlements, a developer generally does not have full “vested rights” to develop a project, and as a result, allocation of acreage between developable and non-developable land may change.  In addition, as a precondition to receipt of building-related permits, master-planned communities are typically required to pay impact and capacities fees, or to otherwise satisfy mitigation requirements.
 
The following table summarizes the stages of development of our properties:
 hofd-20181231_g1.jpg

Otay Land

Otay Ranch is a master-planned community comprised of 22,900 acres in south San Diego County, California. The General Development Plan (“GDP”), a joint effort between the City of Chula Vista and the County of San Diego, establishes land use goals, objectives and policies within the area, and contemplates home sites, a golf-oriented resort and residential community, commercial retail centers, a university site and a network of infrastructure, including roads and highways, a public transportation system, park systems and schools. Any development within the Otay Ranch master-planned community must be consistent with the GDP. Although there is no specified time within which implementation of the GDP must be completed, it is expected that full development of the larger planning area will take years.
We have owned land in Otay Ranch since our initial purchase in 1998, but recent transactions have significantly increased our holdings. In March 2015, we acquired approximately 64 acres for a cash purchase price of $3,750,000, which added 26 acres for industrial development and entitlements for 62 single family homes.  In July 2015, we acquired approximately 1,600 acres for a cash purchase price of $150,000,000. These 1,600 acres are contiguous with the land we already owned and are entitled for approximately 2,640 single family lots, 4,300 multi-family residential units and 40,000 square feet of commercial space. These acres also include approximately 30 acres of land designated for industrial and office space development and 700 acres of land designated for open space and preserve. The purchase was funded in part by our working capital and in part by the proceeds of a $125,000,000 private offering, sale and issuance of the 6.5% Senior Notes due June 30, 2018.
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We own approximately 4,450 acres of land within the Otay Ranch community as of December 31, 2018. Approximately 2,800 acres are designated as various qualities of non-developable open space mitigation land. Under the GDP, 1.188 acres of open space mitigation land from within the Otay Ranch area must be dedicated to the government for each 1.0 acre of land that is developed. We have more mitigation land than we need to develop our property at this project. This land could have value to other developers within the larger Otay Ranch development area or elsewhere, should such developers need to acquire additional mitigation land for their projects. We refer to all of our acreage as our "Otay Land" project, which is currently approved for approximately 13,050 residential units and 1.85 million square feet of commercial space.  
The Otay Land project is in the early stages of development and additional permits are in process. The development of the overall project is likely to take years and will occur in phases, or by village, as the GDP refers to them. Development began in the first of five villages (village three, now known as the "Village of Escaya" (as further described below)) in early 2016. We negotiated contracts with three homebuilders for approximately 948 homes within the Village of Escaya, and are working with the local school districts regarding their school site needs given the future growth throughout the development project. The grand opening occurred in June 2017 and home closings began in January 2018. The Village of Escaya community has 27 model homes currently available for viewing. We are also developing in the second of five villages (village eight west, now known as Cota Vera). We have commenced infrastructure improvements in Cota Vera. Cota Vera is planned for 2,379 residential units to include 809 single family homes, 246 multi-family homes, 285 market rate apartments and 268 affordable apartments with an additional 771 units earmarked for senior housing. The plans for Cota Vera include community serving retail, a school and a fire station.

There is an issue with title to a small portion of Cota Vera related to a 100-foot strip of land approximately two miles in length containing an inactive water line. To clear title, we filed a lawsuit in San Diego Superior Court during February 2019. We are seeking to quiet title by establishing ownership over portions of the 100-foot strip based upon deeds in the chain of title and also through adverse possession. The 100-foot strip was excepted from the land around it in 1912 when it was used as an active pipeline. That use ceased around the year 2000. Our exposure if we are unsuccessful in this litigation will result in additional costs to revise our plans for Cota Vera, the cost of delay while we revise our plans, and a loss of density caused by eliminating units currently planned within the 100-foot strip. At this time, there are too many variables for us to provide an accurate number quantifying these costs.

In December 2017, we entered into an agreement with a San Diego-based contractor to build the town center portion of the Village of Escaya project, known as The Residences and Shops at Village of Escaya, which is comprised of 272 apartments and approximately 20,000 square feet of retail space. The contractor will also build a 10,000-square foot community facility building adjacent to the town center, which will be used for a youth recreational and after school care facility. The construction commenced in January 2018 and is anticipated to be complete over a two-year period with the first apartments expected to be occupied in the second half of 2019. The improvements will be funded by proceeds from the sale of the Rampage property (described below) as part of a 1031 like-kind exchange, cash on hand, EB-5 financing and a new construction loan.

In April 2016, we formed a limited liability company, HomeFed Village III Master LLC, ("Village III Master") to own and develop an approximate 450-acre community in the Village of Escaya planned for 948 homes. We entered into an operating agreement with three home builders as members of Village III Master.  We made an initial non-cash capital contribution of $20,000,000 which represents the fair market value of the land we contributed to Village III Master after considering proceeds of $30,000,000 we received from the builders at closing, which represents the value of their capital contributions.

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In January 2017, we recorded the final map that subdivided the approximately 450-acre parcel of land in the Otay Ranch General Plan Area of Chula Vista, California, which is now known as the community of Village of Escaya. We formed three limited liability companies (each, a "Builder LLC") to own and develop 948 homes within Village of Escaya and entered into individual operating agreements with each of the three builders as members of each Builder LLC. Upon admittance of the three builders into their respective Builder LLC, each of the three builders withdrew as members of Village III Master, which is now a wholly owned subsidiary of HomeFed Corporation. On January 5, 2017, we made an aggregate capital contribution valued at $20,000,000 of unimproved land and $13,200,000 of completed infrastructure improvements to the three Builder LLCs, representing land and completed improvement value. In addition to the $30,000,000 contribution made by the builders, as mentioned above, and $2,250,000 of capitalizable land improvements made by the builders, the builders then made an additional cash contribution of $20,000,000 in January 2017 upon final map subdivision and entry into their respective Builder LLCs, which was used to fund infrastructure costs completed by us.

During the course of development, we discovered the presence of underground perched groundwater that was impacted with certain petroleum byproducts while constructing the primary access road to the community. We are working with regulatory agencies to investigate the matter and have developed mitigation measures, which are being mitigated through the construction process. Further investigation disclosed that soil vapor in a portion of the Village of Escaya project where homes and apartments are to be constructed was impacted with methane and certain volatile organic compounds (collectively “compounds”). These types of compounds commonly exist in soil vapor and can be mitigated through the construction process. We are working with local authorities and have developed measures to fully mitigate the effect of the impacted soil vapors where they have been detected. The apartment site has been mitigated and the number of homes that will need mitigation is to be determined as further investigation is conducted while development progresses. Costs associated with mitigation during the homebuilding process will be shared with the builders through our Builder LLCs. For additional information concerning governmental and environmental matters, see “Government Regulations: and “Environmental Compliance” below.

Our maximum exposure to loss is limited to our equity commitment in each Builder LLC. Additionally, we are responsible for the remaining cost of developing the community infrastructure with funding guaranteed by us under the respective operating agreements for which we received a capital credit of $78,600,000 ("Cost Cap"), and we are responsible for any costs in excess of this limit to complete the community infrastructure. During 2018, the cost of infrastructure improvements in the Village of Escaya that is attributable to the Builder LLCs exceeded the Cost Cap by $9,750,000, and we expect to incur additional costs until we complete our infrastructure obligations. The builders are responsible for the construction and the selling of the 948 homes with funding guaranteed by their respective parent entities.

A map indicating the location of the Chula Vista General Plan area in San Diego County, California and a more detailed map showing general information about our land within that General Plan area can be found on our website at www.homefedcorporation.com. In addition, information about the Village of Escaya can be found at www.escayalife.com.

Brooklyn Renaissance Plaza
 
Brooklyn Renaissance Plaza is comprised of a 665 room hotel operated by Marriott, an approximate 850,000 square foot office building complex and an 888 space parking garage located in Brooklyn, New York. We own a 25.80% equity interest in the hotel and a 61.25% equity interest in the office building and garage. 
 
The office building and garage are owned in partnership with New York City-based Muss Development Corporation and the hotel is owned in partnership with Muss Development Corporation and Marriott. Brooklyn Renaissance Plaza was originally built in 1998; an additional hotel tower was completed in 2005.  Tenants in the office building include, among others, the King’s County District Attorney’s Office, New York City Board of Education, the United States General Services Administration and the United Federation of Teachers. Certain tenants were the original anchors of the building and their leases were used to secure construction financing for a significant portion of the office building in the form of self-amortizing New York City Industrial Revenue Bonds, which were fully paid off in
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2018. On February 28, 2018, Brooklyn Renaissance Holding ("BRP Holding") satisfied, in full, the $8,750,000 principal balance of a portion of the self-amortizing New York City Industrial Revenue Bonds, with the proceeds of a new $198,350,000 fully amortizing 21-year structured lease-back financing. Approximately $157,250,000 of the proceeds was distributed to members of which we received $88,000,000.

Three of our larger tenants in Brooklyn Renaissance Plaza, who currently lease approximately 89,000, 465,000 and 64,000 square feet have agreed to 5-year, 10-year and 15-year lease renewals, respectively, which began in 2018.   

In addition to its equity interest, Marriott manages the hotel for an annual fee subject to the achievement of certain performance thresholds. The hotel completed a major renovation of the restaurant, lobby, banquet facilities and rooms during the third quarter of 2016. During the renovation process, revenues were adversely affected across all revenue categories. Brooklyn Renaissance Hotel refinanced their mortgage during the fourth quarter of 2016 and used the proceeds to reimburse each partner for their respective contribution for the hotel renovation. In December 2016, we received $3,400,000 representing our portion of the contributions made for the hotel renovation.

BRP Leasing
 
BRP Leasing was the indirect obligor under a lease through October 2018 of approximately 286,500 square feet of office space at Brooklyn Renaissance Plaza, substantially all of which had been sublet through October 2018. Beginning on November 1, 2018, leasing activities are directly managed by BRP Holding and we recognize income from the former sublease space through BRP Holding under the equity method of accounting.
 
San Elijo Hills

San Elijo Hills is a master-planned community located in the City of San Marcos in San Diego County, California, consisting of approximately 3,500 homes and apartments, as well as a commercial and residential town center (the "Towncenter").  We own 85% of the project and since August 1998, we have been the development manager, with responsibility for the overall management of the project, including, among other things, preserving existing entitlements and obtaining any additional entitlements required for the project, arranging financing for the project, coordinating marketing and sales activity, and acting as the construction manager. The development management agreement provides that we receive fees for the field overhead, management and marketing services we provide (“development management fees”), based on the revenues of the project.

As of December 31, 2018, we have sold 3,436 of the 3,463 combined single family lots and multi-family units.  We have also substantially completed development of the remaining residential single family lots at the San Elijo Hills project, the remaining lots are “premium” lots which are expected to command premium prices, but typically sell at a slower pace. During June 2015, we entered into an agreement with a local San Diego based luxury homebuilder to construct and sell on our behalf, for a fee, homes on the remaining 58 single family lots at the San Elijo Hills project. The model complex opened in December 2016 and, we sold 24 and 9 of these homes for $38,900,000 and $13,100,000 during 2018 and 2017, respectively.

The Towncenter consists of multi-family residential units and commercial space, which are being constructed in three phases. During 2018, the third phase of the Towncenter, which is a 2.5 acre parcel of land entitled for 12 multi-family units (formerly designated as a church site), sold for $1,600,000. During 2017, the 48,800 square feet of commercial space in phases one and two of the Towncenter and the 12 multi-family units in phase two were sold to a local developer for a cash payment of $5,800,000.

General information about the San Elijo Hills project can be found at www.sanelijohills.com.
 
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Ashville Park
 
In February 2012, we acquired Ashville Park, a 450-acre master planned community located in Virginia Beach, Virginia, with 451 entitled single family lots, one of which is a visitor's center for $17,350,000.  The project is being developed in phases: the first phase is a development of 91 finished lots ("Village A"), and the second phase is a 164 lot development ("Village B").  The project also includes a junior Olympic size pool and a clubhouse that opened in 2016. As of December 31, 2018, all lots in Village A and Village B were sold.  

The entitlement effort to re-plan Villages C, D and E was impacted by a delay within the City of Virginia Beach. In 2014 and 2016, severe storm events caused regional flooding, and large portions of the City of Virginia Beach’s storm water management system did not perform as expected. In 2016, the City of Virginia Beach hired outside civil engineers to study the system and provide possible solutions. The study is now complete and reveals that significant improvements to the storm water management system within the City of Virginia Beach are needed. In August 2018, the City of Virginia Beach approved our plans for 116 homes in Village C. The approval provides that we dedicate approximately 25 acres of land, which we had planned for 44 homes and open space known as Village D, to the City of Virginia Beach to be used as part of the City of Virginia Beach storm water management solution. We are completing improvement plans for Village C and expect to begin development and marketing of lots in 2019.

General information about the Ashville Park project can be found at www.ashvilleparkva.com.  
 
Market Common
 
The Market Common is located in Myrtle Beach, South Carolina and was acquired in 2014 as part of our acquisition during 2014 of substantially all of the real estate properties, operations and investments of Leucadia National Corporation, now known as Jefferies Financial Group Inc. ("Jefferies") and approximately $14,000,000 of cash (including cash acquired as part of working capital) in exchange for 7.5 million newly-issued unregistered shares of HomeFed common stock (the “Acquisition”). The project is a mixed-used retail, office and residential lifestyle center, including adjacent land for future commercial and residential development. The 114 acre mixed-use development is part of a larger 3,900 acre redevelopment of the Myrtle Beach Air Force Base that was closed in 1993.  The Market Common includes a 346,580 square foot retail center, approximately 40,000 square feet of office space and 195 long term apartment units.  The retail and office space, which opened in 2008, are currently 95% leased.  The long-term apartments are approximately 98% leased.  Tenants in the retail center include: Barnes and Noble, PF Chang’s, Gordon Biersch, Anthropology, Chico’s, Pottery Barn, 810 Bowling and Grand 14 Cinema.
 
Since 2014, the balance of the residential land has been redesigned to include 204 single family lots of which 159 have been sold and 176 multi-family lots of which 58 have been sold to date. A 15 acre parcel adjacent to this residential land is expected to include a hotel, additional residential and potential retail uses.
 
General information about The Market Common can be found at www.marketcommonmb.com.  
 
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SweetBay Project
 
The SweetBay project ("SweetBay") is a 700-acre mixed use master planned community located in Panama City, Florida.  The project is a bay front planned community with over five miles of shoreline at the site of the former Panama City-Bay County International Airport.  SweetBay is entitled for up to 3,200 single family and multi-family units, 700,000 square feet of commercial space, a marina with approval for 117 wet slips and 240 dry docks, as well as an extensive trail system, neighborhood parks and the new site of University Park Charter Academy.  The school opened in 2012 in cooperation with Florida State University-Panama City and has relocated to the renovated former airport terminal building which currently provides space for 330 full-time K thru 5 students, eventually expanding to 536 students.  The enrollment of the school is oversubscribed; however future residents of SweetBay will have an enrollment preference for up to 50% of the available seats.  For the 2018-2019 school year, 29 student seats have been reserved for residents of SweetBay.  We may increase or decrease the number of reserved seats for SweetBay residents in an annual notice to the school prior to commencement of the following school year. The financial contribution for reserved student seats is an amount equal to the state funding per student as determined by the Bay County School District and the State of Florida.

Entitlements include a Development Agreement with a 30-year term that sets forth the obligations between SweetBay and Panama City, the local jurisdiction for project approvals. Panama City and Bay County are considered a recovering housing market, with SweetBay being the first and only entitled master planned community of its size in its market area. 

Development has begun in the initial portion of the first phase of the community consisting of 252 single family homes, with 10 models, a welcome center, a community pool and a sport court. Since the opening in 2016, 131 single family homes have been sold as of December 31, 2018.  

General information about the SweetBay project can be found at www.sweetbayfl.com.

Maine Project

Northeast Point is located on Isleboro Island and is an entitled 75-acre project subdivided into 12 oceanfront lots and one existing residence. Islesboro Island is a small island community that is accessed by ferry service from Lincolnville, Maine, just north of Camden, Maine and is a seasonal destination. We are evaluating our options for the Northeast Point property while exercising patience in order to maximize shareholder value for this project.

Fanita Ranch
 
In January 2011, we acquired in a foreclosure sale the Fanita Ranch property, a 2,600-acre parcel of vacant land located in Santee, California for aggregate consideration of $12,350,000.  The City of Santee is located at the intersection of SR125 and SR52 in East San Diego County, about a 30 minute drive from downtown San Diego. We acquired the property with the intention of completing the necessary entitlements to develop the property as a master-planned community.  Fanita Ranch was approved for approximately 1,400 residential units. The project’s Environmental Impact Report (“EIR”) and development agreement with the City of Santee were approved in 2007.
 
We received approval to process an amendment from the City of Santee to amend the General Plan. We are preparing the project and General Plan EIRs and will then prepare a new master development plan which will be the basis for a future plan submittal or development application to the City of Santee. As a prerequisite for development, we are working in cooperation with the City of Santee to complete a habitat preserve plan, which will create an open space preserve required by state and federal regulations for the City of Santee to process and approve our development plans.  In addition, we have entered into an agreement with the California Department of Transportation to identify operational improvements to State Highway Route 52 from the City of Santee to Interstate 15, which may enhance access to the City of Santee and our project. There are no assurances that real estate market conditions, or costs of construction, will allow the project to be profitably developed as currently planned.  If successful, obtaining all the entitlements is expected to take years.
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Pacho Project (Wild Cherry Canyon)
 
The Pacho Project, a leasehold interest in six separate contiguous parcels totaling 2,369 acres of unentitled property located along the central California coast in San Luis Obispo County, California, was acquired in 2014 as part of the Acquisition.  The property is located in the hills above San Luis Obispo Bay and Avila Beach and is near several recreational and tourist attractions including beaches, golf courses and wineries.  The city of San Luis Obispo, home of the 18,000 student California Polytechnic State University, is located approximately 10 miles from the site.
 
We own a 90% controlling interest in the partnerships that are the lessees under a long-term lease entered on December 26, 1968.  The lessor is an affiliate of Pacific Gas & Electric Company ("PG&E"), which owns the nearby Diablo Canyon Power Plant.  The property is largely open space and features slopes rising above Avila Bay offering spectacular panoramic views in all directions.  

We previously reported that we may not develop the Pacho Property unless we are able to obtain fee title from PG&E within a reasonable period of time. The original 99-year lease term to the Pacho Property expires in 2067. The lease includes an option to renew it for an additional 99-year term.

We have made no progress in obtaining the fee title from PG&E. Moreover, because of questions recently raised in the media as to whether the term of our leasehold validly runs until 2166 (including the option term), in August 2018 we notified PG&E that we formally exercised the renewal option and that we intend to commence a declaratory relief proceeding to confirm our leasehold is valid until 2166 and is not rendered shorter by the provisions of California Civil Code section 718. In September 2018, PG&E responded and asserted for the first time that it contends California Civil Code section 717 ends the lease in 2019, which we are disputing.

We concluded that our Pacho leasehold was impaired and recorded a $17,450,000 pre-tax charge (the entire carrying value of the leasehold), of which $1,750,000 is attributable to the non-controlling interest in the third quarter of 2018.

On February 1, 2019, we filed a Complaint for Declaratory Relief and Quiet Title in the San Francisco Superior Court against the lessor, Eureka Energy Company, asking for a determination that the initial term of the lease is valid and enforceable through December 26, 2067 and that the option to renew the lease for an additional 99 years is valid through December 26, 2166. Eureka Energy Company is a wholly owned subsidiary of PG&E. The following day, PG&E filed for bankruptcy protection. Eureka Energy Company was not identified as a debtor in the PG&E bankruptcy. If we are unsuccessful in obtaining a favorable ruling on our claims for declaratory relief, then we believe that we will have recourse to pursue our unrecognized claims against the insurer of the leasehold title and the real estate counsel that represented us in our 2014 purchase of the leasehold interest. However, there is no assurance that we will be successful in these matters.

Other

In December 2018, we formed a joint venture partnership, Carlsbad Village 80, LLC ("Carlsbad Joint Venture"), with JM Carlsbad Village, L.P., to pursue acquisition and possible development of 1.74 acres of land in Carlsbad, CA. We contributed $700,000 for a 90% equity interest in the joint venture. The proceeds were used for a refundable option deposit to acquire the parcel of land.

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Competition
 
Real estate development and ownership is a highly competitive business.  There are numerous residential real estate developers and operators, as well as properties and development projects, operating in the same geographic areas in which we operate.  Competition among real estate developers and development projects is determined by the location of the real estate, the market appeal of the development plan, and the developer’s ability to build, market and deliver project segments on a timely basis. Many of our competitors may have greater financial resources and/or access to cheaper capital than we may have. Residential developers sell to homebuilders, who compete based on location, price, market segmentation, product design and reputation.
 
Government Regulation
 
The residential real estate development industry is subject to substantial environmental, building, construction, zoning and real estate regulations that are imposed by various federal, state and local authorities.  In developing a community, we must obtain the approval of numerous government agencies regarding such matters as permitted land uses, housing density, affordable housing, the installation of utility services (such as water, sewer, gas, electric, telephone and cable television) and the dedication of acreage for open space, parks, schools and other community purposes.  Regulations affect homebuilding by specifying, among other things, the type and quality of building materials that must be used, certain aspects of land use and building design and the manner in which homebuilders may conduct their sales, operations, and overall relationships with potential home buyers.  Furthermore, changes in prevailing local circumstances or applicable laws may require additional approvals, or modifications of approvals previously obtained.
 
Timing of the initiation and completion of development projects depends upon receipt of necessary authorizations and approvals.  Because of the provisional nature of these approvals and the concerns of various environmental and public interest groups, the approval process can be delayed by withdrawals or modifications of preliminary approvals and by litigation and appeals challenging development rights. Our ability to develop projects could be delayed or prevented due to litigation challenging previously obtained governmental approvals. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future.  Such delays could adversely affect our ability to complete our projects, significantly increase the costs of doing so, or drive potential customers to purchase competitors’ products.
 
Environmental Compliance
 
Environmental laws may cause us to incur substantial compliance, mitigation and other costs, may restrict or prohibit development in certain areas and may delay completion of our development projects.  Delays arising from compliance with environmental laws and regulations could adversely affect our ability to complete our projects and significantly increase development costs.
 
Under various federal, state and local environmental laws, an owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances at that property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances.  In addition to remediation actions brought by federal, state and local agencies, the presence of hazardous substances on a property could result in personal injury, contribution or other claims by private parties.  We have not received any claim or notification from any private party or governmental authority concerning environmental conditions at any of our properties.
 
As more fully discussed in the Annual Report on Form 10-K for the year ended December 31, 2013, upon receipt of required approvals, we commenced remediation activities on approximately 30 acres of undeveloped land owned by Flat Rock Land Company, LLC (“Flat Rock”), a subsidiary of Otay Land Company, LLC (“Otay”). The remediation activities were completed in February 2013.  We received final approval of the remediation from the County of San Diego Department of Environmental Health in June 2013.  Otay and Flat Rock commenced a lawsuit in California
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Superior Court seeking compensation from the parties who Otay and Flat Rock believe are responsible for the contamination of the property. In February 2015, the court denied us any recovery. We filed an appeal of this decision, and the Fourth District Court of Appeals affirmed in part and reversed in part the judgment and remanded the matter to the trial court for further proceedings. See Note 13 to our consolidated financial statements for more information.

Farming
 
In January 2018, we closed on the sale of the Rampage property for $26,000,000 which is reflected in Sales of real estate. The agreement was assigned to a qualified intermediary under an Exchange Agreement to facilitate a 1031 like-kind exchange for tax purposes. In July 2018, we completed the 1031 like-kind exchange and acquired $13,400,000 of replacement property, primarily consisting of improvements at the Village of Escaya mixed-use retail and apartment project, and the remaining proceeds of $12,600,000 is no longer restricted and can be used for any business operation. We recorded a gain on the sale of approximately $17,300,000. The sale of Rampage property did not meet the GAAP criteria to be classified as a discontinued operation.

Corporate
 
Corporate primarily consists of investment income and overhead expenses. Corporate amounts are not allocated to the operating units.  The principal assets of the corporate segment are cash and cash equivalents.
 
Financial Information about Segments
 
Our reportable segments consist of the consolidated operating units identified above other than the farming segment, which we no longer report due to the sale of the Rampage property in January 2018. Equity method investments include equity interests in other entities that we account for under the equity method of accounting and are not consolidated. Financial information regarding our reportable segments is contained in Note 16, Segment Information, in our consolidated financial statements.
 
Available Information 
 
The Securities Exchange Commission (the “SEC”) maintains an internet site that contains reports, proxy, information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The following documents and reports are available on or through our website (www.homefedcorporation.com) as soon as reasonably practicable after we electronically file such material with, or furnish to, the SEC as applicable:
•   Code of Business Practice;
•   Reportable waivers, if any, from our Code of Business Practice by our executive officers;
•   Charter of the Audit Committee of the Board of Directors;
•   Annual reports on Form 10-K;
•   Quarterly reports on Form 10-Q;
•   Current reports on Form 8-K;
•   Beneficial ownership reports on Forms 3, 4 and 5; and
•   Any amendments to the above-mentioned documents and reports.
 
Shareholders may also obtain a printed copy of any of these documents or reports free of charge by sending a request to HomeFed Corporation, Investor Relations, 1903 Wright Place, Suite 220, Carlsbad, California 92008 or by calling (760) 918-8200.
 
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Item 1A. Risk Factors.
 
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our common stock.  The risks set out below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected.  In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
 
Our results of operations and financial condition are greatly affected by the performance of the real estate industry. The real estate development industry has historically been subject to up and down cycles driven by numerous market and economic factors, both national and local, beyond the control of the real estate developer. Because of the effect these factors have on real estate values, it is difficult to predict with certainty when future sales will occur or what the sales price will be.
 
Changes in mortgage interest rate levels could impact demand for housing.  Our business is dependent upon the availability and cost of mortgage financing for potential homebuyers.  Any significant increase in the prevailing low mortgage interest rate environment or decrease in available credit could reduce consumer demand for housing, and result in fewer home sales or lower sale prices.
 
Turmoil in the mortgage lending market has adversely affected our results in the past and could negatively impact our results in the future. The residential real estate development industry is dependent upon the availability of financing for both homebuilders and homebuyers.  Turmoil in the credit markets that began in 2008 resulted in a tightening of credit standards for residential and commercial mortgages and significantly reduced liquidity, adversely affecting the ability of homebuilders and homebuyers to obtain financing, which in turn adversely impacted our ability to sell lots.  Although available liquidity in the mortgage lending market has improved since 2008, significant reductions in mortgage lending liquidity in the future would adversely affect our business. 
 
Residential property sales volume, prices and new building starts have declined significantly in many U.S. markets, which have negatively affected sales and profits.  A worsening of current economic conditions could cause a decline in estimated future cash flows expected to be generated from our real estate projects, potentially resulting in impairment charges for real estate assets. When reviewing real estate assets for impairment, the most significant assumption made to determine estimated future cash flows is the estimated future selling prices of our real estate assets. If current conditions worsen and/or if we lower our estimate of future selling prices, impairment charges could be recorded.
 
Changes in domestic laws and government regulations or in the implementation and/or enforcement of government rules and regulations may delay our projects or increase our costs. Our plans for development projects require numerous government approvals, licenses, permits and agreements, which we must obtain before we can begin development and construction. Our negotiations with local authorities often result in requirements for us to incur development expenses related to improvements for roads, sewers or other common areas that are both inside and outside of our project area. The approval process can be delayed by withdrawals or modifications of preliminary approvals, by litigation and appeals challenging development rights and by changes in prevailing local circumstances or applicable laws that may require additional approvals.  Regulatory requirements may delay the start or completion of our projects and/or increase our costs. 
 
Demographic changes in the U.S. generally and California in particular could reduce the demand for housing. If the current trend of population increases in California were not to continue, or in the event of any significant reductions in employment, demand for real estate in California may decline from current levels.
 
Increases in real estate taxes and other local government fees could adversely affect our results. Increases in real estate taxes and other government fees may make it more expensive to own the properties that we are currently developing, which would increase our carrying costs of owning the properties.

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Recent U.S. tax legislation may have a material adverse effect on our financial condition, results of operations and cash flows. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. This legislation has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations by, among other things, limiting interest deductions, limiting deductibility of certain executive compensation, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "transition tax" on undistributed earnings and profits of U.S. owned foreign corporations, and introducing certain anti-base erosion provisions. The legislation is highly complex and remains unclear in certain respects and will require final interpretations and regulations by the Internal Revenue Service and state tax authorities. Additionally, the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. Thus, the impact of certain aspects of the legislation on us could have an adverse impact on our financial condition, results of operations and cash flows. See Note 11, Income Taxes, to our consolidated financial statements for more information.

Significant competition from other real estate developers and homebuilders could adversely affect our results. Many of our competitors may have advantages over us, such as more favorable locations which may provide more desirable schools and easier access to roads and shopping, or amenities that we may not offer, as well as greater financial resources and/or access to cheaper capital.  In addition, the downturn in the real estate markets nationwide could result in an influx of lower-priced lots and homes coming onto the market, as competitors need to address their individual liquidity needs.  Lower-priced homes and lots would increase the competition we face, and could adversely affect our ability to sell lots and/or pricing.
 
Delays in construction schedules and cost overruns could adversely affect us. Any material delays could adversely affect our ability to complete our projects, significantly increasing the costs of doing so, or drive potential customers to purchase competitors’ products. 
 
Increased costs for and/or scarcity of land, materials and for labor could adversely affect us. If these costs increase, it will increase the costs of completing our projects; if we are not able to recoup these increased costs, our results of operations would be adversely affected. 
 
Imposition of limitations on our ability to develop our properties resulting from condemnations, environmental laws and regulations and developments in or new applications thereof could increase our costs and delay our projects. When we acquire our projects, our estimate of future profits and cash flows is derived from our estimates of future selling prices and development costs, less acquisition costs.  Subsequent to acquisition, if environmental laws or other regulations change resulting in additional unanticipated costs, future profitability and cash flows could be reduced, and impairment charges might have to be recorded.
 
Our properties may be at risk from natural disasters beyond our control. Damage to any of our properties, whether by natural disasters or weather related events, including earthquakes, hurricanes, flooding, drought, extreme heat, other adverse weather events and fires or otherwise, may either delay or preclude our ability to develop and sell our properties, or affect the price at which we may sell such properties.
 
Under state law we could be liable for some construction defects in structures we build or that are built on land that we develop. State law imposes some liabilities on developers of land on which homes are built as well as on builders. Future construction defect litigation could be based on a strict liability theory based on our involvement in the project or it could be related to infrastructure improvements or grading, even if we are not building homes ourselves. 

We may not be able to insure certain risks economically. We may experience economic harm if any damage to our properties is not covered by insurance or if our insurance is insufficient or unavailable.  We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers will be financially viable if we make a claim. 
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Shortages of adequate water resources and reliable energy sources in the areas where we own real estate projects could adversely affect the value of our properties or restrict us from commencing development.  If we are unable to obtain adequate water resources and reliable energy sources for our development projects, development of the projects might be delayed and/or their value may decrease, resulting in reduced profitability and cash flows.
 
Opposition from local community, political or environmental groups with respect to construction or development at a particular site could increase development costs.  At acquisition, the Fanita Ranch property had an approved EIR and development agreement.  However, the project's existing entitlements have been challenged, some of which have been successful, resulting in us incurring legal expenses to defend our entitlements and being required to reimburse legal and other costs incurred by the plaintiffs.  Further challenges to our entitlements at any of our projects are possible, which would result in increased legal fees, development costs and/or delays in development. 
 
We own or have economic interests in real estate investments in California, Florida, Maine, New York, South Carolina and Virginia. As a result, our financial results are dependent on the economic strength of various regions within the U.S. Significant adverse changes in local economic conditions in areas where we own or are developing real estate projects could adversely affect the value of our projects and negatively impact our financial results. Significant increases in local unemployment and cost of living, including increases in residential property or other taxes, or concerns about the financial condition of the municipalities in which we have properties, could adversely affect consumer demand for our housing projects and negatively impact our financial results.

We may not be able to renew the ground leases at Brooklyn Renaissance Plaza at rates that are satisfactory to us. The majority of Brooklyn Renaissance Plaza is subject to a 99-year ground lease with the City of New York (the “City”).  The first period of the ground lease expires in June 2022, with the base rent at a stated flat rent in addition to a percentage of the garage operating income. The amount of the ground lease payment beyond June of 2022 will be determined every 10 years based on then-market conditions and subject to certain qualifiers specified in the lease. There can be no assurance that we will agree with the City on the what constitutes market rent.  Our inability to renew the ground lease at rates that are satisfactory to us or that we view as market could have a negative impact on our cash flow and the valuation of our interest in Brooklyn Renaissance Plaza.

Our business and operations could suffer in the event of system failures or cyber security attacks. Our systems are vulnerable to damage from any number of sources, including energy blackouts, natural disasters, terrorism, war, telecommunication failures and cyber security attacks, including computer viruses or unauthorized access. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions. Any compromise of our security could also result in a violation of applicable privacy and other laws, unauthorized access to information owned by the Company or third parties, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. We could also be negatively impacted by similar disruptions to the operations of our vendors or outsourced service providers.

Significant influence over our affairs may be exercised by our principal stockholders who could impact our business. As of February 12, 2019, Jefferies is the beneficial owner of an aggregate of 10,852,123 shares of our common stock or approximately 70% of our common stock outstanding.  In addition, our other significant stockholders include our Chairman, Joseph S. Steinberg (approximately 5.0% beneficial ownership, including ownership by trusts for the benefit of his respective family members, but excluding Mr. Steinberg's private charitable foundation) who is also Chairman, a director and a significant stockholder of Jefferies.  Pursuant to a stockholders' agreement with the Company, Jefferies has agreed that to the extent its ownership of shares of our common stock exceeds 45% of the outstanding voting securities of the Company, Jefferies will limit its vote to no more than 45% of the total outstanding voting securities voting on any matter, assuming all of the total outstanding voting securities not owned by Jefferies vote on such matter.  This concentration of equity ownership may delay or
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prevent a change in control of our Company and may make some transactions more difficult without the support of Jefferies.  In addition, the interests of our significant stockholders may not always coincide with the interests of other stockholders. 
  
Our common stock is subject to transfer restrictions. We and certain of our subsidiaries have certain tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of our common stock and the ability of persons or entities now owning 5% or more of our common stock from acquiring additional common stock.  The restriction will remain until the earliest of (a) December 31, 2028, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of our taxable year to which these tax attributes may no longer be carried forward. The restriction may be waived by our board of directors.  Stockholders are advised to carefully monitor their ownership of our common stock and consult their own legal advisors and/or us to determine whether their ownership of our common stock approaches the proscribed level.

Our common stock is not traded on NASDAQ or listed on any securities exchange. Prices for our common stock are quoted on the Over-the-Counter (OTC) Bulletin Board.  Securities whose prices are quoted on the OTC Bulletin Board do not have the same liquidity as securities that trade on a recognized market or securities exchange.  As a result, stockholders may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities.
 
We may not be able to finance our development projects and related business activities. There is no assurance that if desirable or required we will be able to obtain the financing needed to develop our properties. Financing may depend on our financial condition, the creditworthiness of our projects and the availability of credit based on both market and economic conditions.
  
Our ability to access our cash may be affected by adverse events relating to our banks that may be beyond our control. Our cash accounts are not insured or otherwise protected.  Should the bank holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with that particular bank or trust company.
 
As we enter into the homebuilding market, we will face increased exposure to the fluctuations in the housing market. Reduction in demand may adversely affect our results. Demand for our homes will be subject to fluctuations, often due to factors outside of our control. Cancellations of agreements for the sale of homes or the ability of home buyers to obtain suitable financing to consummate the home purchases could also impact our results.  Further, a reduction in home sales may impair our ability to recoup development costs or force us to absorb additional costs in connection with the engagement of the builder and its subcontractors to build homes. 
 
We will rely on builders who will hire subcontractors to construct our homes. The failure of the builders and their subcontractors to properly construct our homes may be costly.  The builders will engage subcontractors to perform the actual construction of our homes. Despite the builders’ quality control efforts, we may discover that the subcontractors are engaging in improper construction practices. The occurrence of such events could require us to repair the homes in accordance with our standards and as required by law. The cost of satisfying our legal or other obligations in these instances may be significant, and we may be unable to recover the cost of repair from the builders, subcontractors, suppliers and insurers.
 
Product liability claims and litigation and warranty claims that arise in the ordinary course of business may be costly, which could adversely affect our business.  As we enter the homebuilding market, we may be subject to increased exposure to construction defect and home warranty claims that commonly arise in the ordinary course of business and can be costly.  In addition, the costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies is currently limited. There can be no assurance that this coverage will not be further restricted and become more costly. If the limits or coverages of our
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current and former insurance programs prove inadequate, or we are not able to obtain adequate or reasonably priced, insurance against these types of claims in the future, we may experience losses that could negatively impact our financial results.

Cancellation of the EB-5 Program, significant changes in the program guidelines, or the inability to successfully raise capital under the program may adversely affect our ability to complete capital improvements at our projects and could adversely impact our operations. The current EB-5 Program expires on September 30, 2019. Though the program has been regularly extended since inception, there is no guarantee that it will be approved for future extensions. In addition, the program guidelines may change which may adversely impact our ability to raise capital under the program. We intend to fund the Village of Escaya project in part by raising funds under the program. Delay in extension of the program or changes in the program guidelines may adversely impact our ability to fund the improvements necessary to complete the project.

Our construction loan agreements require us to comply with various covenants and the failure to comply with the covenants and conditions imposed by our loan agreements could restrict future borrowing or cause our debt to become immediately due and payable.  Our loan agreements include provisions for timely payment of principal and interest and to comply with various covenants, including covenants regarding financial ratios and limitations on the number of homes that may be under construction during the term of the loan.  If we fail to make timely payment of principal and interest when due (subject to grace periods, if any) or fail to comply with covenants, we may be considered in default and the lender may cease future funding and amounts outstanding under the loans could become immediately due and payable, which could have a material adverse impact on our consolidated financial condition.

Increasing the level of our indebtedness may have an adverse effect on our business or limit our ability to take advantage of business, strategic or financing opportunities. Increasing our level of indebtedness may increase the possibility that we may be unable to generate cash sufficient to pay the principal, interest or other amounts due under our loan agreements. In addition, reliance upon debt to finance our construction costs may increase our risks related to adverse economic and/or homebuilding industry conditions and may reduce our flexibility in planning or reacting to changes in our business.       
 
Item 1BUnresolved Staff Comments.
Not applicable.

Item 2Properties.
 
At December 31, 2018, we are the developer of various real estate properties, all of which are described under Item 1. Business under our Real Estate segment disclosure. Our real estate had an aggregate book value of approximately $366,200,000 at December 31, 2018.
 
We lease 12,755 square feet for our corporate headquarters which is located at 1903 Wright Place, Suite 220, Carlsbad, California 92008.  We rent office space at our corporate headquarters to Jefferies for an annual rent of $15,000, payable in twelve equal monthly installments.
 
BRP Leasing leased 286,500 square feet of office space at Brooklyn Renaissance Plaza, substantially all of which had been sublet through October 2018.
 
Item 3Legal Proceedings.  
 
From time to time, we or our subsidiaries may be parties to legal proceedings that are considered to be either ordinary routine litigation incidental to our business or not material to our business or consolidated financial position or liquidity. We do not believe that the ultimate resolution of any such matters will materially affect our consolidated financial position, consolidated results of operations or liquidity.
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Item 4Mine Safety Disclosures.  
 
Not applicable.
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PART II
 
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded in the over-the-counter market under the symbol “HOFD.” Our common stock is not listed on any stock exchange, and price information for the common stock is not regularly quoted on any automated quotation system.  We do not currently meet certain requirements for listing on a national securities exchange or inclusion on the Nasdaq Stock Market.
 
The following table sets forth, for the two most recently completed fiscal years indicated, the high and low bid price of our common stock, as published by the National Association of Securities Dealers OTC Bulletin Board Service.
HighLow
2017  
First Quarter$48.00 $43.00 
Second Quarter44.80 43.00 
Third Quarter45.50 41.52 
Fourth Quarter51.80 43.10 
2018  
First Quarter$57.26 $49.75 
Second Quarter57.00 52.00 
Third Quarter55.00 49.75 
Fourth Quarter52.00 32.65 
2019  
First quarter (through February 12, 2019)$39.25 $34.09 
 
The over-the-counter quotations reflect inter-dealer prices, without retail mark up, markdown or commission, and may not represent actual transactions. On February 12, 2019, the closing bid price for our common stock was $34.64 per share. As of that date, there were 341 stockholders of record. No parent company dividends were paid during 2018 or 2017 to HomeFed common shareholders. We do not have a regular dividend policy, and whether or not to pay dividends is subject to the discretion of our Board of Directors.
 
During the third quarter of 2017, dividends of $13,000,000 were declared and distributed by our subsidiary that owns the San Elijo Hills project, of which $1,950,000 was paid to the noncontrolling interests in the San Elijo Hills project, and the balance was transferred to HomeFed Corporation. The dividends retained by us did not increase the amount of consolidated liquidity reflected on our consolidated balance sheet; however, they did increase the liquidity of the parent company, HomeFed Corporation.
 
We and certain of our subsidiaries have tax attributes, and the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of five percent or more of the common stock and the ability of persons or entities now owning five percent or more of the common stock from acquiring additional common stock. The restrictions will remain in effect until the earliest of (a) December 31, 2028, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of our taxable year to which certain tax benefits may no longer be carried forward. 
 
The transfer agent for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.
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In July 2004, the Board of Directors approved the repurchase of up to 500,000 shares of our common stock.  As of December 31, 2018, 104,591 common shares remain available for repurchase under this program. The shares may be purchased from time to time, subject to prevailing market conditions, in the open market, in privately negotiated transactions or otherwise.  Any such purchases may be commenced or suspended at any time without prior notice. 

We did not purchase any of our common shares during the fourth quarter of 2018.

See "Equity Compensation Plan Information" in Item 12 of Part III below.

Stockholder Return Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return on our common stock against the cumulative total return of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Homebuilding-500 Index for the period commencing December 31, 2013 to December 31, 2018. Index data was furnished by Standard & Poor’s Capital IQ.  The graph assumes that $100 was invested on December 31, 2013 in each of our common stock, the S&P 500 Index and the S&P 500 Homebuilding Index and that all dividends were reinvested.

hofd-20181231_g2.jpg

INDEXED RETURNS 
Base Years Ending 
Period 
Company / Index Dec13Dec14Dec15Dec16Dec17Dec18
HomeFed Corporation 100 122.95 93.03 122.95 142.76 103.83 
S&P 500 Index 100 113.69 115.26 129.05 157.22 150.33 
S&P 500 Homebuilding Index 100 111.43 120.95 110.32 191.24 129.56 

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Item 6Selected Financial Data.
 
The following selected financial data have been summarized from our consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in Item 7 of this Report.  
 Year Ended December 31,
 20182017201620152014
 (In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:     
Revenues$140,571 $114,508 $86,947 $69,538 $59,505 
Expenses150,336 122,115 90,084 61,257 54,066 
Net income (loss) (a) (1,505)10,989 32,844 6,503 4,732 
Net income (loss) attributable to HomeFed Corporation common shareholders (a) (68)10,931 32,565 5,835 3,886 
Basic earnings (loss) per share (a) $(0.00)$0.71 $2.11 $0.38 $0.29 
Diluted earnings (loss) per share (a)$(0.00)$0.71 $2.11 $0.38 $0.29 

 At December 31,
 20182017201620152014
 (In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:     
Cash and cash equivalents$63,053 $40,415 $53,140 $66,676 $61,495 
Investments available for sale— — — — 35,898 
Real estate held for development328,239 311,664 297,665 301,683 143,301 
Real estate held for investment, net37,962 38,022 42,536 43,347 45,184 
Total assets594,008 607,947 578,213 555,311 433,189 
HomeFed Corporation shareholders’ equity455,147 452,264 440,057 406,381 399,895 
Shares outstanding15,500 15,474 15,449 15,408 15,388 
Book value per share (b)$29.36 $29.23 $28.48 $26.37 $25.99 
 
(a) On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act is one of the most comprehensive changes in the U.S. corporate income tax since 1986. The Tax Act revises the U.S. Corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21% and adopting a territorial income tax system. We have evaluated the impact that the Tax Act will have on both our Consolidated Balance Sheets and Consolidated Statements of Operations. At that time, based on information currently available, results for the fourth quarter of 2017 reflect a provisional expense of $2,150,000. In 2018, we completed our determination of the accounting implications of the Tax Act, and no material adjustment was necessary.  

During 2017, we effectively settled our 2014 federal tax examination with the IRS and, as a result, recorded an $8,600,000 reduction to deferred tax liabilities and a $4,700,000 reduction to unrecognized tax benefits. The statute of limitations with respect to the Company’s federal income tax returns has expired for all years through 2014, and with respect to California state income tax returns through 2013. We are currently under examination by the City of New York for the year ended 2014. We do not expect that resolution of this examination will have a significant effect on our consolidated financial position, but it could have a significant impact on the consolidated results of operations for the period in which resolution occurs.

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During 2016, we determined that we had enough positive evidence to conclude that it is more likely than not that we will be able to generate enough future taxable income to fully utilize all of our Federal minimum tax credits. As a result, $31,850,000 of the deferred tax valuation allowance was reduced as a credit to income tax expense during 2016. For the years ended December 31, 2015 and 2014, we decreased our deferred tax valuation allowance by recording a decrease to our income tax provision of $1,550,000 and $900,000, respectively.
 
(b) Excludes noncontrolling interest.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources, off-balance sheet arrangements and results of operations.  This analysis should be read in conjunction with the consolidated financial statements, related footnote disclosures and the following “Cautionary Statements for Forward-Looking Information.”
 
Cautionary Statement for Forward-Looking Information
 
Statements included in this report may contain forward-looking statements.  Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
 
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified.  When used in this report, the words “will,” “could,” “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends” and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties.  Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
 
Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk Factors and elsewhere in this report and in our other public filings with the SEC.
 
Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof.  We undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events.
 
Results of Operations
 
We currently have two reportable segments—real estate and corporate.  Real estate operations consist of a variety of residential land development projects and commercial properties and other unimproved land, all in various stages of development. Real estate also includes contract service revenues, contract service expenses and the equity method investments in BRP Holding, BRP Hotel, RedSky JZ Fulton Investors and the Builder LLCs in the Otay Land project. Corporate primarily consists of investment income and overhead expenses. Our farming segment, which we no longer report, consisted of the Rampage property which included an operating grape vineyard and an almond orchard under development which was sold in January 2018. Revenue from the sale of the Rampage property is included in our real estate segment.

Revenues were $140,600,000 for 2018 versus $114,500,000 for 2017. The four main drivers for 2018 were home and land sales at the San Elijo Hills project of $40,500,000, the sale of Rampage of property for $26,000,000, home and land sales at the SweetBay project of $19,100,000 and contract service revenues related to the Builder LLCs at the Otay Land project. Loss from operations before income from equity method investments was $9,800,000 for 2018 as compared to $7,600,000 for 2017. Excluding the real estate impairments during 2018 of $20,000,000 (of
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which $17,450,000 relates to the Pacho Project), the increase in income from operations before income from equity method investments can be primarily attributed to the gain on the sale of Rampage property of approximately $17,300,000.
 
Certain information concerning our segments for the years ended 2018, 2017 and 2016 is presented in the following table.  
 201820172016
 (in thousands)
Revenues:   
Real estate$140,559 $110,989 $82,499 
Farming— 3,507 4,436 
Corporate12 12 12 
Total consolidated revenues$140,571 $114,508 $86,947 
Income (loss) from continuing operations before income taxes and noncontrolling interest
Real estate$11,239 (1)$14,497 $9,405 
Farming— (342)462 
Corporate(13,298)(12,098)(9,212)
Total consolidated income (loss) from continuing operations before income taxes and noncontrolling interest

$(2,059)$2,057 $655 
 
(1) Includes $20,000,000 of impairment charges during 2018 of which $17,450,000 relates to the write-down of our Pacho leasehold, $1,800,000 relates to the write-down at the SweetBay project and $750,000 relates to the write-down at our Maine project.

Real Estate
 
Otay Land Project:
 
We sold a .88 acre parcel of land at the Otay Ranch project during 2018, which will be used for a gas station, for $1,200,000, of which $1,050,000 was recognized at the time of sale related to delivery of the improved land and of which $150,000 is deferred related to a performance obligation to complete an access road subsequent to closing. Cost of sales of $1,050,000 was recorded related to the delivery of the land.

In October 2018, we received $1,550,000 from a neighboring land owner to complete mitigation improvements on approximately 2 acres of land in the Otay River Valley on their behalf in conjunction with our mitigation improvements associated with our development in Otay. As of December 31, 2018, we recorded $650,000 as contract service revenues and $650,000 as contract service expenses. The remaining $900,000 is deferred as a contract liability and will be recognized as performance obligations are completed over time.

During 2017, we sold seven acres of open space mitigation land for $250,000 to another developer who needed it to satisfy their mitigation land requirement. Cost of sales was $20,000 for 2017. The grand opening at the Village of Escaya occurred in June 2017. As of February 12, 2019, 393 homes were sold, and 83 homes are under contract.

Of the $30,000,000 in cash proceeds we received from the builders at closing of HomeFed Village III Master, LLC, $22,800,000 was recognized as revenue from sales of real estate and cost of sales during 2016. At the time of sale, a contract liability of $7,200,000 was recorded. As development costs were incurred, the contract liability balance was reduced. Profit will be recognized when we have sufficient evidence to reasonably estimate profits on the land sale and ongoing development activities. At that point, cumulative profit to date will be recognized as a change in estimate.

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Contract service revenues and expenses were $30,200,000, $35,850,000 and $13,200,000 for 2018, 2017 and 2016, respectively. Under our agreements, we are responsible for the remaining cost of developing the community infrastructure but we also are entitled to receive up to $78,600,000 as reimbursement of development costs through the sale of homes at the Village of Escaya. However, we are also responsible for any costs in excess of this limit to complete the community infrastructure.

During the early course of development while constructing the primary access road to the Village of Escaya, we discovered the presence of underground perched groundwater that was impacted with certain petroleum byproducts. We are working with regulatory agencies to investigate the matter and have developed mitigation measures, which are being mitigated through the construction process. Further investigation disclosed that soil vapor in a portion of the Village of Escaya project where homes and apartments are to be constructed was impacted with methane and certain volatile organic compounds (collectively “compounds”). These types of compounds commonly exist in soil vapor and can be mitigated through the construction process. We are working with local authorities and have developed measures to fully mitigate the effect of the impacted soil vapors where they have been detected. The apartment site has been mitigated, and the number of homes that will need mitigation is to be determined as further investigation is conducted while development progresses. Costs associated with mitigation during the homebuilding process will be shared with the builders through our Builder LLCs.

General and administrative expenses increased by $1,300,000 for 2018 as compared to 2017 due to a $1,100,000 increase in legal expenses, a $200,000 increase in marketing expansion of the EB-5 program to additional countries, and a $200,000 increase in professional fees related to the EB-5 program. Marketing expenses also decreased by $200,000 related to the grand opening in 2017 at the Village of Escaya.

General and administrative expenses increased by $1,200,000 in 2017 as compared to 2016 which includes a $1,250,000 increase in marketing expenses related to the initial launch of the Village of Escaya, a $200,000 increase for the marketing expenses for the EB-5 Program and a $150,000 increase in legal expenses related to the Village of Escaya. It also reflects a decrease of $400,000 for legal fees related to the Flat Rock litigation (see Note 13 for more information).

San Elijo Hills Project:
 
For the three years ended December 31, we have closed on sales of real estate as follows:
 
201820172016
Number of units sold:   
Single family lots— — 27 
Single family homes24 — 
Sales price, net of closing costs: 
Single family lots$— $— $14,600,000 
Single family homes$38,900,000 $13,100,000 $— 
Towncenter$1,600,000 $5,800,000 $— 
 
Revenues recognized at closing were $40,500,000, $18,800,000 and $11,300,000 for 2018, 2017 and 2016, respectively. During 2018, 2017 and 2016, cost of sales of real estate aggregated $33,150,000, $18,500,000 and $6,950,000, respectively.

Prior to the new revenue recognition standard adopted on January 1, 2018, a portion of the revenue from sales of real estate was deferred and was recognized as revenues upon the completion of certain improvements, including costs related to common areas which we were obligated to make to lots sold under the percentage of completion method of accounting. Revenues include previously deferred amounts of $3,150,000 and $800,000 for 2017 and 2016, respectively.

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We recorded co-op marketing and advertising fee revenue of approximately $300,000, $450,000 and $300,000 for the years ended December 31, 2018, 2017 and 2016, respectively. We record these fees pursuant to contractual agreements, which was generally when builders sell homes prior to the new revenue recognition standard adopted on January 1, 2018 and over time as performance obligations are satisfied by us under the new revenue recognition standard. The fees are based upon a fixed percentage of the homes’ selling price. 
 
General and administrative expenses increased by $400,000 for 2018 as compared to 2017 primarily due to a $250,000 loss on the extinguishment of debt during 2018 and increased marketing efforts of $150,000 during 2018 to promote the homes available for sale.

Depreciation and amortization expenses decreased by $100,000 for 2017 versus 2016 primarily due to the sale of phase one of the Towncenter during the first quarter of 2017.

Ashville Park:
 
For the years ended December 31, 2018, 2017 and 2016, we have closed on sales of real estate as follows:
 
201820172016
Number of units sold:  
Former visitor center— — 
Sales price, net of closing costs:
Former visitor center
$— $— $550,000 
 
Revenues recognized at closing were $550,000 for 2016.  Since we are obligated to complete certain improvements to the lots sold, a portion of the revenue from sales of real estate is deferred, and is recognized as revenues upon the completion of the required improvements to the property, including costs related to common areas, under the percentage of completion method of accounting.  Prior to the new revenue recognition standard adopted on January 1, 2018, revenues also include previously deferred amounts of $30,000 and $500,000 for 2017 and 2016, respectively.

Cost of sales of real estate aggregated $20,000 for 2017 and $450,000 for 2016. Cost of sales was recognized in the same proportion to the amount of revenue recognized under the percentage of completion method of accounting.

Revenues from sales of real estate also include amounts recognized pursuant to revenue or profit sharing with a homebuilder of $10,000, $100,000 and $200,000 for 2018, 2017 and 2016, respectively.

We recorded co-op marketing and advertising fee revenue of approximately $100,000, $150,000 and $250,000, respectively, for the three years ended December 31, 2018, 2017 and 2016.  We record these fees pursuant to contractual agreements, which was generally when builders sell homes prior to the new revenue recognition standard adopted on January 1, 2018 and over time as performance obligations are satisfied by us under the new revenue recognition standard. The fees are based upon a fixed percentage of the homes’ selling price.

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The Market Common:
 
For the years ended December 31, 2018, 2017 and 2016 the rental activity includes:
 
 201820172016
Rental income$10,200,000 $10,600,000 $9,450,000 
Amortization of lease intangibles included
   in rental income
(300,000)(400,000)250,000 
Adjustment for straight-line rental income(200,000)(100,000)(50,000)
Rental operating expenses$4,800,000 $4,950,000 $5,600,000 
 
During the fourth quarter of 2016, Piggly Wiggly closed its supermarket due to economic hardship with several years remaining on its lease. As a result, we had a decline in rental income in 2016 as compared to 2015 because we had to write-off our intangible asset related to their above market lease contract and tenant improvement incentives which aggregated $750,000. Rental income for 2017 includes $400,000 pursuant to a termination payment received from Piggly Wiggly in June 2017. During the fourth quarter of 2017, we signed a new tenant to operate an upscale entertainment facility including bowling alleys with food and bar accommodations. The lease commenced on July 1, 2018 with a 10-year lease term.

For the years ended December 31, 2018, 2017 and 2016 we have closed on sales of real estate as follows:
 
201820172016
Number of units sold: 
Single family lots17 38 38 
Multi-family lots15 10 
Sales price, net of closing costs: 
Single family lots$850,000 $1,800,000 $1,750,000 
Multi-family lots200,000 375,000 250,000 
 
Revenues from sales of real estate at The Market Common also include amounts recognized pursuant to revenue for profit sharing with a homebuilder of $600,000, $1,250,000 and $1,600,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

Cost of sales of real estate were $900,000, $1,900,000 and $1,900,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

General and administrative expenses decreased by $300,000 for 2017 as compared to 2016 primarily due to the reversal of $200,000 of certain fees previously accrued regarding an uncertain tax liability that was successfully resolved during 2017 and decreased by $100,000 due to lower legal activity at the project.

Depreciation and amortization expenses decreased by $650,000 for 2018 periods versus 2017 due to certain depreciable and amortizable assets becoming fully depreciated during 2018.

Depreciation and amortization expenses decreased by $1,300,000 for 2017 versus 2016 primarily due to certain depreciable and amortizable assets being fully depreciated over the course of 2017 and 2016 and the write-off of lease intangibles and other assets related to Piggly Wiggly's lease during 2016.

Maine projects:

There were no sales of real estate for 2018 and 2017.  During 2016, we closed on the sale of three lots at Rockport, Maine and one home at Northeast Point, Maine for aggregate cash proceeds of $650,000.

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During 2018, we concluded that our real estate in Maine was partially impaired due to a recent weakness in local housing market conditions. We recorded a write-down of $750,000 and thus reducing the carrying value to $3,300,000 which we believe reflects the fair value of the property.

SweetBay project:

We sold 47 single family homes for $17,100,000 for 2018. Cost of sales of real estate was $16,200,000 for 2018. During 2018, we received and recognized an additional $2,000,000 as sales of real estate due to a court determination of the final purchase price of land related to the 2016 sale of seven acres of land to the Florida Department of Transportation to be used for the expansion of State Road 390.

We sold 71 single family homes for $24,850,000 during 2017. Cost of sales of real estate was $24,750,000 for 2017. Pre-tax income for 2017 was weak due to increased home building costs and includes a reserve for a potential loss of $100,000 that was recorded related to home sales under contract which closed during 2018.

General and administrative expenses increased by $650,000 for 2018, respectively as compared to 2017 primarily due to increased marketing efforts related to the release of additional homes available for sale and expanding advertising efforts to a broader market. The 2018 period also includes an increase of $100,000 of professional fees related to advice on product positioning.

General and administrative expenses decreased by $100,000 for 2017 as compared to 2016, primarily due to a reduction in marketing activity which reflects the lower level of inventory available for sale during 2017. 

Depreciation and amortization expenses decreased by $100,000 during 2018 versus 2017 primarily due to buildings and other fixed assets becoming fully depreciated during early 2018.

In October 2018, Hurricane Michael passed through Panama City, Florida causing damage to the SweetBay project. The SweetBay project was adversely impacted by the hurricane, and we recorded a write-down of $1,800,000. During the fourth quarter of 2018, one of our insurance carriers assessed the damages and finalized one of our claims for $4,250,000. Accordingly, we accrued the $4,250,000 as other income but did not receive the proceeds until January 2019.

Pacho Project:

We previously reported that we may not develop the Pacho Property unless we are able to obtain fee title from Pacific Gas & Electric (“PG&E”) within a reasonable period of time. The original 99-year lease term to the Pacho Property expires in 2067. The lease includes an option to renew it for an additional 99-year term.

We have made no progress in obtaining the fee title from PG&E. Moreover, because of questions recently raised in the media as to whether the term of our leasehold validly runs until 2166 (including the option term), in August we notified PG&E that we formally exercised the renewal option and that we intended to commence a declaratory relief proceeding to confirm our leasehold is valid until 2166 and is not rendered shorter by the provisions of California Civil Code section 718. In September, PG&E responded and asserted for the first time that it contends California Civil Code section 717 ends the lease in 2019, which we are disputing.

We concluded that our Pacho leasehold was impaired (the entire carrying value of the leasehold) and recorded a $17,450,000 pre-tax charge during 2018, of which $1,750,000 is attributable to the non-controlling interest in the third quarter of 2018. 

On February 1, 2019, we filed a Complaint for Declaratory Relief and Quiet Title in the San Francisco Superior Court against the lessor, Eureka Energy Company, asking for a determination that the initial term of the lease is valid and enforceable through December 26, 2067 and that the option to renew the lease for an additional 99 years is
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valid through December 26, 2166. Eureka Energy Company is a wholly owned subsidiary of PG&E. The following day, PG&E filed for bankruptcy protection. Eureka Energy Company was not identified as a debtor in the PG&E bankruptcy. If we are unsuccessful in obtaining a favorable ruling on our claims for declaratory relief, then we believe that we will have recourse to pursue our unrecognized claims against the insurer of the leasehold title and the real estate counsel that represented us in our 2014 purchase of the leasehold interest. However, there is no assurance that we will be successful in these matters.

General and administrative expenses increased by $200,000 for 2018 as compared to 2017 due to increased legal fees.

General administration expenses decreased by $450,000 during 2017 as compared to 2016 due to decreased legal fees.

BRP Leasing:
 
For the years ended December 31, 2018, 2017 and 2016 the rental activity is as follows:
 
 201820172016
Rental income$11,000,000 $12,900,000 $12,450,000 
Amortization of lease intangibles included
   in rental income
1,400,000 1,650,000 1,600,000 
Adjustment for straight-line rental income350,000 400,000 (100,000)
Rental operating expenses$10,600,000 $12,100,000 $11,900,000 
 
During the fourth quarter of 2017, we recorded a benefit in regards to the capital tax on our recently filed New York State and New York City tax returns. In addition, we lowered our projected 2017 capital expense based on our 2016 tax return information. As a result, our general and administrative expenses decreased by $1,350,000 in 2017 compared to 2016. General and administrative expenses increased by $500,000 due to increased capital tax expenses incurred during 2018 as compared to the same period in 2017 due to the adjustments made in 2017 which reduced our capital tax obligation.

Farming
 
Rampage Property:

In January 2018, we closed on the sale of the Rampage property for $26,000,000 which is reflected in the Real Estate segment as mentioned above.

Farming revenues at the Rampage property aggregated $3,500,000 and $4,450,000 for the years ended December 31, 2017 and 2016, respectively.  Farming revenues were generally recognized during the second half of the year when the crop is harvested and sold. The decline in farming revenues during 2017 as compared to 2016 principally due to lower grape yields resulting from an adverse weather event in June 2017.  
 
Farming expenses decreased by $100,000 during 2017 versus 2016 primarily due to lower grape yields resulting in reduced harvesting expenses.  

Depreciation and amortization expenses decreased by $300,000 during 2018 versus 2017 due to the sale of the Rampage property in January 2018.

Depreciation and amortization expenses increased by $100,000 during 2017 versus 2016 primarily due to the acquisition of farming equipment related to the almond orchard during 2017.

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Interest and other income includes $200,000 for the year ended 2017 from insurance proceeds received under our crop insurance policy for damages incurred from the adverse weather event in June 2017.

Corporate

General and administrative expenses increased by $1,400,000 during 2018 as compared to 2017, primarily due to increases in stock compensation, compensation and benefits expense, professional fees and legal expenses.   Compensation and benefits increased by $500,000 related to higher headcount and increased estimated bonus expense. Professional fees increased by $400,000 for additional costs associated with restating prior period financial statements, adopting new accounting standards, and additional tax planning services and increased by $200,000 for investigation of potential new business transactions. Legal fees increased by $400,000 related to the investigation of potential real estate opportunities. Stock compensation increased by $250,000 related to the grant of RSUs to executive officers in March 2017 and the employee stock option grants on August 4, 2017 (see Note 7 for more information).  When we extinguished the Old Notes during September 2017, a portion of the capitalized issuance costs of approximately $350,000 were immediately expensed as a loss on extinguishment of debt and did not re-occur in 2018.

General and administrative expenses increased by $2,850,000 during 2017 as compared to 2016, primarily due to an increase in stock compensation, a loss on extinguishment of debt and salary expenses. Stock compensation increased by $1,950,000 related to the grant of RSUs to executive officers in March 2017 and the employee and director stock option grants on August 4, 2017 (see Note 7 for more information). Upon extinguishing the 6.5% Senior Notes due 2018 (the "Old Notes") during 2017, a portion of the capitalized issuance costs of approximately $350,000 were immediately expensed as a loss on extinguishment of debt. Compensation and benefits increased by $550,000 due to higher headcount and higher bonus expense.

On December 22, 2017, the Tax Act was enacted. The Tax Act is one of the most comprehensive changes in the U.S. corporate income tax since 1986 and certain provisions are complex in their application. The Tax Act revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21% and adopting a territorial income tax system. In connection with our initial analysis of the impact of the Tax Act, we recorded a discrete tax expense of $2,150,000 during 2017. This expense primarily related to the revaluation of our deferred tax assets. In 2018, we completed our determination of the accounting implications of the Tax Act, and no material adjustment was necessary.

For 2018, 2017 and 2016, our income tax benefit was $550,000, $8,950,000 and $32,200,000, respectively.
 
During 2017, we effectively settled our 2014 federal tax examination with the IRS and, as a result, recorded an $8,600,000 reduction to deferred tax liabilities and a $4,700,000 reduction to unrecognized tax benefits. The statute of limitations with respect to the Company’s federal income tax returns has expired for all years through 2014, and with respect to California state income tax returns through 2013. We are currently under examination by the City of New York for the year ended 2014. We do not expect that resolution of this examination will have a significant effect on our consolidated financial position, but it could have a significant impact on the consolidated results of operations for the period in which resolution occurs.

During 2016, we were able to conclude that it is more likely than not that we will be able to realize the entire portion of our net deferred tax asset. As a result, $31,850,000 of the deferred tax valuation allowance was released as a credit to income tax expense during 2016.

Liquidity and Capital Resources
 
On February 19, 2019, we announced that we received a proposal from our majority shareholder, Jefferies, to purchase the remaining common stock of HomeFed not already owned by Jefferies in a transaction that would entail Jefferies issuing two shares of Jefferies common stock for each share of HomeFed’s common stock to be acquired by Jefferies.

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Consistent with its fiduciary duties and with the stockholders agreement between HomeFed and Jefferies, the HomeFed Board of Directors has appointed a special committee of independent directors (the "special committee") who, in consultation with independent financial and legal advisors, will carefully review and evaluate Jefferies’ proposal. Jefferies’ proposal is subject to an affirmative recommendation by the special committee and approval by holders of a majority of the outstanding shares of HomeFed common stock not already owned by Jefferies or its affiliates, in addition to any other vote required by applicable law.

Corporate Liquidity

Our principal sources of funds are cash and cash equivalents, proceeds from the sale of real estate, rental income from leased properties, fee income from certain projects, dividends and tax sharing payments from subsidiaries, interest income, distributions from equity method investments, construction loans (as described below) and financing from the EB-5 Program (see below for more information).

Consolidated Statements of Cash Flows:
Net cash of $10,750,000 and $27,450,000 was used for operating activities during 2018 and 2017, respectively. For 2018 and 2017, cash was used for payments of federal and state income taxes and real estate expenditures on held for development properties. Real estate development ramped up during 2018 at the Village of Escaya, the SweetBay project and the San Elijo Hills project as infrastructure improvements progressed and as more homes were under construction and completed for sale. During 2018, we spent $9,750,000 related to costs for infrastructure improvements for the Village of Escaya above the $78,600,000 reimbursement limit per the terms of the Builder LLCs' agreements. We also received $13,200,000 during 2018 from distributions from our equity investments in the Builder LLCs. During 2017, we also collected $5,650,000 less cash from the Builder LLCs between what was earned and what we actually received.

Net cash of $55,450,000 was provided by investing activities during 2018 period consisting of a distribution of $82,000,000 from BRP Holding related to mortgage refinancing that was used to fully satisfy our outstanding preferred equity balances for BRP Holding and BRP Hotel. We received proceeds from the sale of Rampage property of $26,000,000 during 2018. We contributed $52,500,000 into RedSky JZ Fulton Investors (see Note 4 for more information) during 2018.

Net cash of $24,750,000 was used for financing activities during 2018 period related to the reduction of debt of $75,000,000 on the Notes and of $10,800,000 related to the construction loans at the San Elijo Hills project and the payment of debt issuances costs of $8,350,000. Net cash provided by financing activities also include the issuance of $58,500,000 principal amount of debt under the EB-5 program and the proceeds from a construction loan of $10,800,000 at the San Elijo Hills project during 2018. Net cash of $14,800,000 was provided by financing activities during 2017 related to net proceeds received of $18,350,000 from the issuance of the 6.5% Senior Notes due 2019 and the EB-5 Program net of cash payments to redeem the 6.5% Senior Notes due 2018. Cash used in 2017 includes payment of costs of $1,650,000 related to the redemption of the 6.5% Senior Notes due 2018, the issuance of the 6.5% Senior Notes due 2019 and EB-5 Program during 2017 and the $1,950,000 distribution to a non-controlling interest related to the San Elijo Hills project.
 
Liquidity information:
On September 27, 2017, we and certain of our domestic wholly-owned subsidiaries as guarantors (the “Guarantors”) entered into purchase agreements (collectively, the “Purchase Agreements”) with certain investors named therein (the “Purchasers”) pursuant to which we agreed to issue to the Purchasers an aggregate of $75,000,000 of 6.5% Senior Notes due 2019 (the “Notes”) in a private placement. Pursuant to the terms of the Purchase Agreements, the purchase price for the Notes was 100% of the principal amount. The Notes were issued pursuant to an indenture dated September 27, 2017 among us, the Guarantors, and Wilmington Trust, N.A., as trustee. The maturity date of the Notes was October 1, 2019, and the Notes were fully and unconditionally guaranteed by the Guarantors on the terms provided in the Indenture. The Notes were senior unsecured obligations of the Company and the guarantees were the senior unsecured obligations of the Guarantors. Pursuant to the Placement Agency Agreement, Jefferies Group LLC (“Jefferies Group”), a wholly-owned subsidiary of Jefferies, received a fee of $100,000 for acting as the placement agent and the closing agent.

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On September 28, 2017, we used proceeds of the Notes, together with cash on hand, to redeem all of the outstanding Old Notes. After considering the repurchases and redemption, there is no remaining principal due under the Old Notes. In connection with the extinguishment of the Old Notes, issuance costs of approximately $350,000 were recorded as an expense.

On April 20, 2018, we used cash on hand to redeem $37,500,000 aggregate principal amount of the Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. On April 30, 2018, we used cash on hand to redeem the remaining $37,500,000 aggregate principal amount of the Notes at a redemption price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest and satisfied and discharged the Indenture in accordance with its terms.

We expect that our cash and cash equivalents, together with the other sources described above, will be sufficient for both our short and long term liquidity needs. Residential sales at the Otay Land, San Elijo Hills, Ashville Park, The Market Common and the SweetBay projects are expected to be a source of funds to us in the future; however, except as otherwise disclosed, the amount and timing is uncertain. We are not relying on receipt of funds from our other projects for the short and intermediate term, since the timing of development activity and sales of developable and undevelopable property cannot be predicted with any certainty. Except as disclosed herein, we are not committed to acquire any new real estate projects, but we believe we have sufficient liquidity to take advantage of appropriate acquisition opportunities if they are presented.

Option payments are non-refundable if we fulfill our obligations under the real estate sales agreements and will be applied to reduce the amount due from the purchasers at closing.  Although these agreements are binding on the purchasers, should we fulfill our obligations under the agreements within the specified timeframes and the purchasers decide not to close, our recourse will be primarily limited to retaining the option payments.

As of December 31, 2018, we had consolidated cash and cash equivalents aggregating $63,050,000.

Subsidiary Liquidity
Information about the Otay Land, RedSky JZ Fulton Investors, San Elijo Hills and Ashville Park projects, The Market Common, SweetBay and our other projects is provided below. Because of the nature of our real estate projects, we do not expect operating cash flows will be consistent from year to year.

Otay Land Project:
In April 2016, through a HomeFed subsidiary, we formed a limited liability company, HomeFed Village III Master, LLC (“Village III Master”), to own and develop an approximate 450-acre community planned for 992 homes in the Otay Ranch General Plan Area of Chula Vista, California. We entered into an operating agreement with three builders as members of Village III Master to build and sell 948 homes within the community.  We made an initial non-cash capital contribution of $20,000,000 which represents the fair market value of the land we contributed to Village III Master after considering proceeds of $30,000,000 we received from the builders at closing, which represents the value of their capital contributions. The historical book value of the land we contributed to Village III Master is $15,150,000, which represents a basis difference of $4,850,000.

In January 2017, we recorded the final map that subdivided the approximately 450-acre parcel of land in the Otay Ranch General Plan Area of Chula Vista, California, which is now known as the Village of Escaya. We formed three limited liability companies (each, a "Builder LLC") to own and develop 948 homes within the Village of Escaya and entered into individual operating agreements with each of the three builders as members of the Builder LLCs. Upon admittance of the three builders into their respective Builder LLCs, each of the three builders withdrew as members of Village III Master, which is now a wholly owned subsidiary of HomeFed Corporation. On January 5, 2017, we made an aggregate capital contribution valued at $20,000,000 of unimproved land and $13,200,000 of completed infrastructure improvements to the three Builder LLCs, representing land and completed improvement value. In addition to the $30,000,000 contribution made by the builders, as mentioned above, and $2,250,000 of capitalizable land improvements made by the builders, the builders then made an additional cash contribution of $20,000,000 in
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January 2017 upon final map subdivision and entry into their respective Builder LLCs, which was used to fund infrastructure costs completed by us.

In March 2018, we entered construction loan agreements of $58,850,000, the proceeds of which will be used for the construction of the town center portion of the Village of Escaya known as The Residences and Shops at Village of Escaya, which is comprised of 272 apartments, approximately 20,000 square feet of retail space, and a 10,000 square foot community facility building. The outstanding principal amount of the loan will bear interest at 30-day LIBOR plus 3.15%, subject to adjustment on the first of each calendar month, and the loan is collateralized by the property underlying the related project with a guarantee by us. Monthly draws are permitted under the loan agreement once evidence of our investment into the project reaches $35,000,000, including land value. As of February 12, 2019, no amounts have been drawn under the loan. The loan matures on March 1, 2021 with one 12-month extension subject to certain extension conditions as set forth in the loan agreements.

The grand opening of the Village of Escaya occurred in June 2017, and home sales began in January 2018. As of February 12, 2019, 393 homes were sold, and 83 homes are under contract.

In the fourth quarter of 2018, we entered into an agreement to sell the 10,000 square feet community facility building in the towncenter area of Village of Escaya for $1,900,000, which is expected to close in 2020 upon completion of the building. We have received a $60,000 option deposit, which is non-refundable if we fulfill our obligations under the agreement and will be applied to reduce the amount due from the buyer at closing.

Although each of the three Builder LLCs is considered a variable interest entity, we do not consolidate any of them since we are not deemed to be the primary beneficiary as we share joint control of each Builder LLC through a management committee and lack authority over establishing home sales prices and accepting offers. However, since two of our executive officers are members of the four-member management committee at each Builder LLC, designated to consider major decisions for that Builder LLC, we account for them under the equity method of accounting. Our share of the income earned from the sales of built homes in any of these three Builder LLCs will be recorded as income from equity method investments.

Our maximum exposure to loss is limited to our equity commitment in each Builder LLC. Additionally, we are responsible for the remaining cost of developing the community infrastructure with funding guaranteed by us under the respective operating agreements for which we received a capital credit of $78,600,000 ("Cost Cap"), and we are responsible for any costs in excess of this limit to complete the community infrastructure. During 2018, the cost of infrastructure improvements in the Village of Escaya that is attributable to the Builder LLCs exceeded the Cost Cap by $9,750,000, and we expect to incur additional costs until we complete our infrastructure obligations. The builders are responsible for the construction and the selling of the 948 homes with funding guaranteed by their respective parent entities.

During the early course of development while constructing the primary access road to the Village of Escaya, we discovered the presence of underground perched groundwater that was impacted with certain petroleum byproducts. We are working with regulatory agencies to investigate the matter and have developed mitigation measures, which are being mitigated through the construction process. Further investigation disclosed that soil vapor in a portion of the Village of Escaya project where homes and apartments are to be constructed was impacted with methane and certain volatile organic compounds (collectively “compounds”). These types of compounds commonly exist in soil vapor and can be mitigated through the construction process. We are working with local authorities and have developed measures to fully mitigate the effect of the impacted soil vapors where they have been detected. The apartment site has been mitigated, and the number of homes that will need mitigation is to be determined as further investigation is conducted while development progresses. Costs associated with mitigation during the homebuilding process will be shared with the builders through our Builder LLCs.

We are contractually obligated to obtain infrastructure improvement bonds on behalf of each Builder LLC. See Note 13 of the financial statements for more information.

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EB-5 Program:
We intend to fund our Otay Land project in part by raising funds under the Immigrant Investor Program administered by the U.S. Citizenship and Immigration Services ("USCIS") pursuant to the Immigration and Nationality Act ("EB-5 Program"). This program was created to stimulate the U.S. economy through the creation of jobs and capital investments in U.S. companies by foreign investors. The program allocates a limited number of immigrant visas per year to qualified individuals seeking lawful permanent resident status on the basis of their investment in a U.S. commercial enterprise. Regional centers are organizations, either publicly owned by cities, states or regional development agencies or privately owned, which facilitate investment in job-creating economic development projects by pooling capital raised under the EB-5 Program. Geographic areas within regional centers that are rural areas or areas experiencing unemployment numbers higher than the national unemployment average rates are designated as Targeted Employment Areas (“TEA”). The EB-5 program is set to expire on September 30, 2019. Various reforms and bills have been proposed and will be considered by Congress in 2019.

EB-5 Program - Village of Escaya:
In February 2017, we formed Otay Village III Lender, LLC, which is intended to serve as a new commercial enterprise (“NCE”) under the EB-5 Program. The NCE is managed by Otay Village III Manager, LLC, a wholly owned subsidiary of HomeFed. The NCE raised $125,000,000 by offering 250 units in the NCE to qualified accredited EB-5 investors for a subscription price of $500,000 per unit, which is the minimum investment that an investor in a TEA project is required to make pursuant to EB-5 Program rules. The proceeds of the offering will be used to repay any outstanding bridge loan provided by HomeFed to its wholly owned subsidiary HomeFed Village III LLC, a job creating entity under the EB-5 Program, and to fund infrastructure costs related to the development of the Village of Escaya project.

EB-5 Program - Village 8 West (Cota Vera):
In July 2018, we formed Otay Village 8 Lender, LLC, which is intended to serve as a NCE under the EB-5 Program. The NCE is managed by Otay Village 8 Manager, LLC, a wholly owned subsidiary of HomeFed. The NCE is seeking to raise up to $134,000,000 by offering up to 268 units in the NCE to qualified accredited EB-5 investors for a subscription price of $500,000 per unit. The proceeds from the offering will be used to repay any outstanding bridge loan provided by HomeFed to its wholly owned subsidiary HomeFed Village 8, LLC, a job creating entity under the EB-5 Program, and to fund infrastructure costs related to the development of Cota Vera.

Each NCE has offered the units to investors primarily located in China, Vietnam, South Korea and India either directly or through relationships with agents qualified in their respective countries, in which case the NCE will pay an agent fee. Once an investor’s subscription and funds are accepted by the NCE, the investor must file an I-526 petition with the USCIS seeking approval of the investment’s suitability under the EB-5 Program requirements and the investor’s suitability and source of funds. All investments are held in an escrow account and will not be released until the investor files their I-526 petition with the USCIS and we have identified and provided collateral to secure the amount of the funds drawn from escrow. The funds drawn by us under the Village of Escaya EB-5 Program were guaranteed by us until the Village of Escaya project was approved by the USCIS in December 2017 and is collateralized by certain Otay Village property. Each loan term is five years with two one-year options to extend by us. The effective interest rate is approximately 3.5%.

At December 31, 2018, we had a $105,000,000 principal amount outstanding under the EB-5 Program. As of February 12, 2019, we have $1,500,000 and $5,000,000 in escrow for Village of Escaya and Cota Vera, respectively, which cannot be drawn until certain provisions (such as filing of Investor I-526, investor suitability and source of funds) are satisfied.

RedSky JZ Fulton Investors:
We contributed $52,500,000 into RedSky JZ Fulton Investors which is a joint venture partnership consisting of us, RedSky Capital, LLC, a Brooklyn-based real estate developer and JZ Capital Partners Limited, a London-based investment company. The joint venture was formed for the acquisition and possible redevelopment of a development site located on the Fulton Mall corridor in Downtown Brooklyn, New York. The property consists of
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15 separate tax lots, divided into two premier development sites which may be redeveloped with buildings consisting of up to 540,000 square feet of floor area development rights.

San Elijo Hills Project:
The Towncenter consists of multi-family residential units and commercial space, which are being constructed in three phases. During 2018, the third phase at the Towncenter, which is a 2.5-acre parcel of land entitled for 12 multi-family units (formerly designated as a church site), sold for $1,600,000. During 2017, the 48,800 square feet of commercial space in phases one and two of the Towncenter and the 12 multi-family units in phase two were sold to a local developer for a cash payment of $5,800,000.

During the third quarter of 2017, dividends of $13,000,000 were declared by our subsidiary that owns the San Elijo
Hills project, of which $1,950,000 related to the noncontrolling interest. The dividends were paid during the fourth
quarter of 2017. The dividends retained by us did not increase the amount of consolidated liquidity reflected on our
consolidated balance sheet; however, they did increase the liquidity of the parent Company.

During June 2015, we entered into an agreement with a local San Diego based luxury homebuilder to construct and sell on our behalf, for a fee, up to 58 homes at the San Elijo Hills project. We received a $500,000 deposit during the third quarter of 2015 which is reflected in Other liabilities. This deposit is a builder performance deposit that will be fully refundable to the builder after the builder performs all of its requirements under the agreement. Sales began during the second quarter of 2017, and we sold 24 and 9 homes for $38,900,000 and $13,100,000 during 2018 and 2017, respectively. As of February 12, 2019, we have entered into agreements to sell 18 single family homes at the San Elijo Hills project under this agreement for aggregate cash proceeds of $32,600,000, which are expected to begin closing in the first quarter of 2019.

As of December 31, 2018, the remaining land at the San Elijo Hills project to be sold or leased consists of 25 dwelling units (combined single and multi-family lots).

In April 2018, we entered into a $31,450,000 loan agreement, the proceeds of which were used for homebuilding under the fee builder arrangement at the San Elijo Hills project. The loan was comprised of a $20,200,000 revolving component and a $11,200,000 non-revolving component, which was drawn at the close of the loan, proceeds of which were $10,300,000, which is net of fees, costs, and interest reserve. The loan was scheduled to mature on October 5, 2019, with one 6-month extension subject to certain extension conditions as set forth in the loan agreement. In August 2018, the principal balance outstanding of $9,050,000 was paid in full. Unamortized issuance costs of $250,000 were expensed during 2018.

Ashville Park Project:
There were no sales of real estate at the Ashville Park project during 2018 and 2017.

The Market Common:
Cash proceeds from sales of real estate and other real estate activities at The Market Common during 2018 and 2017 is comprised of the following:

20182017
Number of units sold Revenue from contracts with customers Number of units sold Cash Proceeds 
Single family lots 17 $850,000 38 $1,800,000 
Multi-family lots 200,000 15 375,000 
Profit sharing agreements N/A 600,000 N/A 1,250,000 

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As of February 12, 2019, we have entered into an agreement to sell 45 single family lots for $2,250,000 and 118 multi-family lots for $3,300,000 at The Market Common to a homebuilder. A non-refundable option deposit of $25,000 was transferred from Jefferies to us as part of the Acquisition.

SweetBay project:
During May 2015, we signed an agreement with a local builder to construct and sell on our behalf, for a fee, up to 127 homes in Phase 1A, which was subsequently amended to add an additional 56 homes in Phase 1B and 69 homes in Phase 1C.

We sold 47 single family homes for $17,100,000 during 2018. As of February 12, 2019, we have entered into agreements to sell 47 single family homes at the SweetBay project for aggregate cash proceeds of $15,700,000 which are expected to close in 2019. During 2018, we received and recognized an additional $2,000,000 as sales of real estate due to a court determination of the final purchase price of land related to the 2016 sale of seven acres of land to the Florida Department of Transportation to be used for the expansion of State Road 390.

In October 2018, Hurricane Michael passed through Panama City, Florida causing damage to the SweetBay project. During the fourth quarter of 2018, one of our insurance carriers assessed the damages and finalized one of our claims for $4,250,000. Accordingly, we accrued the $4,250,000 as income but did not receive the proceeds until January 2019.

Rampage property:
In July 2018, we completed the 1031 like-kind exchange and acquired $13,400,000 of replacement property, primarily consisting of improvements at the mixed-use apartment and retail project at the Village of Escaya, and the remaining proceeds of $12,600,000 is no longer restricted and can be used for any business operation.

Other projects:
In April 2015, we entered into a $15,000,000 revolving line of credit agreement.  The draw period was set to expire on January 1, 2021, and the loan would have matured on January 1, 2035.  The revolving line of credit was terminated upon the sale of the Rampage property in January 2018. There was also a $3,000,000 operational line of credit available that was secured by the Rampage property’s crops and matured on January 1, 2018. No amounts were drawn under either line of credit.

BRP Leasing was required to keep a minimum of $500,000 on deposit in an escrow account to secure its lease obligations. Our obligation to secure the lease ended in October 2018, and the escrow account has been closed.

As indicated in the table below, at December 31, 2018, our contractual cash obligations consisted of our EB-5 financing, our operating lease and a non-cancellable construction contract for The Residences and Shops at the Village of Escaya.
 
 Payment Due by Period
Contractual Obligations Total 20192020-20212022-2023Thereafter
Indebtedness$105,000,000 $— $— $105,000,000 $— 
Operating lease, net of sublease income$2,188,000 $302,000 $694,000 $738,000 $454,000 
Non-cancellable construction contract$45,546,000 $31,817,000 $13,729,000 $— $— 
 
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Capitalized Interest
 
We began capitalizing interest when we issued our Old Notes on June 30, 2015.  Capitalized interest for the Notes was allocated among all of our projects that are currently under development and capitalized interest for our EB-5 financing was directly allocated to the Village of Escaya. For the years ended December 31, 2018 and 2017, capitalized interest aggregated $4,400,000 and $7,600,000, respectively. 
 
Off-Balance Sheet Arrangements
 
For real estate development projects, we are generally required to obtain infrastructure improvement bonds at the beginning of construction work and warranty bonds upon completion of such improvements.  These bonds are issued by surety companies to guarantee satisfactory completion of a project and provide funds primarily to a municipality in the event we are unable or unwilling to complete certain infrastructure improvements.  As we develop the planned area and the municipality accepts the improvements, the bonds are released.  Should the respective municipality or others draw on the bonds for any reason, certain of our subsidiaries would be obligated to pay.

Specifically for the San Elijo Hills project, Jefferies is contractually obligated to obtain these bonds on behalf of the project pursuant to the terms of agreements entered into when the project was acquired by us.  We are responsible for paying all third-party fees related to obtaining the bonds.

As of December 31, 2018, the amount of outstanding bonds for each project is as follows:
Amount of outstanding bonds
Otay Land project$56,200,000 
San Elijo Hills project650,000 
Ashville Park project800,000 
The Market Common 400,000 

Inflation
 
We, as well as the real estate development and homebuilding industry in general, may be adversely affected by inflation, primarily because of either reduced rates of savings by consumers during periods of low inflation or higher land and construction costs during periods of high inflation. Low inflation could adversely affect consumer demand by limiting growth of savings for down payments, ultimately adversely affecting demand for real estate and our revenues. High inflation increases our costs of labor and materials. We would attempt to pass through to our customers any increases in our costs through increased selling prices. To date, high or low rates of inflation have not had a material adverse effect on our results of operations.  However, there is no assurance that high or low rates of inflation will not have a material adverse impact on our future results of operations.
 
Interest Rates
 
Our operations are interest-rate sensitive. We have indirectly benefited from the prevailing low mortgage interest rate environment, since low rates made housing more affordable for the home buyer, thereby increasing demand for homes. We cannot predict whether interest rates will remain low and what impact an increase in interest rates and mortgage rates would have on our operations, although any significant increase in these rates could have a chilling effect on the housing market, which could adversely affect our results of operations.

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Critical Accounting Estimates
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate all of these estimates and assumptions. Actual results could differ from those estimates.
 
Profit Recognition on Sales of Real Estate – Under the new Revenue Recognition standard adopted on January 1, 2018, revenues from the sales of real estate are recognized at a point in time when the related transaction is completed.  The majority of our real estate sales of land, lots, and homes transfer the goods and services to the customer ("buyer") at the close of escrow when title transfers to the buyer and the buyer has the benefit and control of the goods and services. If performance obligations under the contract with the customer related to a parcel of land, lot or home are not yet complete when title transfers to the buyer, revenue associated with the incomplete performance obligation is deferred as a contract liability until the performance obligation is completed. 

Prior to the adoption of the new Revenue Recognition standard on January 1, 2018, when we had an obligation to complete improvements on property subsequent to the date of sale, we utilized the percentage of completion method of accounting to record revenues and cost of sales. Under percentage of completion accounting, we generally recognized revenues and cost of sales based upon the ratio of development costs completed as of the date of sale to an estimate of total development costs which will ultimately be incurred, including an estimate for common areas. Revenues which cannot be recognized as of the date of sale were reported as deferred revenue on the consolidated balance sheets. 
 
We generally believed we could reasonably estimate our future costs and profit allocation in order to determine how much revenue should be deferred. However, such estimates were based on numerous assumptions and required management’s judgment. For example, the estimate of future development costs included an assumption about the cost of construction services for which we had no current contractual arrangement.  If the estimate of these future costs proved to be too low, then we would have recognized too much profit as of the date of sale resulting in less profit to be reported as the improvements are completed. However, our estimates of future development costs that had been used to determine the amount of revenue to be deferred at the date of sale had subsequently been proven to be reasonably accurate.

Due to the length of the development period and the amount of consideration tied to the homes at the Otay project, we determined that we do not yet have sufficient evidence to reasonably estimate profits on land sales and ongoing development activities. Profit will be deferred until we can reasonably estimate it. At that point, any cumulative profit will be recognized as a change in estimate.

Income Taxes – We record a valuation allowance to reduce our net deferred tax asset to an amount that we expect is more likely than not to be realized.  If our estimate of the realizability of our deferred tax asset changes in the future, an adjustment to the valuation allowance would be recorded which would increase income tax expense in such period.  The valuation allowance is determined after considering all relevant facts and circumstances, and is based, in significant part, on our projection of taxable income in the future.  
 
During 2016, we determined that we had enough positive evidence to conclude that it is more likely than not that we will be able to generate enough future taxable income to fully utilize all of our Federal minimum tax credits. As a result, approximately $31,850,000 of the deferred tax valuation allowance was released as a credit to income tax expense during 2016.

The projection of future taxable income is based upon numerous assumptions about the future, including future market conditions where our projects are located, regulatory requirements, estimates of future real estate revenues
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and development costs, future interest expense, operating and overhead costs and other factors.  We evaluate all positive and negative evidence with respect to our realizability of our deferred tax asset. To the extent there is sufficient negative evidence, an increase to the valuation allowance and tax expense would be recorded to reflect the appropriate amount of the change. If the actual taxable income is less than the amounts projected and are thus insufficient to support the deferred tax asset, an addition to the valuation allowance would be recorded that would increase tax expense in the future.  Adjustments to the valuation allowance in the future can be expected.
We also record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and if so estimating the amount.  If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which could be significant to our consolidated balance sheets or results of operations.
 
We record interest and penalties, if any, with respect to uncertain tax positions as components of income tax expense. During 2017, we effectively settled our 2014 federal tax examination with the IRS and, as a result, recorded an $8,600,000 reduction to deferred tax liabilities and a $4,700,000 reduction to unrecognized tax benefits.

Provision for Environmental Remediation – We record environmental liabilities when it is probable that a liability has been incurred and the amount or range of the liability is reasonably estimable. During 2002, we recorded a charge of $11,150,000 representing our estimate of the cost (including legal fees) to implement the most likely remediation alternative with respect to approximately 30 acres of undeveloped land owned by our subsidiary, Flat Rock. The estimated liability was neither discounted nor reduced for claims for recovery from previous owners and users of the land who may be liable, and may increase or decrease based upon the actual extent and nature of the remediation required, the actual cost of the remediation, the expenses of the regulatory process, the costs of post-remediation monitoring requirements, inflation and other items.

We have periodically examined, and when appropriate, adjusted our liability for environmental remediation to reflect our current best estimate. A change to the current estimate could result from, among other things, that the cost to implement the remediation is different than our current estimate, that the cost of future on-going monitoring efforts is different than our current estimate, and/or requirements imposed by regulatory authorities that we did not anticipate but are nevertheless required to implement. 
 
Provision for Impairment Losses on Real Estate – Our real estate is carried at cost. Whenever events or changes in circumstances suggest that the carrying amount may not be recoverable, management assesses the recoverability of the carrying amount of its real estate in accordance with GAAP.
Some of the events or changes in circumstances that we consider as indicators of potential impairment include: (i) a change in market conditions in the local markets where the Company owns real estate, (ii) a change in the availability of mortgages for retail buyers or a significant change in interest rates for mortgages, (iii) a change in expected use or development plans for properties, (iv) continuing operating or cash flow losses for real estate held for investment purposes, (v) an accumulation of costs in a development property that significantly exceeds its historical basis in property held long-term and (vi) a significant weather event that may have a negative impact on the property value.
We use varying methods to determine if impairment exists, such as considering indicators of potential impairment and analyzing expected future cash flows and comparing the expected future undiscounted cash flows of the property to the carrying value.  
The accounting estimate related to the real estate impairment evaluation is susceptible to the use of assumptions about future sales proceeds and future expenditures. For projects under development, an estimate of future cash flows on an undiscounted basis is performed using estimated future expenditures necessary to maintain the existing project and using management’s best estimates about future sales prices and planned holding periods. 
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If a property is considered impaired, the impairment charge is determined by the amount of the property’s carrying value exceeds its fair value. During 2018, we concluded that our Pacho leasehold was impaired and recorded a$17,450,000 pre-tax charge (the entire carrying value of the leasehold), of which $1,750,000 is attributable to the non-controlling interest. See Note 2 for more information. During 2018, we concluded that our real estate in Maine was partially impaired due to a recent weakness in local housing market conditions. We recorded a write-down of $750,000 and thus reducing the carrying value to $3,300,000 which we believe reflects the fair value of the property. During the fourth quarter of 2018, we evaluated the damage caused by Hurricane Michael to our SweetBay project and recorded a write-down of $1,800,000.
We did not record any provisions for impairment losses during the years ended December 31,  2017 and 2016.

Item 7AQuantitative and Qualitative Disclosure about Market Risk.  

Currently, our market risk arises principally from interest rate risk related to our borrowing activities.

 Expected Maturity Date
 20192020202120222023ThereafterTotalFair Value
Rate Sensitive Liabilities:        
Fixed Interest Rate
 Borrowings
$— $— $— $105,000,000 $— $— $105,000,000 $105,000,000 
   Weighted Average    
      Interest Rate
3.5 %   
 
Item 8.   Financial Statements and Supplementary Data.
Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a) below.

Item 9.   Changes and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9A.    Controls and Procedures.
Our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2018. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2018.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

– Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;
– Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and our expenditures are being made only in accordance with authorizations of our management and directors; and
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–  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based on our assessment, management concluded that, as of December 31, 2018, our internal control over financial reporting was effective.The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
 
Remediation of Prior Material Weakness

We previously identified a material weakness, which is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. This was due to the inadequate design of the control specific to complex revenue transactions that involve equity method investments of the Company where there is both an obligation to perform further development combined with an unusual development pattern where costs and profits are difficult to reasonably estimate.

We implemented a new control designed to (i) assess ability to estimate costs associated with performance obligations of each transaction considering risks and complexities of the transaction and related development (ii) determine whether or not profit can be reasonably estimated and if not, profit over a particular transaction is not recorded until it can be reasonably estimated.

The new control identified above has operated for a sufficient period of time and management has concluded, through testing, that the control is operatively effectively. The material weakness previously identified has been effectively remediated.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described above under the caption "Remediation of Prior Material Weakness."

Item 9BOther Information.
Not applicable.

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PART III
 
Item 10. Directors, Executive Officers and Corporate Governance.
 
As of February 12, 2019, our directors and executive officers, their ages, the positions with us held by each of them, the periods during which they have served in such positions and a summary of their recent business experience is set forth below.  Each of the biographies of the current directors listed below also contains information regarding such person’s service as a director, business experience, director positions with other public companies held currently or at any time during the past five years, and the experience, qualifications, attributes and skills that our Board of Directors considered in selecting each of them to serve as one of our directors.
 
Directors
 
Patrick D. Bienvenue, age 64, has served as a director since August 1998 and was an Executive Vice President of The St. Joe Company from August 2011 to November 2015, a publicly traded company engaged in real estate development, sales and other activities.  From January 1996 until April 2011, Mr. Bienvenue served in a variety of executive capacities with real estate related subsidiaries of Jefferies and was responsible for the entitlement, development and management of these entities and their properties.  Mr. Bienvenue has senior managerial and development experience in the real estate sector.
 
Timothy M. Considine, age 78, has served as a director since January 1992, serving as Chairman of the Board from 1992 to December 1999. He is now retired from Considine and Considine, an accounting firm in San Diego, California, where he was a partner from 1965 to 2002. Mr. Considine has accounting and managerial experience. Mr. Considine also has experience serving on the boards of private entities.
 
Brian P. Friedman, age 63, has served as a director since April 22, 2014. Mr. Friedman has served as a director and as President of Jefferies since March 1, 2013. Since July 2005, Mr. Friedman has been a director and executive officer of Jefferies Group, a wholly-owned subsidiary of Jefferies, and has been Chairman of the Executive Committee of Jefferies since 2002. Since 1997, Mr. Friedman has served as President of Jefferies Capital Partners (formerly known as FS Private Investments), a private equity fund management company controlled by Mr. Friedman in which Jefferies has an ownership interest. Mr. Friedman was previously employed by Furman Selz LLC and its successors, including serving as Head of Investment Banking and a member of its Management and Operating Committees. Prior to his 17 years with Furman Selz and its successors, Mr. Friedman was an attorney with the New York City law firm of Wachtell, Lipton, Rosen & Katz. As a result of his roles at Jefferies and Jefferies Group, as well as his management of various private equity funds and the significant equity positions those funds hold in their portfolio companies, Mr. Friedman serves on several boards of directors of subsidiaries and investee companies of Jefferies Group and Jefferies, and since May 2012 has served on the board of directors of Fiesta Restaurant Group, Inc., a public company that owns and operates two restaurant chains. Mr. Friedman served on the board of directors of Carrols Restaurant Group from June 2009 through May 2012. Mr. Friedman has managerial and investing experience in a broad range of businesses, as well as experience serving on the boards and committees of both public and private companies.

Jimmy Hallac, age 48, has served as a director since March 28, 2017 and is a managing director of Jefferies, where he has been employed since 2002. Mr. Hallac also serves on the boards of certain of Jefferies’ portfolio entities, including, FXCM Group LLC, as Chairman, Linkem S.p.A.and Golden Queen Mining Company LLC. Mr. Hallac has managerial and investing experience in a broad range of businesses and has experience serving on the boards of private companies.

Michael A. Lobatz, age 69, has served as a director since February 1995 and has been a practicing physician in San Diego, California since 1981. Dr. Lobatz has managerial experience in both the real estate and healthcare sectors and has experience serving on the boards of private and not-for-profit entities.
 
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Joseph S. Steinberg, age 75, has served as a director since August 1998 and as Chairman of the Board since December 1999.  Mr. Steinberg is Chairman of the Board of Directors of Jefferies, and from January 1979 until March 1, 2013 served as President of Jefferies. Mr. Steinberg is also a director of Jefferies.  He also serves on the board of directors of Spectrum Brands Holdings, Inc. and Crimson Wine Group, Ltd. Mr. Steinberg had previously served as a director of Mueller and Fortescue. Mr. Steinberg has managerial and investing experience in a broad range of businesses through his more than 30 years as President and a director of Jefferies. He also has experience serving on the boards and committees of both public and private companies.

Executive Officers

Christian E. Foulger, age 44, has served as President since February 2018. He was our Vice President of the Company from April 2011 to February 2018 and has been employed by us as a Special Projects Manager since November 2005. Prior to joining us, Mr. Foulger was a Financial Analyst from 1998 to 2000 and Vice President from 2001 to October 2005 for Cottonwood Partners Management, a real estate development and management company in Salt Lake City, Utah.
 
Paul J. Borden, age 70, has served as Vice Chairman since February 2018 and as a director since May 1998.  He was our President from May 1998 to February 2018. Mr. Borden was a Vice President of Jefferies from August 1988 through October 2000, responsible for overseeing many of Jefferies’ real estate investments.  Prior to working for Jefferies, he had a 16 year career in commercial lending.  Mr. Borden has managerial and development experience in the real estate sector.
 
John K. Aden, Jr., age 61, has served as Vice President of the Company since May 2012 and has been employed by us as Senior Project Development Manager since May 2012.  Prior to joining us, Mr. Aden was an Executive Vice President from 1998 to April 2012 and Vice President from 1994 to 1997 for The Otay Land Company and JPB Development and Vice President of Community Development from 1989 to 1994 for The Eastlake Company, real estate development companies in San Diego, California.  Mr. Aden is a licensed architect.
 
Erin N. Ruhe, age 53, has served as Vice President of the Company since April 2000, Treasurer since March 2004 and has been employed by us as Controller since January 1999. Previously, Ms. Ruhe was Vice President since December 1995 and Controller since November 1994 of HSD Venture, a real estate subsidiary of Jefferies.
 
Audit Committee
 
The Board of Directors has a standing Audit Committee, established in accordance with the requirements of the SEC.  The Board of Directors has adopted a charter for the Audit Committee, which is available on our website, www.homefedcorporation.com.  The Audit Committee consists of Mr. Considine (Chairman) and Dr. Lobatz.  The Board of Directors has determined that Mr. Considine is qualified as an audit committee financial expert within the meaning of regulations of the SEC and Mr. Considine and Dr. Lobatz are independent applying the NASDAQ Stock Market’s listing standards for independence.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC.  Based solely upon a review of the copies of such forms furnished to us and written representations from our executive officers, directors and greater than 10% beneficial stockholders, we believe that during the year ended December 31, 2018, all persons subject to the reporting requirements of Section 16(a) filed the required reports on a timely basis.
 
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Code of Business Practice
 
We have a Code of Business Practice, which is applicable to all of our directors, officers and employees, and includes a Code of Practice applicable to our principal executive officers (as listed above) and senior financial officers.  Both the Code of Business Practice and the Code of Practice applicable to our principal executive officers and senior financial officers are available on our website. We intend to post amendments to or waivers from our Code of Practice on our website at www.homefedcorporation.com if disclosure is required by applicable law.

Item 11. Executive Compensation.
 
Compensation Discussion and Analysis
  
Introduction
 
The Board of Directors has a Compensation Committee consisting of Joseph S. Steinberg (the "Compensation Committee") that determines and approves the compensation of our executive officers, including those named in the Summary Compensation Table below (the “Named Executive Officers”).
 
Compensation Objectives and Philosophy
 
Our compensation philosophy is based upon rewarding current and past contributions, performance and dedication and providing incentives for superior long-term performance.  We believe that there should be a strong link between pay and performance of both the Company and the individual.  Accordingly, a large percentage of annual compensation consists of discretionary bonus compensation.  This ensures that compensation paid to an executive reflects the individual’s specific contributions to our success, the level and degree of complexity involved in his/her contributions to us and our overall performance.  We believe our compensation package aligns the interests of executive officers with those of our stockholders.
 
We believe that our current compensation program fits within our overall compensation philosophy of providing a straight-forward compensation package and strikes the appropriate balance between short and long-term performance objectives.
 
At our 2018 annual meeting of stockholders, the say-on-pay advisory vote received approval from approximately 99.9% of the shares voted on the matter and the Compensation Committee made no significant changes to our executive compensation program during the year.
 
Setting Executive Compensation
 
In determining compensation for our Named Executive Officers, the Compensation Committee does not rely on any specific formula, benchmarking or pre-determined targets.  The Compensation Committee focuses primarily on its subjective determination of the performance of the individual executive officer, as well as on our performance.  In considering executive compensation, the Compensation Committee takes into account an executive officer’s responsibilities, as well as the services rendered by the executive officer.
 
Elements of Compensation
 
Our compensation package for executive officers consists of three basic elements: (1) base salary; (2) annual bonus compensation; and (3) long-term incentives in the form of stock options granted pursuant to our Amended and Restated 1999 Stock Incentive Plan (the “Option Plan”) and the opportunity to be awarded restricted stock units (“RSUs”) pursuant to our RSU Opportunity Plan (the “2014 RSU Plan”) adopted in 2014 and the RSU Opportunity Plan (the "2017 RSU Plan") adopted in 2017.
 
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Other elements of compensation include medical and life insurance benefits available to employees generally.  Additionally, certain perquisites may be available to executive officers that are not available to other employees generally.
 
Each element of compensation serves a different purpose. Salary and bonus payments are designed mainly to reward current and past performance, while stock options and RSUs are designed to provide incentive for strong long-term future performance and are directly linked to stockholders’ interests because the value of the awards will increase or decrease based upon the future price of our common stock.
 
Base Salary
 
Base salary is consistent with the executive’s office and level of responsibility, with annual salary increases which generally amount to a small percentage of the executive’s prior base salary, primarily reflecting cost of living increases.
 
Short-Term Incentives – Annual Bonus Compensation
 
Annual bonus compensation of executive officers is determined by the Compensation Committee based on its subjective assessment of an executive’s and our performance, given the cyclical nature of the real estate development industry. Bonuses are subjective and are not based upon any formula or the application of any mathematical criteria. While there is no agreement to pay annual bonuses, at the time each of the executive officers was employed by us there was a discussion that, in all but exceptional circumstances, annual subjective bonuses would be paid. The Compensation Committee considers our actual and estimated results of operations for the year in question, as well as operating results and bonus compensation for prior years. The Committee also considers self-evaluations completed by each executive officer for the year, which provide the Compensation Committee with each executive’s subjective assessment of his or her achievements for the year, as well as identify personal goals for the coming year, and bonus recommendations from our President.
 
In evaluating each executive’s performance, the Compensation Committee takes into account the incremental value to us of obtaining project approvals and entitlements as our development projects progress, and places more emphasis on whether the executive’s performance has increased our long-term value, rather than on our earnings for that year. The Compensation Committee also recognizes that, due to the extended length of time that it takes to obtain land entitlements, especially in California where our development business is currently centered, the current efforts of our executive officers may not result in operating profits for many years in the future.
 
Bonuses, which have varied from year to year, also reflect our profitability and activities for the year in question. For example, in years in which we are actively selling real estate, the Compensation Committee is likely to subjectively consider the executive’s contribution to the sales effort and in years in which we are actively engaged in land acquisition, entitlement and land development efforts, the Compensation Committee is likely to consider the executive’s contribution to those efforts. The Compensation Committee also subjectively considers the executive’s contribution to evaluation of new opportunities, and also places importance upon the executive’s critical analysis that can result in avoiding making investments that do not meet our investment criteria and are not consummated, as well as on those opportunities that are consummated. 

For Mr. Foulger, the Compensation Committee recognized his leadership role in providing overall direction and oversight to the Company and for focusing on maximizing returns for shareholders. Notable for 2018, Mr. Foulger successfully completed HomeFed’s $125,000,000 Village of Escaya EB-5 raise, oversaw the closing of our newest investment in Brooklyn as well as the refinancing of the Kings County District Attorney condominium at Brooklyn Renaissance Plaza, and negotiated an agreement with the City of Virginia Beach which will allow for further development of Ashville Park.

For Mr. Borden, the Compensation Committee recognized his role in directing and implementing a seamless transition as Mr. Foulger became President in early 2018. In addition to many corporate matters, Mr. Borden’s focus
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in 2018 included providing direction for several high level development project matters, including litigation matters, related to our SweetBay, Pacho, Otay and San Elijo Hills projects; advancing important initiatives in each.

For Mr. Aden, the Compensation Committee recognized his continuing success in providing senior management support to the project managers. Mr. Aden was responsible for insuring that the deadlines for project improvements were satisfied and for prioritizing tasks to keep projects on schedule. For 2018, the Committee also recognized the continued success of the Village of Escaya, the commencement of construction of our second project within Otay Ranch, Cota Vera, as well as the advancement of our entitlement effort at Fanita Ranch.

For Ms. Ruhe, the Committee again considered her continuing leadership role in managing the Company’s accounting and financial reporting, the treasury and risk management areas, corporate governance and human resources. Additionally, Ms. Ruhe manages the Company’s growing banking and borrowing relationships. She was also recognized for providing continuing managerial support to all of the Company’s projects and corporate operations.

Based upon the foregoing, on December 19, 2018, the Compensation Committee approved annual salary increases (effective January 1, 2019) and discretionary 2018 cash bonuses for each of the Named Executive Officers reflected in the Summary Compensation Table below.
 
Additionally, all of our employees receive a year-end bonus equal to approximately 3% of base salary and a discretionary bonus.
 
Long-Term Incentives – Stock Options
 
By means of our Option Plan (described below), we seek to retain the services of persons now holding key positions and to secure the services of persons capable of filling such positions.

Options Awarded to Executive Officers
 
Occasionally, stock options may be awarded which, under the terms of our Amended and Restated 1999 Stock Incentive Plan (the "Option Plan"), permit the executive officer or other employee to purchase shares of our common stock at not less than the fair market value of the shares of common stock at the date of grant. The extent to which the employee realizes any gain is, therefore, directly related to increases in the price of our common stock and, therefore, stockholder value, during the period of the option.  In certain circumstances, options having an exercise price below the fair market value of our common stock on the date of grant may be issued (although none have been granted to date). Options granted to executive officers become exercisable at the rate of 25% per year, commencing one year after the date of grant. As discussed above under “Short-Term Incentives – Annual Bonus Compensation,” the number of stock options awarded to an executive officer is not based on any specific formula, but rather on a subjective assessment of the executive’s performance and our performance. Options are priced at the closing price on the date of grant and are not granted to precede the announcement of favorable information.  
 
Options Awarded to Directors
 
Under the terms of our Option Plan, each director, including Paul J. Borden, is automatically granted options to purchase 1,000 shares on the date on which the annual meeting of our stockholders is held each year. As stated above, options are priced at the closing price on the date of grant.
 
In August 2018, pursuant to this automatic grant, each director, including Paul J. Borden, was granted options to purchase 1,000 shares of our common stock with an exercise price of $50.50 per share, which become exercisable at the rate of 25% per year, commencing one year after the date of grant.
 
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Long-Term Incentives – Restricted Stock Units
 
2017 RSU Plan:
On August 4, 2017, the Board of Directors adopted an RSU Opportunity Plan (the “2017 RSU Plan”) under which 66,000 shares of Common Stock are authorized for issuance to our executive officers. Participants were eligible for RSU awards based on satisfaction of performance criteria established by the Board of Directors in 2017. The restricted stock units (“RSUs”) may be granted at the end of the performance period based on the degree to which performance criteria has been satisfied at the sole discretion of the Board of Directors. The performance period ends on December 31, 2019, and RSUs will be issued no later than April 1, 2020.

2014 RSU Plan:
On August 13, 2014, the Board of Directors adopted an RSU Opportunity Plan (the "2014 RSU Plan”) under which 100,000 shares of Common Stock were authorized for issuance under the 2014 RSU Plan to our executive officers. Participants were eligible for RSU awards based on satisfaction of performance criteria established by the Board of Directors in 2014. The performance period under the 2014 RSU Plan ended on December 31, 2016. The Board of Directors evaluated the participants' performance against the performance criteria and awarded an aggregate of 75,000 RSUs to the participants on March 15, 2017. Fifty percent of the RSU award under the 2014 RSU Plan vested on December 31, 2017, and the remaining fifty percent vested on December 31, 2018, to those executive officers who were continuously employed by the Company through the applicable vesting date.

The 2014 RSU grant consists of two settlement features:

(1) 45,000 RSUs settled through the issuance of shares of Common Stock within 30 days of each vesting date; this component is classified as an equity award. The closing price on March 15, 2017 of $44.20 was used to value this component of the award. On each of December 31, 2017 and 2018, 22,500 RSUs vested and were distributed at the beginning of the following year to our executive officers; stock compensation expense for this component of the award was $1,000,000 for each of 2018 and 2017.

(2) 30,000 RSUs settled in cash based on the average closing price over a period of 10 trading days immediately preceding the date of declaration which must occur within 30 days of the respective vesting date. This component is classified as a liability award, which required us to measure the fair value of the award at the end of each reporting period. On each of December 31, 2017 and 2018, 15,000 RSUs vested and settled in cash during January 2018 and January 2019. Stock compensation expense for this component of the award was $600,000 and $750,000 for 2018 and 2017, respectively.

Other Benefits; Executive Perquisites
 
Medical and life insurance benefits and matching contributions to our 401(k) plan are available to employees generally.
 
Mr. Borden maintains his primary residence in New Jersey.  We reimburse him for costs of maintaining a temporary residence in California, airfare to and from his primary residence and transportation costs including the personal use of a Company car while in California.  Such reimbursements are considered to be taxable compensation reportable by Mr. Borden under federal income tax rules, which results in a net cash cost to him, even though he does not gain any incremental financial benefit from these reimbursements.  As a result, beginning in 2005, the Board of Directors (without Mr. Borden’s participation) agreed to pay Mr. Borden additional compensation which, after taxes, will provide him with sufficient funds to pay the taxes due on the expense amounts reimbursed by us.  In 2018, we paid Mr. Borden $37,468 with respect to additional taxable compensation reported by Mr. Borden for reimbursements made during 2018.
 
Mr. Aden receives a monthly car allowance.
 
No other Named Executive Officers receive perquisites.
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CEO Pay Ratio

Our 2018 CEO to median employee pay ratio is 13:1. Our CEO had 2018 annual total compensation of $1,048,055, while our median employee had 2018 annual total compensation of $77,895.

Our CEO to median employee pay ratio is calculated in accordance with Item 402(u) of Regulation S-K. We identified the median employee by examining the 2018 W-2 wages for all individuals, excluding our CEO, who were employed by us on December 31, 2018. We included all employees, whether employed on a full-time, part-time, or seasonal basis. We did not make any assumptions or estimates with respect to total compensation, but we did annualize the compensation for any full-time employees that were hired during 2018 so that we could compare data on a similar basis. We believe the use of W-2 wages for all employees is a consistently applied compensation measure that allowed us to efficiently identify the median employee in order to calculate the CEO pay ratio. We define "total compensation" as the aggregate of salary, bonus, stock awards, option awards, and "all other compensation", as applicable, as set forth in the 2018 Summary Compensation Table below. After identifying the median employee based on total W-2 wages, we calculated annual total compensation in 2018 for such employee using the same methodology we use for our named executive officers as set forth in the 2018 Summary Compensation Table below.

Stock Ownership Requirements
 
We do not have a formal stock ownership requirement, although one of our directors, Mr. Steinberg, beneficially own approximately 5.0% of our outstanding common stock.
 
Accounting and Tax Matters
 
The cost of all share-based payments to employees or directors is recognized in the financial statements based on their fair values.  The cost is recognized as an expense over the vesting period of the award. 

Under Section 162(m) of the Internal Revenue Code of 1986 (“Section 162(m)”), for 2017 and prior years, certain compensation paid by the Company to its Named Executive Officers was subject to a limitation on tax deduction for amounts in excess of $1 million per year, unless the compensation qualified as “performance-based compensation” under Section 162(m). In 2017 and in prior years, the Company’s executive compensation program was administered, to the maximum extent deemed appropriate by the Compensation Committee, in a manner intended to comply with the performance-based compensation exception, while maintaining flexibility to pay amounts that may not so qualify. Under the Tax Act, the performance-based compensation exception from the deduction limitation under Section 162(m) has been eliminated, except for certain compensation arrangements that are eligible for a transition rule under the new tax law. Thus, the Company expects that additional amounts paid to its named executive officers in 2018 and future years will not be tax deductible for federal income tax purposes. The Compensation Committee will continue to take into account the impact of Section 162(m) on its executive compensation programs, including the availability of the grandfathering rule for existing qualified arrangements.

Compensation Committee Report
 
I have reviewed and discussed with our management the above Compensation Discussion and Analysis (“CD&A”).  Based upon my review and discussions, I have recommended to the Board of Directors that the CD&A be included in this Form 10-K.
 
Compensation Committee
 
Joseph S. Steinberg


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Summary Compensation Table
Equity Compensation
Name and Principal   StockOptionAll Other  
PositionYearSalaryBonusAwards (1) Award (2)Compensation (3) Total
Christian E. Foulger,2018$350,000 $257,519 $429,030 $— $11,506 (4)$1,048,055 
President
2017$245,714 $257,371 $601,313 $157,721 $11,299 $1,273,418 
2016$240,896 $207,227 $— $— $11,084 $459,207 
Paul J. Borden,2018$398,585 $261,958 $286,020 $13,547 $121,672 (5)$1,081,782 
Vice Chairman2017$390,770 $261,723 $400,875 $200,807 $143,829 $1,398,004 
 2016$383,108 $211,493 $— $10,535 $133,404 $738,540 
John K. Aden, Jr.2018$326,101 $259,783 $429,030 $— $17,506 (6)$1,032,420 
Vice President
2017$319,707 $259,591 $601,313 $157,721 $17,299 $1,355,631 
 2016$313,438 $209,403 $— $— $17,084 $539,925 
Erin N. Ruhe,2018$239,152 $207,175 $286,020 $— $11,506 (7)$743,853 
Vice President,
2017$234,462 $207,034 $400,875 $157,721 $11,299 $1,011,391 
Treasurer and2016$229,865 $206,896 $— $— $11,084 $447,845 
Controller       
 
(1) This column represents the aggregate compensation earned in 2018 and 2017 under the 2014 RSU Plan. The fair value of award was based on the average closing price over a period of ten trading days immediately preceding the date of declaration which was January 15, 2019 and January 29, 2018 which was within the thirty day window from the December 31st vesting date. See Note 7 to our consolidated financial statements contained herein.
(2) This column represents the grant date fair value of stock options granted to the named executive, including stock options granted to the Vice Chairman for director services, in accordance with GAAP.  Information on the valuation assumptions made when calculating the amounts in this column is found in Note 7 to our consolidated financial statements contained herein.
(3) Certain items included in this column (including personal use of company cars) are currently taxable to the Named Executive Officer.  The amount of taxable income for the individual is determined pursuant to Internal Revenue Service rules which may differ from the amounts reflected in this column.
(4)   Consists of contributions made by us to a defined contribution 401(k) plan and life insurance benefits on behalf of Mr. Foulger, none of which exceeded the greater of $25,000 or 10% of the total amount of these benefits for Mr. Foulger.
(5) Consists of non-cash compensation of $38,678 for maintaining a temporary residence in California and $10,196 for airfare to and from his primary residence in New Jersey, $37,468 in additional cash compensation which, after taxes, is intended to provide Mr. Borden with sufficient funds to pay the taxes due on the expense amounts reimbursed by us and director fees from the Company of $24,000. This column also includes transportation and the personal use of a company car while in California and related expenses, as well as contributions made by us to a defined contribution 401(k) plan and life insurance benefits on behalf of Mr. Borden, none of which exceeded the greater of $25,000 or 10% of the total amount of these benefits for Mr. Borden.
(6) Consists of a monthly car allowance and contributions made by us to a defined contribution 401(k) plan and life insurance benefits on behalf of Mr. Aden, none of which exceeded the greater of $25,000 or 10% of the total amount of these benefits for Mr. Aden.
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(7) Consists of contributions made by us to a defined contribution 401(k) plan, life insurance benefits on behalf of Ms. Ruhe, none of which exceeded the greater of $25,000 or 10% of the total amount of these benefits for Ms. Ruhe.
Grants of Plan-Based Awards in 2018
This table provides information about equity awards granted to our Named Executive Officers in 2018 under our Option Plan. As discussed in the CD&A, in August 2018, Mr. Borden was granted 1,000 options pursuant to the automatic grant to directors under the Option Plan.
Grant
All Other Option
Awards:  Number of
Securities Underlying
Exercise or Base
Price of Option
Grant Date Fair
Value of Stock and
NameDate
Options (1)
Awards ($/share) (2)
Option Awards (3)
Paul J. Borden,8/8/20181,000 $50.50 $13,547 
Vice Chairman    
 
(1) This column shows the number of shares of common stock issuable under options granted in 2018.  The options vest and become exercisable in four equal installments beginning one year after the grant date.
(2)    This column shows the exercise price for the stock options granted, which was the closing price of our common stock on the date of grant.
(3) This column shows the grant date fair value of stock options awarded in 2018. The fair value was determined in accordance with GAAP on the grant date, and is being recognized as an expense over the vesting period. For information on the valuation assumptions with respect to this grant refer to Note 7 to our consolidated financial statements contained herein.
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Outstanding Equity Awards at Fiscal Year-End
This table provides information on the holdings of option awards by our Named Executive Officers at December 31, 2018.  This table includes exercisable and unexercisable stock options. Options granted to our Named Executive Officers on August 4, 2017, vest and become exercisable in four equal annual installments, commencing one year from the grant date. Options granted to Mr. Borden as a director also vest and become exercisable in four equal annual installments, commencing one year from the grant date.  For additional information about the option awards, see “Long-Term Incentives – Stock Options – Options Awarded to Executive Officers” in the CD&A.
  Option Awards
  Number of Securities Underlying Unexercised OptionsOption Exercise PriceOption Expiration Date
NameGrant DateExercisableUnexercisable  
Christian E. Foulger,8/4/20173,125 9,375 $44.00 8/4/2022
President
Paul J. Borden,6/12/20141,000 — $58.00 6/12/2019
Vice Chairman7/15/2015750 250 $47.85 7/15/2020
 7/14/2016500 500 $40.50 7/14/2021
 8/4/2017250 750 $44.00 8/4/2022
 8/4/201715,000 (1)— $44.00 8/4/2022
8/8/2018— 1,000 $50.50 8/8/2023
John K. Aden, Jr.8/4/20173,125 9,375 $44.00 8/4/2022
Vice President
 
Erin N. Ruhe,8/4/20173,125 9,375 $44.00 8/4/2022
Vice President,
Treasurer and